Who needs competitors when your friends in the insurance industry can put you out of business with a single phone call? Matthew Richards reports on construction's increasingly untenable position – and how it can find a way out
If you want to know what it's like at the sharp end of the insurance crisis, ask Ray Webber. He is the managing director of Essex-based roofing specialist Anglo Asphalt, and he is fighting for survival. First, he was threatened with sudden death when his insurer threatened to withdraw employer's liability cover earlier this year. Then he found out that, when he renews his cover next year, the cost increase alone would be five times his firm's annual profit. And what is happening to Webber is also happening to the rest of the UK's roofers and scaffolders.

"I believe that, come about Easter, sites will be stopping because craftsmen will be out of business," Webber says. "But a lot of people haven't realised what's going to happen yet. We're running headlong into a brick wall."

In the present climate, a well-run, healthy business can be rendered untenable with a single phone call. Manchester-based Craven Scaffolding paid £10,500 for its employers' liability cover last year. This year it was offered a policy for a premium of £100,000. Dave Law, the firm's accountant, says: "It was unbelievable – we were ready to put the tools away and pack it all in."

His broker managed to find an insurer willing to write a policy for £25,000 – more than double last year's premium – but Law says other scaffolders will not be so lucky. He says: "People will be laid off – Some people would close their business rather than pay increased premiums."

Peter Garnett at broker CCG, who found the cheaper insurance for Craven, puts the position starkly: "In today's market, insurers call the shots."

It will not be much consolation of the staff at Craven and Asphalt, but others are in an even worse position. A roofing contractor in the West Country with £4m turnover – which did not wish to be named – told Building: "We're paying £200,000 now, compared with £7000 two years ago."

The contractor adds that these kind of price rises will inevitably drive some subcontractors out of business, and that this will have repercussions throughout the industry. He says: "Instead of main contractors being picky about who they take on, us subbies will be in the driving seat, because specialist subcontractors will either be charging more or they won't be there at all."

Main contractors have already been hit by insurance troubles of their own. Announcing its annual results in July, contractor Haymills said it increased its turnover 17%, but that operating profit fell 60%, partly as a result of rising insurance costs. The firm's professional indemnity cover tripled in one year.

Chief executive Steve Feery says: "When you apply huge premium increases to an industry with low profit margins, and those increases need to be paid up front, you have very difficult dynamics in terms of cash flow. At some stage, price rises will be passed on to clients – but in the interim period, it's painful."

People don’t realise sites will have to stop as craftsmen go bust. We’re running headlong into a brick wall

Ray Webber, Flat Roofing Alliance

The insurance crisis has dampened down the industry's ambitions. Feery says insurance costs make expansion less attractive. And Dermott Craven, managing director of Craven Scaffolding, feels the same way. He says: "I'd like to expand, but insurance costs put me off." Getting your insurance renewed is hard enough, but starting from scratch is even worse. Emma Hastings of the RICS says: "If you're setting up a survey valuation business, you just can't get insurance."

Roots of the crisis
The present situation is the result of a number of factors. First there was the merger between Norwich Union, Commercial Union and General Accident in 1999, which drastically reduced competition in the market. Then there was last year's collapse of Independent Insurance, which removed one of the most popular – and cheapest – insurers from the marketplace.

The final straw was the attack on the World Trade Centre in September 2001. This hit reinsurance firms – the companies who insure the insurers – with big losses. The reinsurers then passed these costs to the underwriters, who in turn transmitted them to companies such as Craven Scaffolding.

Garnett identifies a less prominent factor: employer's liability premiums are rising, he says, because British society is growing increasingly litigious. "On Sky TV, virtually every advert break has an ad asking, 'Have you been injured at work?' It's surpassing America."

As a result, insurance premiums have risen across the board. Earlier this month, some fireworks displays were scaled down or cancelled because of prohibitive premiums – one village even replaced its real bonfire with a simulated one. Now a survey by the British Chamber of Commerce found that half of the firms that responded had had premium rises of 20%, 11% were paying double and 6% of businesses had been refused cover altogether.

Naturally, the hardest hit are the professions with the greatest risk, and few industries are as inherently dangerous as roofing and scaffolding. And, as Webber points out, an inevitable consequence of the present impossible situation is that roofers and scaffolders that cannot obtain affordable insurance will break the law by working without it. He says: "A lot of people are working uninsured. Sooner or later there's going to be a nasty accident."

Any answers?
It is difficult, amid the gloom that has enveloped the industry, to make out any answers to the insurance drought. However, there are some common sense points to be made. For one thing, the cost of a mistake or accident is needlessly increased by the way the industry goes about resolving disputes.

The head of one engineer's in-house legal team says: "You have to prove liability to get any money out of insurers, which starts a feeding frenzy for the lawyers. We're supporting a gravy train of people who milk all this for money.

Construction gets the insurance it deserves. While people persist in adversarial methods, they’ll get adversarial insurance

Stephen Bamforth, broker Griffiths & Armour

About 65-75% of an insurance payout goes on claims-related costs – that puts up premiums."

The problem is that if the system requires a proof of liability, that splits the project team into its individual members – each with its own firm of solicitors. What then ensues is a lively game of volleyball as each tries to pass that liability on to someone else – a process that is not helped by the complexity of the law in this area.

Clearly, this situation can only be radically changed if the notion of liability is treated differently. This has led some in the industry to promote single-project insurance as an alternative to the beggar-your-neighbour system. This would mean that everyone working on a scheme was covered by a single professional indemnity policy.

Stephen Bamforth, managing director of professional risks at broker Griffiths & Armour, says that construction gets the insurance products it deserves. "If it changes its way of working, it will get new insurance products. But while people persist with adversarial methods, they'll get adversarial insurance." He has therefore proposed an arrangement whereby the parties to a construction contract waive the right to sue each other, and agree to share any losses up to a prearranged ceiling; any losses above that are covered by a single insurance policy. The idea is that since losses are shared equally, nobody is tempted to play the blame game.

Despite backing from the Movement for Innovation and a plug in the strategic forum's Accelerating Change report, project insurance has not caught on yet. A drawback is that it is only suitable on major schemes – one of the few projects to use it is BAA's Terminal 5 at Heathrow. For smaller jobs, such insurance would not be cost-effective, according to the CCG's Garnett.

So where can small firms turn for help? The answer seems to be to trade associations – the Federation of Small Businesses wrote to the government this week demanding an urgent inquiry into spiralling insurance costs.

"Trade bodies have a role to play," says Andrew Large, director of external affairs at the Federation of Master Builders. The FMB has negotiated a deal with insurance broker Aon, that caps price rises in employer's liability premiums at 17% for FMB members. The National Federation of Roofing Contractors is also busy on behalf of its members, lobbying the House of Lords and looking into the creation of a mutual scheme for its members (see "The feeling is mutual", below).

The insurance crisis is bad enough already – so the question now is, will it get any worse? "Premiums will continue to rise, but you won't get the hundreds of percentage point increases any more," says Mike Williams, chief executive of the British Insurance Brokers Association. The association has warned the government that some subcontractors can no longer afford cover and are operating illegally.

The Feeling’s Mutual

An alternative to going through a commercial underwriter The National Federation of Roofing Contractors is considering the creation of a mutual insurance scheme for its members. Taking out insurance with a mutual scheme is a bit like joining a club. Any profit the scheme makes is either paid back to the members or, more likely, put into a reserve fund to cover future claims. At a time like this, such a cosy arrangement sounds very attractive to companies overwhelmed by massive insurance costs. But, as the following examples show, some mutuals work better than others. One that worked was The Wren Insurance Association, a selective club formed by large architectural firms. Its 47 members include BDP, Chapman Taylor and Sheppard Robson. It was created in 1987, and gives its members professional indemnity cover. The scheme is run by specialist mutual manager Tindall Riley, whose in-house lawyers handle all claims. Managing director Alasdair Niven says: “We know all our members personally, and visit them in their offices.” Although Wren members pay lower premiums than they would if they were insured by commercial underwriters, Niven warns: “People shouldn’t start with a mutual because they want cheaper insurance in the short term.” One that didn’t was the Structural Engineers Professional Indemnity Association. It was launched in the late 1980s and endorsed by the Institution of Structural Engineers. Griffiths & Armour’s Stephen Bamforth recalls: “In terms of cash flow, it was very damaging to members.” That’s because the initial premiums were not enough to cover claims, and members were tapped for more money. The scheme was wound up after five years, and its business was sold on to a commercial insurance company.