Facing exacting questions at renewal is proving the order of the day for firms seeking to renew their Professional Indemnity (PI) cover, particularly for design and construction businesses. Brokers need to respond to this by being more alert than ever to the requirement to ask the pertinent questions to which insurers expect answers.
Acting in the client’s best interest entails gathering as much information about previous contracts handled by a company as possible. Brokers should be asking clients to go back through their files to examine past projects, including a review of materials and processes where appropriate, in the light of what happened at Grenfell Tower.
Terms offered by PI insurance markets have typically hardened as a result of the sizeable underwriting losses incurred and anticipated because of Grenfell. PI insurance policies operate by providing retrospective cover – covering projects in the past that have been handled by the insured – as well as cover for current-day projects and those being handled in the future.
Professional errors leading to a claim can occur several years before they actually manifest themselves. Insurers are therefore keener than ever to know what work has been carried out in the past and to assess the risks these could carry, for example, understanding what type of cladding, façade and panelling materials were used.
Some insurers no longer have the appetite for PI risks, so have withdrawn from the market altogether. This is not surprising. Lloyd’s and London Markets made a £2bn loss in 2017 and PI was an underperforming class. One underwriter – Berkshire Hathaway – made its first loss in 15 years. Those insurers remaining are getting tougher on PI policyholders, by restricting cover, hiking premiums, increasing excesses or asking for elements of self-insurance.
Over a third of claims result from errors made by third parties…
Brokers who are being asked to place PI risks on behalf of construction companies, architects and consultants, need to be on their toes. They must provide insurers with the full picture, however unpalatable it may be, highlighting the retroactive date of the policy and what historic projects need to be covered.
Naturally, insurers are nervous about large claims appearing on the horizon. They are even asking brokers to go back 15 years – not the typical five or ten – declaring all material facts relating to projects carried out in the past, on which their clients could have offered advice, design specifications, inspection or supervisory services, or consultation.
Insurers want to see that businesses have systematically audited previous installations, to ascertain what they used in the past does not now present a fire risk. They also wish to reassure themselves that buildings such as schools, hospitals and commercial premises – and not just high-rise residential tower blocks – are not at an increased risk.
Furthermore, insurers need to know whether or not the proposed insured has been asked to remove any potentially dangerous materials from any sites, or whether any concerns have ever been raised about materials used in the past.
Both clients and brokers need to be giving themselves a long lead-time to deal with a PI renewal, as renewing a policy or finding a new insurer to take one on could easily take two to three months with all the additional information required to be sourced and provided. Whilst much of the spotlight is on the construction world, others looking for PI cover such as lawyers and accountants, also need to get in contact with their broker some way ahead of the date from which they require cover, or when a policy is due to be renewed, for the same reasons.
Not declaring material facts relating to a risk could land a client in serious financial trouble. Any circumstances known at the inception of a policy, undeclared to the insurer, can result in a claim being refused. It is also essential to get the retroactive date right, as any claims arising from work carried out, or advice given before that date will also be turned down. From our data analysis, the average time it takes for an error to be discovered is 1171 days, but some errors go back much further.
Over a third of claims result from errors made by third parties, so the audit of what has happened in the past needs to cover the actions and materials choices of sub-contractors who carried out work in the main contractor’s name.
Having a broker assist by probing and asking the right questions is probably vital for many who are seeking PI cover in the construction and design sectors. Contact us now to find out more about how we can ensure you get the correct cover to meet your requirements.
Sources: Willis Towers Watson PI Flyer: Property Cladding Willis Towers Watson PI Webinar – Construction Professional Indemnity Insurance, January 2019, A Brief Guide