Cover up

Have you tried to renew your employer's liability insurance recently? If not, you could be in for a bit of a shock. Some contractors are reporting hikes as much as 300% following a general hardening of the insurance market post 11 September.

The construction industry has been particularly badly hit, with scaffolders, demolition contractors and roofers proving too hot to handle. Specialist engineering contractors working in hazardous sectors, such as high voltage, are finding themselves in the same boat. With so many firms across the industry now perceived as too risky, the National Federation of Builders has warned that building sites could grind to a halt as increasing numbers of construction firms are refused cover by their insurers.

The first signs of what was to follow came back in 2001, long before 11 September. "There had been a cheap insurance market for some time, with premiums foolishly competitive," explains Richard Forrest-Smith, business development manager with the Electrical Contractors' Insurance Company (ECIC). "Losses were filtering through so increases were inevitable. Then the events of 11 September stripped capital out of the market, driving the costs of insurance up."

A briefing paper from the Association of British Insurers (ABI) puts more flesh on this argument. It claims that underwriting losses during the pre-2001 soft market (£4.5 billion since 1993) saw prices start to harden last year in an effort to rebuild capital and deliver reasonable results to shareholders. The attack on the World Trade Centre then removed an estimated $80 billion of worldwide capacity at a stroke, further impacting on premiums.

Another factor is that some companies have pulled out of the insurance market altogether due to the volatile nature of profitability in the sector. As major companies leave insurance or scale down operations, this further reduces capacity in the market.

In the UK, the collapse of Independent Insurance further fuelled the upwards price trend. According to the ABI, Independent was responsible for insuring a substantial part of the liability market and that capacity has now gone. Furthermore, Independent's premiums were set at uneconomically low rates. "Anecdotal evidence suggests that their commercial business was significantly below an economic market rate – by as much as 50%," says the ABI. As a result, companies insuring now with a new provider are faced with substantial increases – which industry estimates suggest are between 40-100% – over and above the other effects on premiums generally.

All is not doom and gloom, insists Forrest-Smith, not for m&e contractors at least. "In the construction sector, the reduction of capacity affects the high-risk industries first. Scaffolders and roofers may well have particular problems getting cover. The electrical side has also seen an effect with a correction in liability pricing of about 40-50%. However, high-risk elements such as high voltage and heavy industrial are more problematic."

The problem for contractors facing a big hike from their usual insurer is that they may have trouble getting any alternative quotes at all. "Most businesses are managing the risks they already have and are not looking at new business," says Forrest-Smith. ECIC's policy depends on the firm. As a subsidiary of the Electrical Contractors' Association, ECIC will support the high-risk work of ECA members. For non-ECA firms, it will generally cover typical electrical contracting risks but is very selective on high-risk work from these companies.

It looks like it is going to get worse before it gets better. Insurers are being hit for new types of claims and have to get their money back somehow. Stress, violence and sick building syndrome are all relatively new phenomena; one major insurer reports that payments for stress in the UK rose by 19% in the last year.

The insurance profession is also blaming the legal system for rising premiums. The Law Commission has been reviewing the extent and level of damages for personal injury claims and the Civil Justice reforms proposed in the Woolf Report have also impacted on such claims; the ABI estimates that settlements for personal injury claims are rising at around 10-12% per year.

Many in the insurance sector are calling for reforms of the 33-year-old liability legislation. The British Insurance Brokers Association (BIBA) has put forward proposals including ring fencing claims for long-term illnesses like hand-arm vibration and asbestos-related diseases. The Association would also like to see a maximum payout for those claims. It argues that such diseases were unheard of when the liability law was drawn up and claim it is now too expensive to include them. BIBA proposes a workers' compensation scheme instead.

Other proposals include an insurance pool, where an insurer would cover its contractors on a pooled basis rather than individually. There have been calls for a government-backed mutual insurer for construction similar to the Pool Re scheme introduced to provide cover against terrorist activities. Railtrack is one company currently investigating the pool approach in reaction to problems experienced by many of its thousands of contractors threatened with going out of business because they cannot obtain employer's liability insurance.

For many companies in the m&e contracting sector, the recent hikes will come as something of a shock and often bear little relation to past claims records. The National Federation of Builders (NFB) has called for clearer guidelines on the calculation of premiums: "Companies currently have no guarantee that any improvement to their risk management will lead to a proportionate reduction in their premium costs," said NFB director of policy Barry Stephens. "A degree of increase in premium costs was inevitable given the market conditions. But the hikes being witnessed are unsustainable and do not reflect the true risk companies present." The industry may well have to resort to benchmarking measures to differentiate between high and low-risk companies.

Clearly something has to give. Already there are warnings that smaller contractors are going out of business as perilously low profit margins mean that they cannot afford the massive price hikes. Reports also abound of contractors illegally trading without cover. "In worse cases, businesses are struggling to even obtain the cover, causing a big headache to them," says Paul Williams, head of business insurance for Hill House Hammond Business. "Employer's liability is a legal requirement and they risk trading illegally if they do not have it."

Contractors coming up to the next renewal need to provide as much information on risk as they possibly can, ranking hazards and what can be done to minimise risk. Working closely with your broker is the best way to ensure that your premium is a true reflection of the risks posed by your business.