Building Safety 2021 – A state-backed insurance for construction professionals
23 February 2021
23 February 2021
Paul Lowe, Partner, Weightmans, Jo Martin, Consultant, Weightmans
10 February 2021 saw a major milestone reached in the Government’s building safety programme, with the announcement of a £3.5 billion fund to finance the cost of unsafe cladding for all leaseholders in residential buildings 18 metres (six storeys) and over in England.
Hidden in the body of the announcement was another major but less heralded policy: the creation of a state-backed insurance scheme to tackle the obstacles faced by construction professionals in obtaining insurance cover. This proposal is currently limited to professionals who complete ESW1 forms, which are currently the cause of a bottleneck in the property market, but it nonetheless amounts to a significant shift in the Government’s engagement with the insurance market and the professional indemnity market in particular. It has the potential to ease the claims pressure on professional indemnity insurers, which has led to a substantial premium increase in recent years. The advent of a state-backed insurance scheme for construction professionals might also address concerns that have been raised regarding the availability of insurance for new professional services created by the Building Safety Bill and specifically the key role of Building Safety Manager (for more detail on these new roles, see our previous article on the subject.
The scope of the insurance scheme, eligibility to apply to it and whether it will remain limited to the completion of EWS1 forms remains to be seen. We anticipate that there will be substantial pressure from construction professionals to expand the scheme to a wider range of professional activities.
As has been widely publicised, the draft Building Safety Bill (“the Bill”) has now been published for pre-legislative scrutiny by industry, lawmakers and interested stakeholders. The Bill is, however, just one part of a wider attempt to address building safety issues, which includes:
- The Ministry of Housing, Communities and Local Government (“MHCLG”) has recently released preliminary details of its proposed leaseholder funding scheme for cladding and building safety issues;
- The Fire Safety Bill received its third reading in the House of Lords on 24 November 2020 and is likely soon to receive Royal Assent; and
- The Royal Institute of Chartered Surveyors (RICS) has released guidance as to the correct use of the EWS1 form to try to reduce the bottleneck of unsaleable properties.
All of these recent developments indicate a serious attempt by Government to press forward with the resolution of these issues, and the impact on the insurance sector is potentially very significant.
Funding of remedial works
There has been increasing public and political concern as to the situation of the residents of buildings affected by unsafe cladding. Stories abound in the local and national press of leaseholders suffering very severe financial consequences as a result of the costs associated with unsafe cladding to the exterior of their properties.
The Government has now presented its policies for: i) a £3.5 billion fund the cost of replacing unsafe cladding for leaseholders in residential buildings 18 metres and over; and ii) a long-term and low interest, Government-backed loan scheme offered to remediate buildings between 11 and 18 metres. Under the second scheme, no leaseholder will ever pay more than £50 a month towards the removal of unsafe cladding. Although details as yet are thin on the ground, there has been immediate and vocal resistance from pressure groups, property owners and the press to the idea that leaseholders should bear any responsibility for remediation costs (whether funded by way of loans or otherwise). On 1 February 2021 (and in advance of publication of the Government’s funding proposals), a number of MPs added their voices to these objections during debate in the House of Commons.
As the Government intends to press ahead with a loan scheme in the face of such vocal opposition, it will be doubly important to demonstrate that active steps are being taken to reduce the sums which fall to leaseholders to pay by seeking funds from the construction industry. An industry levy on certain high-rise developments in England has already been announced, together with a new tax for the UK residential property development sector. One possible further option available to reduce the liability of leaseholders is the issue of legal claims for breach of contract and/or breach of a tortious duty of care against developers, contractors and professionals. Such claims will not, however, be straightforward: the Government itself has no standing to bring such claims, and in many instances the leaseholders will also lack that standing. Freeholders may have a right to sue, but in circumstances where Government and/or leaseholders are bearing the cost of remedial works, it seems unlikely that many Freeholders will wish to incur the risk and expense of issuing legal proceedings which have no guarantee of success. Limitation of actions is also likely to be an ever-increasing problem.
Impact on the insurance sector
The Bill itself has potentially very significant ramifications for the insurance sector, and, in particular, the professional indemnity market. The creation of new professional dutyholders, and the increase in scope of the duties and obligations that fall to existing professional dutyholders, may well cause headaches in an already-challenging area of the market. The availability of insurance to such dutyholders will be critical to the success of the Bill’s proposals in this regard, but underwriters’ appetite for such new and untested risks remains to be seen. There is little doubt that Government will be watching the insurance sector’s response closely, and there may well be scope for expansion of the newly-announced Government-backed insurance scheme discussed above if the market cannot respond to the demands placed upon it by the new regime.
There is, however, a more immediate reputational issue facing the insurance market as a whole. While public and political ill-will is currently directed primarily at developers or the Government, the insurance sector is increasingly being criticised for its perceived role in the deepening crisis. On 20 December 2020, Lord Stephen Greenhalgh, Minister of State at MHCLG, asked on Twitter:
“Are insurers profiteering from the #GrenfellTower tragedy? @JeremyClarkson can afford a hike in his insurance from £8k to £60k for his West London high rise clad in safe material with a sophisticated fire-prevention system. Many can’t.”
Jeremy Clarkson himself then chimed in to the debate in an article in The Times, suggesting that there had been “blatant profiteering” by insurers in relation to buildings and fire insurance premiums since the Grenfell disaster. Allegations of this nature from within Government and the press risk undermining public confidence in the insurance sector, and increase the prospects of Governmental policy intervention. While the increase in buildings insurance premiums on high-risk properties may be justifiable in many instances, underwriters should be careful to consider whether, in any particular instance, further increases on premiums are objectively justifiable in light of the true risk to the property. A market response to allegations of profiteering, and proposals for ensuring a common and coherent approach to premium-setting, may also need to be considered to alleviate concerns in this regard.
Given the current strength of feeling, the Government’s proposals for a leaseholder loan scheme may need to be revisited. Whatever the outcome, however, the insurance sector is likely to find itself drawn ever-deeper into these issues, and it is possible that the Government will look to impose requirements on the market if agreement cannot be reached on an sector-wide response.
It is clear that building safety issues are an increasingly high-profile topic, and the insurance sector is involved at almost every stage. The advent of a state-backed professional indemnity insurer is a very significant intervention in the operation of the UK construction insurance market and has the potential to affect both premiums and capacity. Developments in this area should be carefully tracked, therefore, and clear, consolidated responses to emerging issues should be agreed across the market where possible. Certainly, in light of the clear indications from the political sphere that the insurance market will be expected to be part of the solution to the various issues relating to building safety, any opportunity for stating the market’s case should be taken. Professional bodies will hold a critical role in discussions with Government and stakeholders, and engagement with consultations and sector collaboration is strongly to be encouraged.
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.