The Impact Of Restrictions In The Professional Indemnity Insurance Market

Most professional consultants do not have sufficient financial capacity to pay for claims brought against them in respect of professional negligence. Subject to the terms of the particular policy, professional indemnity insurance ('PII') provides insurance cover to a consultant where they breach a professional duty that gives rise to financial loss or damage to a third party. Further an obviously related reason, PII is also of vital importance to developers in that it provides a route to financial recourse with regard to any potential design liability of its professional team.

The Grenfell tragedy and Carillion's collapse has contributed to a recent hardening of the construction PI market. These incidents, combined with the ever growing threat of climate change catastrophes, have resulted in insurers considering ways of limiting their exposure.

Exclusions in PI policies

In late 2018 the UK Government announced a ban on the use of combustible cladding on high-rise residential buildings above 18 metres. As a result, PII insurers are frequently choosing to reduce or even exclude cladding cover and fire related safety issues. The following are some of the preferred ways in which insurers curtail PII and reduce their risk:

Increasing the excess for cladding loss / fire related safety issues. Imposing an aggregate cap for cladding loss / fire related safety issues. Excluding consequential and/or indirect losses arising from cladding loss fire related safety issues. Limit cladding cover so far as building regulations or fire safety regulations are met. Requesting additional information regarding the insured's supply chain / risk profile. Charging increased premiums to ensure that adequate cover can be provided. Move towards an aggregate cap

As a way of mitigating their risk, it is becoming more common for PII insurers to offer policies on an aggregate basis, as opposed to the more traditional 'any one claim' basis. This often includes a mix of aggregate sub-limits, particularly with respect to claims relating to pollution and asbestos. The move towards an aggregate cap and generally more restrictively structured policies has presented obvious complications for parties involved in construction projects.

As well as making it difficult for consultants (and design and build contractors in this context) to obtain adequate cover, the tightening of the market presents developers with the challenge of persuading third party stakeholders to accept the...