Hackitt consultation: Taking a hard line on risk

There have been recent warnings of likely increases to contractors’ insurance premiums, particularly on work involving cladding, in the wake of the tragic Grenfell fire and the subsequent Hackitt report on fire safety. There are potential liabilities against the suppliers and installers of the cladding on Grenfell, and on other high-rise residential buildings. This construction risk, however, is not to be viewed in isolation. Large infrastructure projects – especially waste-to-energy plants and renewable energy projects, some involving wind turbines – also tend to be regarded by insurers as high-risk. 

In the present, ’hard’ insurance market, contractors would be well advised to consider carefully with their insurance brokers the wordings of their policies… what protection will the policy confer? To consider the wording only after a claim has arisen would be foolish

Design liabilities are often onerous on big infrastructure schemes, with contractors assuming liabilities for the operational lifespan of the project. These may include the assumption of liability for the designs of their suppliers and subcontractors. In a complex project where defects are identified, it is often unclear, at least at the outset, whether they are defects of design, which are insurable, or are due to poor workmanship and defective materials, which generally are not. This will mean that insurers will be drawn into disputes, at least in the early stages, until it can be established whether the alleged problem is an insurable risk.

This has reduced the willingness to insure construction-related risks, and design and construct risks in particular. Insurers often refer to the insurance markets as being “hard” or “soft”. In a “soft” market there is overcapacity leading to lower rates. The market for insuring construction risks is always cyclical, but is certainly accepted as being “hard” at present. The construction industry’s recent poor claims record has led to some insurers declining to underwrite new risks. In January of this year, it was reported that four Lloyd’s syndicates had decided in rapid succession to cease underwriting any new construction risks. Others have decided to reduce their capacities.

The inevitable consequence of a “hard” insurance market is not only a rise in premium costs for the insured but also the restrictions and limitations placed on the coverage provided.

• Insurers may insist on increases to the deductible – that is, the portion which the insured party must bear itself in the first instance.
• The limit of the indemnity may be reduced, which may be stated to include – as opposed to excluding – the insured’s costs of defending the claim.
• Insurers may seek to exclude some liabilities altogether. Although insurance wordings are usually underwritten on a “claims made” basis, insurers may impose a total limit for any or all claims made during that year. These are termed as limits “in the aggregate”.
• Finally insurers may impose stricter policy wordings leading to reductions in the indemnities conferred, and more onerous requirements with which the insured parties must comply. 

A “hard” insurance market will also usually lead to a greater willingness for insurers to invoke coverage defences. Where an insurer has ceased to underwrite a specific class of business, it will not derive any future income and its responsibilities will be limited to responding to claims or circumstances already notified. It no longer sees a future relationship with the client and any claims will be paid from the insurer’s previously accumulated reserves. 

There is no single exhaustive list of arguments that an insurer may advance when denying liability. Whereas a policy has a limit of liability for each and every claim, an insurer may allege that the facts constitute more than a single claim. This will mean that the insured could be asked to bear more than one deductible. If there is a claim for defectively designed cladding, replicated by the same designer in five separate projects, will this be a single claim under the policy or will there be five claims? Other typical defences may be an alleged failure to disclose material facts prior to the renewal of the insurance policy, a failure to notify the claim or the circumstances within any prescribed time limits, or even that the losses do not fall within the insurer’s obligations to indemnify. It may also allege that the defects are of poor workmanship as opposed to design. 

In the present “hard” insurance market, contractors would be well advised to consider carefully with their insurance brokers the wordings of their policies. The increased cost of renewing the cover will be important, of course, but what protection will the policy confer? To consider the wording only after a claim has arisen would be foolish. Litigation can be a painful experience, but to then find that any liabilities will not be covered, as was previously assumed, will be significantly worse.

Jeffrey Brown is a partner in Howard Kennedy