COVID-19 and its impact on cladding and building safety – the commercial and insurance considerations
10 June 2020
10 June 2020
Recent developments in connection with building safety and cladding programmes during COVID-19.
The COVID-19 pandemic has brought with it widespread changes to almost all areas of economic activity. For the construction industry, site closures and adoption of widespread staff furloughing have become common place. In these circumstances, it is welcome news that the UK Government continues to maintain that remediation of high rise buildings with unsafe cladding is a matter of ‘critical public safety’. It would though be naïve to believe that COVID-19 will not have an impact on the UK construction industry’s ability to meet the building safety challenges presented to it by Government through the Building a Safer Future programme.
At the same time, it is also clear that elements of the Government’s programme require further development. Specifically, further consultation and consideration need to be given to the ability of the insurance sector to make professional indemnity cover and D&O cover available to the new risks that will be created by Government’s planned legislative changes. The COVID-19 pandemic may call into question the insurance market’s ability to meet those challenges and its appetite to underwrite the new forms of risk presented by the regulatory and legislative change.
We summarise below the most recent developments in connection with building safety and cladding programmes during the pandemic before turning to an analysis of the opportunities available to and difficulties faced by the insurance market.
To date the UK Government has been clear that construction sites can continue operating if those operations are carried out safely. Guidance from the Ministry of Housing, Communities & Local Government (“MHCLG”) includes staggering site hours to reduce peaks in public transport usage, and following the Construction Leadership Council’s site operating procedures which incorporate social distancing measures. Similar guidance has been provided by the National Fire Chiefs’ Council for the provision of waking watches during the pandemic. In theory, at least, remediation works to unsafe cladding ought to continue, although given the practical and economic difficulties faced by the construction industry at present, the reality may be different.
Despite the current difficulties faced by the construction industry, the Government’s plan for wide-ranging legislative reform of the construction industry continues. The most recent developments can be found in the Government’s response to the “Building a Safer Future” consultation. In that response the Government sets out an expansive programme of legislative reform and regulatory change that will shape the construction industry for the foreseeable future and will have an impact upon those who choose to insure it.
As a sign of the seriousness with which the need to establish a safer and more sustainable construction industry has been taken, the Government’s consultation on regulatory change received over 900 responses from representative groups and other interested parties. The main points from the consultation response can be summarised as follows:
- General support for a reformed building safety system.
- Government commitment to legislate for these reforms through a Building Safety Bill.
- Government commitment to publish an Economic Impact Assessment of the projected costs and benefits associated with regulatory change. This is now likely to be a highly important assessment in light of the economic distress caused to industry by COVID-19.
- Government commitment to support change in the culture within the UK construction industry in order to bring about higher levels of competency for site operatives.
For those familiar with Dame Judith Hackitt’s Independent Review of Building Regulations and Fire Safety, the fact that the conclusions of that report are supported by the consultation response is to be welcomed. Although the flagship piece of legislation, the Building Safety Bill, has not yet been published, we have a strong idea of its likely content from the description found in the consultation response.
Building Safety Bill
In an economic environment that has already been put under great pressure, what will a reformed building safety system look like and how can it be implemented?
As a result of the consultation response, we know the answer to the first part of that question, which will in large part be driven by the establishment of a new national Building Safety Regulator (“BSR”).
In outline, the BSR will regulate all multi-occupied residential buildings at the outset but will also subsequently have powers to regulate any buildings where there are concerns as to fire and building safety. The key points of the new regime (largely following the conclusions of Dame Judith Hackitt’s review of building safety) are in summary:-
- A new duty holder regime aimed at placing greater responsibility on those designing and constructing buildings.
- A new Accountable Person regime, identifying a single person who will be responsible for managing fire and structural safety during the occupancy of buildings.
- Mandatory occurrence reporting – a new system of requiring mandatory reporting for any structural or fire safety related event.
- Supervision by the relevant duty holders to ensure they employ operatives with the requisite competence.
- Stringent enforcement measures for the BSR, which could lead to criminal prosecutions in the event of breaches of the new regulations. Those measures include the ability to issue an unlimited fine for breach of regulations.
Without question the new regime will require investment in terms of both time and money for all those involved in the design and construction and maintenance of buildings that fall within the scope of the new regulatory regime. Of course, whilst many of these proposals have been drawn up prior to the full impact of COVID-19 being known, the dilemma now faced by the Government is whether to press ahead with these safety critical changes and if so, how to do so in circumstances where economic activity has been reduced and contractors’ revenue adversely affected. As things stand, an answer to this question has not yet been given by the UK Government.
The implications for insurers
The Government’s consultation response set out in a degree of detail what the new likely regulatory regime might look like. It is noteworthy though that the impact of the proposed changes upon the insurance market and upon parties seeking to obtain insurance in connection with the new duties that will be imposed has not been addressed by the Government.
On any reading, the impact of regulatory change for insurers is likely to be significant and require consideration by underwriters and collaboration with those who deal with claims made against policies.
- Consideration will need to be given to the ‘insurability’ of risks placed upon duty holders during the design, construction and refurbishment of buildings. These include whether professional indemnity insurance will cover designers and contractors who carry out and manage fire and building safety responsibilities as a consequence of the new regulatory regime.
- The proposed legislation also establishes what is, in effect, a new profession of the Accountable Person, who will be responsible for the fire and safety management of buildings during the occupancy phase. It is unclear whether the insurance market would be willing to extend professional indemnity cover to encompass the obligations placed upon that person.
- Consideration would also need to be given as to whether current design and construct policy wordings would be adequate to encompass contractors’ management and control of construction operations in light of new fire and structural safety requirements. Insurers will wish to consider whether it would be appropriate to apply new exclusions or extensions of cover.
- Further consideration is required to the operation of D&O insurance and whether existing policies are capable of responding to the threat of enforcement actions taken by the BSR. The BSR’s ability to apply criminal sanction for breach of the new regime will form part of the new legislation. As a result, the possibility of D&O policies responding to any criminal investigations that arise needs to be given.
The COVID-19 pandemic has placed the Building a Safer Future programme in a fresh light. On the one hand, remediation of unsafe cladding and the creation of a safer more sustainable culture in construction remains a priority. On the other hand, the investment costs associated with implementing a new regime are likely to be significant and challenging in a weaker economic environment.
Importantly, further consultation is needed between Government, the construction industry and insurers to determine to what extent the risks created by a new regulatory regime are capable of being insured and whether the insurance market is willing to extend its exposure to the construction industry. Central to this discussion will be how insurers see their exposures arising from COVID-19 and whether there arises from it an appetite to take on new risks.
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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), Society of Claims Professionals or Chartered Insurance Institute, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the Society or Chartered Insurance Institute.