The Building Safety Act gained Royal Assent in April 2022 and will be fully enforced by October 2023. Janet Penny, Client Manager for Aon Commercial Risk Solutions, considers the insurance implications for building owners, developers, and contractors.
The Building Safety Act 2022 is intended to drive improvements in building safety and risk management, benefitting residents and ultimately reducing the cost and frequency of claims. But, as it brings in some significant changes to legislation, stakeholders must consider the insurance implications and take appropriate risk mitigation action.
One of the key changes under the Act is that it enables direct claims to be made against manufacturers and suppliers of defective construction products. Where a defective product is the cause, or one of the causes, of a dwelling becoming unfit for habitation, and it results in injury, damage, or economic loss, it will be possible to pursue a claim against the supplier or manufacturer directly.
This circumvents the previous situation where only those in a direct contractual relationship could successfully make a claim against the manufacturer. In today’s economic environment, contractors are increasingly going into receivership and so, even if this happens, aggrieved parties can still claim directly from the manufacturer or other parties in the chain.
Limitation extension
Changes to the Defective Premises Act 1972 also significantly alter the legal landscape. The changes, which were brought under the Building Safety Act and came into effect on 28 June 2022, apply a 15-year limitation period for new work from when the works are completed. Further, for cladding products, where the work was completed before 28 June 2022, a 30-year retrospective liability applies.
These are massive periods in time and a significant increase from the six-year limitation period that was in place under the Defective Premises Act 1972. The length of the limitation period creates the potential for a challenge under the Human Rights Act 1998 as the lapse of time means it may not be possible to have a fair trial, but it will have major implications for stakeholders.
The Act also introduces a new head of damages – economic loss due to a dwelling becoming unfit for habitation. Previously economic loss would only have been covered when it was linked to claims where damage or injury occurred, so this creates a potential gap in cover.
Insurance implications
The recent introduction of these changes means that insurer responses are, yet, unknown. However, with new and broader liabilities in place, insurers are likely to seek increased premiums in some areas as well as imposing additional exclusions.
This will have implications for the public sector, both in terms of its own cover, but also through higher costs, as the construction sector passes insurance premium increases along the supply chain.
In addition, there are new uninsured exposures under the Act – pure economic loss where no damage or injury has taken place. This may arise where a Local Authority incurs a loss as tenants can no longer stay in a building that has been deemed unsafe due to the fire risk from the cladding.
It is still unclear whether insurers will have appetite to cover this and there are two key areas that warrant investigation – public / products liability and professional indemnity (PI).
With public and products liability, policies normally only respond to bodily injury and property damage, covering any consequential economic loss arising directly from these incidents. Any economic loss that is not directly linked to an injury or damage would usually be excluded.
Cover gap
This gap in cover will exist for all prospective work but it may be possible to cover any stand-alone economic loss under a separate financial loss extension to a public liability policy on a claims-made basis. However, because liability also applies retrospectively, manufacturers and suppliers of cladding products would also suffer from up to a 30-year cover gap on previous policies placed on an occurrence policy trigger. Again, this cover may be available through a financial loss extension but building owners without a history of purchasing this cover would need to specifically request such retrospective coverage and it is not clear it would be given.
There are also potential issues for PI insurance. Claims made under the Act against a professional who advises on the use of construction products, which could include architects, engineers, fire safety advisers and other consultants, would fall under a PI policy.
As PI covers are written on a claims-made basis, where any claim would fall to the policy in force when the claim is made, this has resulted in some restrictions in cover. Total cladding exclusions are commonplace for professionals in the building trade.
While this market position continues, PI policies are unlikely to provide any cover in respect of historic cladding defaults. In addition, with more building owners attempting to plug the retroactive gap, it’s likely that cover will contract further.
This will also create pressure on PI premiums, at a time when the financial lines market is already very stretched and has seen significant rating increases over the past few years. These costs will initially be borne by these professionals but will inevitably be passed down the supply chain to other organisations, including local authorities.
Risk mitigation
Given the changes, and insurance implications, of this new legislation, public sector organisations should review their risk mitigation strategies to ensure they are appropriate. Liabilities, but also an organisation’s recourse to compensation, have shifted in some areas and new measures may be required.
More record keeping will be essential. Under the Building Safety Act 2022 it is possible to pursue the manufacturer and/or supplier of any defective material, even if there is no contract between the organisation and that party. This means that, rather than just holding details of the main contractors, it will be important to hold details on all parties to the work.
Keeping accurate records affords an organisation greater protection, giving additional routes for remedy if one of the parties to the building construction goes out of business. This is particularly relevant in the current economic climate where there is a greater risk of a business failing.
Local authorities should also ensure adequate insurance is in place where they run facility management companies, either directly or through a joint venture. Individuals working for these companies could incur personal liability if they are involved in serving notices on others or advising on fire safety protections.
Directors’ and Officers’ insurance (D&O) can provide protection for managers and senior employees carrying out additional responsibilities under the Act. Adequacy of limits should be reviewed for companies in the private sector as it also should be for officials’ indemnity in the local authority sector.
It’s also advisable to ringfence the D&O cover and secure a reasonable limit where an officer is on the management board of a joint venture carrying out work with implications under the Act.
Historic review
The introduction of longer limitation periods means it is also prudent to review old claims and construction contracts to consider the potential impact of the extension.
Setting up a risk register detailing potential additional exposure because of the retroactive limitation period, noting what is insured and uninsured for historic and future contracts, is prudent.
The new provisions mean there could also be cover gaps, for instance economic loss. Organisations need to consider the ramifications of these gaps for ongoing and historical projects, both in terms of their own cover where relevant, but also through seeking evidence of the cover held by contractors and suppliers they have worked with.
Contracts with contractors would continue to include statutory responsibilities, including that under the Building Act, but it is also recommended that the contractors and their sub-contractors hold public and product liability and professional liability cover for 15 years from the date of the completion of the project to match the period of new requirements in the Act.
Any additional exposures should be discussed with insurers and brokers at the earliest opportunity to determine their appetite to provide cover.
Working closely with brokers and insurers is key to understanding how the Building Safety Act 2022 affects an organisation and the adjustments in cover and risk mitigation strategies that are now required. The new Act will bring significant improvements in safety but public sector organisations need to ensure they are prepared for the potential ramifications of this new legislation.
Janet Penny is a Client Manager for Aon Commercial Risk Solutions. Janet has worked in insurance broking client management service delivery for more than 15 years specialising in the public sector for local authorities, universities and NHS trusts. Janet provides day to day servicing as well advising on insurance tenders and general construction insurance advice.
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This article has been compiled using information available to us up to 06/07/23.
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