There has been a substantial amount of press around the introduction of the proposed Building Safety Bill.
The tragic events of the Grenfell Tower fire in 2017 highlighted failings across the system of building and managing high-rise homes and this has resulted in the UK government demanding improvements in building and fire safety. In this insight, we focus on the impact that the proposed Bill may have on the limitations under the current Defective Premises Act 1972 (DPA) and what this could mean for buyers of Professional Indemnity (PI) insurance and their insurers.
Section 1 of the Defective Premises Act (DPA) requires those involved in constructing a dwelling (all dwellings, not just flats in high-rise buildings) to ensure that it is “fit for habitation” when the work is finalised. If works are completed to a sub-standard level, a claim for compensation can be brought against the responsible parties. The current scope of the DPA is such that the claimant has a period of six years to make a claim, otherwise the matter is time-barred.
Compensation can be claimed from anyone responsible for the defective work, such as builders and other contractors, architects or designers.
The key changes that the proposed Building Safety Bill will bring to the DPA can be summarised as follows:
- The DPA will apply to extensions/refurbishment works to existing dwellings in England and Wales. Currently the Act applies to new properties only.
- The period in which to bring claims under the act will be extended from six years to 30 years. This essentially means that a claimant can bring an action against a defendant for works that were finished up to 30 years before the new Building Safety Bill comes into effect. Assuming that the Act comes into force this year, that would mean that there is retrospective exposure to claims for works completed as long ago as 1992. Additionally, the limitation period will be extended prospectively (i.e. for work completed in the future) from six to 15 years.
What does this mean for the insured and their insurers?
Clearly these proposed changes to legislation create a much wider exposure for those firms involved in the construction and refurbishment of residential dwellings in England and Wales. Not only will the Act apply to new builds and extensions/refurbishment projects, the time frame within which to make a claim has been extended considerably.
The extension of the limitation period means that claims that were previously time-barred will no longer be. This could well lead to an influx of complaints from homeowners, some of which may inevitably develop into PI claims against construction professionals and their insurers. Given that the UK construction PI market is already stressed, it is feasible that insurers could take action to limit their exposure to claims that were unforeseen both in terms of frequency and severity.
The longer statue period will also present issues in defending claims. Staff involved in projects completed many years ago would have moved on and documentation needed to help defend claims will be harder to provide.
It is worth mentioning here that some buyers of PI insurance in the UK purchase an aggregate limit of insurance (either because they elect to or they are forced to due to lack of market appetite), meaning that the amount of protection they have is capped to a specific amount for all claims in the policy period. Being exposed to a greater number of claims could well mean that limits of insurance are eroded or exhausted quicker and they will need to be increased or replenished if the insurance buyers are to remain compliant with their contractual obligations to maintain PI insurance. This will create further costs for construction professionals, not just in terms of additional premium but through having to fund additional policy excesses (typically applying to each and every claim).
Insurance aside, house builders in the UK are already starting to consider their financial exposure to rectify historic fire safety issues that the changes to the legislation would present.
What can we expect from PI insurers?
At this stage the impact on insurer appetite and how they will approach the proposed change in legislation is unknown. What we do know is that PI insurance for the UK construction sector in the last 3-4 years has been challenging with a number of insurers choosing to exit that part of the market due to poor profitability and increased claims exposure, particularly in the fire safety and cladding space.
Rightly so, PI insurers are following developments closely and it may well transpire that the increased duty under the DPA will cause insurers to revisit their position and potentially seek to limit their exposure.