The Irish construction professional indemnity (PI) insurance market has been noticeably hardening in recent years. Having enjoyed quite a lengthy period of relatively stable market conditions, it is our experience that many insurance companies are now tightening their policy terms, increasing premiums and overall are seemingly more reluctant to underwrite the same level of risk. But what is driving this market change and what are the implications?
What is PI?
PI Insurance is an insurance product that provides protection where the insured is in breach of professional duty and such breach gives rise to loss or damage to a third party. It is a “claims based” policy, meaning the policy will pay out for any valid claim made during the policy period (typically 12-month), regardless of when the alleged breach of duty occurred. PI insurance is particularly relevant in the construction sector as a number of consultants such as architects and engineers (and indeed, contractors and subcontractors with design responsibility) have a professional duty in relation to design services. Employers have historically taken comfort in the knowledge that such construction parties have the benefit of a PI policy to respond to any claim taken by the employer against them for defective design. However, recently, the availability of PI in the construction sector and the terms upon which such insurance is available has proven a source of difficulty for contractors, consultants and sub-contractors, which suggests the comfort PI insurance has previously given employers may be under threat.
Why is the PI Insurance market hardening?
The Grenfell fire of June 2017 is considered the worst residential fire in the UK since the Second World War and has widely been cited as a turning point for the construction PI insurance market. Combustible materials used to refurbish the cladding exterior of Grenfell Tower are thought to have caused the rapid and devastating spread of the fire. As a result, insurers are increasingly excluding claims related to fire safety, particularly in relation to cladding systems. This tragedy has also resulted in a surge in insurance premiums for contractors and other professionals in the industry such as architects and surveyors, in some cases to a prohibitive level.
The impact of international events such as COVID-19 and Brexit has also reduced the number of insurers in the Irish construction market and those remaining have expressed reluctance to write new business. It is reported that insurers in 2020 were actively seeking to reduce their exposure to construction PI insurance policies. The ongoing COVID-19 pandemic continues to result in delays and even cancellation of construction projects, which is adding to the general wariness of insurers in underwriting construction companies. The full extent of the impact of COVID-19 on the PI insurance remains to be seen. However, it seems likely that the uncertainty and increased risk of delay caused by the COVID-19 pandemic will serve to perpetuate the tightening of the PI insurance market in Ireland.
Recent trends in the Irish PI market
Each and Every Claim vs Aggregate Cover
A key shift in market trends is the availability of “each and every claim” or “any one claim” cover. A number of major insurers, that have in recent years been very active in the Irish market and have underwritten policies for a substantial number of larger professional firms and construction companies, have stopped offering “each and every claim” policies in favour of “aggregate claim” policies. This will have a noticeable impact on the market.
The market has witnessed the exit of a number of insurers in recent years. With fewer insurers willing to write PI insurance for construction projects, it has become very difficult for many contractors, consultants and sub-contractors to obtain cover at an affordable level and/or on acceptable terms. Premiums have reportedly increased between 20% and 400%, with higher excesses being applied. This may also pose issues for construction companies and consultancy firms who are contractually obliged to maintain specific limits of indemnity of PI insurance on an each and every claim/any one claim basis under the terms of their contract. Employers may need to consider paying the increased premium to ensure the construction parties on the project have PI cover in place.
Another challenge is the increase in policy conditions and restrictions such as exclusion for claims relating to certain incidents (such as fire cladding as mentioned above).
There has also reportedly been an increase in the use of reinstatement. Unlimited reinstatements are often referred to as being tantamount to each and every claim cover. However, the devil is in the detail on exactly what reinstatement is being offered and specialist advice should be sought from a construction insurance advisor to understand the nature and extent of the cover being offered.
The availability and terms of PI insurance, particularly in the wake of COVID-19, remains unknown. However, it does seem that the recent hardening looks set to continue for the near future. Going forward, employers and construction counterparties should look closely at the PI insurance requirements in the underlying construction contracts to ensure the terms aligns with the PI insurance available. A “look back” exercise might also be prudent, to assess what contractual commitments have been given with regards to PI insurance and how might this now be addressed in the changing climate. Employers and construction counterparties should take specialist advice from a construction insurance advisor in relation to the matters discussed in this article.
For further information on this topic, please contact Conor Owens, Partner, Siobhan Kearney, Senior Associate, or any member of A&L Goodbody’s Construction and Engineering team.