Binyamin Ali investigates how 900% PI insurance premiums hikes have affected envelope specialists, and why they don’t know if today’s jobs will remain compliant.
On 18 June 2017, four days after the Grenfell Tower fire, permanent secretary to the Department for Communities and Local Government, Melanie Dawes wrote to every local authority and housing association chief executive in England.
In her letter, Ms Dawes said that by the end of Monday 19 June, they all needed to have identified “whether any panels used in new build or refurbishments are a particular type of cladding made of aluminium composite material” (ACM).
The cladding installed on the Grenfell Tower when it was refurbished in 2016 was suspected to have aided the spread of the fire (a Hotpoint fridge/freezer would later be identified (on 22 June) as the source of the fire by the Metropolitan Police).
The chief executives were asked to examine the cladding installed on buildings over 18 m tall.
A combustibility testing programme followed (conducted by the Building Research Establishment (BRE), which set out to test six (later extended to seven) different combinations of ACM wall cladding and insulation materials for their combustibility (see box).
Four out of the seven tested combinations failed the fire safety test.
Unfortunately for the cladding industry, the government’s early move to prioritise finding out which buildings were safe for residents to continue occupying – a move which cannot be faulted – placed a negative public spotlight on cladding materials.
It had a chilling effect on clients and insurers which cladding firms have suffered from in lost business and in many cases, massive increases to their professional indemnity (PI) insurance.
Case study: Stanmore
“At the time, HCC, who were our insurers, said to us ‘Don’t worry. That building was insured abroad so it hasn’t had an impact on the UK markets and we don’t foresee it affecting your insurance renewal terms’,” says envelope specialist Stanmore director of operations Peter Baker.
Stanmore’s PI insurance had to be renewed by 29 September 2017, but in an attempt to get ahead and be more organised, the company started working on its renewal documents (before the fire) at the start of June and submitted its renewal papers just after the fire happened.
“Eventually at the start of August, it started filtering through. [Our broker said] he was struggling to get the same terms for renewal this year and when we asked what the terms were, we were told they’d be in touch because they were finalising the details,” recalls Mr Baker.
“As we started getting quotes through with exclusion clauses and increased premiums and things like that, it started hitting home.”
“In our terms for this year, we have an exclusion clause for anything combustible, which is ludicrous”
Peter Baker, Stanmore
To continue working on the projects the company had on its books and to win new work, it needed a £10m PI liability in place. When it became clear HCC’s terms were not going to be acceptable to it, the company had to look elsewhere.
“We went back out to market and had to get it from two separate providers – we got £5m and £5m with a lot less favourable premiums and excesses but we have got the cover. We were happy just to do that so we can make sure we provide that £10m PI we need to work on a lot of these projects,” Mr Baker says.
In 2016, Stanmore’s PI premium was £24,000 per annum, but this jumped to £68,000 last year. What’s more, their excess used to be £5,000 for each claim, but this increased to £50,000.
Having signed up to these terms, Mr Baker says he and Stanmore MD Rajbir Sing Manak sat down to talk about the insurance situation. “There’s pretty much no point claiming on particular projects [because] £50,000 is not a small sum of money, and probably would cover most of the work needed to remediate some of these schemes that may come out of the woodwork in the future,” says Mr Baker.
And it got worse for the firm. Mr Baker says: “In our terms for this year, we have an exclusion clause for anything combustible, which is ludicrous. Everything in the right circumstances is combustible. So that exclusion means that in the event of any fire or any claim relating to fire, we would potentially be uninsured from a PI point of view.”
Some of the biggest PI insurance providers (Allianz, Zurich, Chubb and Aviva) were all contacted for comment by CN, and asked to explain why there had been such drastic increases. But all, barring Aviva, declined to comment.
An Aviva spokesperson said: “Aviva has not applied any punitive increases as a result of Grenfell and continues to underwrite each risk on an individual basis.
“The nature of our corporate client base means we engage much more closely with individual clients as part of the underwriting and claims processes and therefore know much more about each individual risk. This means we are able to mitigate against pricing volatility and cover uncertainty during the renewal underwriting process.”
Combinations of ACM cladding materials tested
1. ACM with unmodified polyethylene filler with foam insulation - Failed
2. ACM with unmodified polyethylene filler with stone wool insulation – Failed
3. ACM with a fire retardant polyethylene filler (category 2 in screening tests) with polyisocyanurate (PIR) foam insulation – Failed
4. ACM with a fire retardant polyethylene filler (category 2 in screening tests) with stone wool insulation – Passed
5. ACM with A2 filler (category 1 in screening tests) with polyisocyanurate (PIR) foam insulation – Passed
6. ACM with A2 filler (category 1 in screening tests) with stone wool insulation – Passed
7. ACM with a fire retardant polyethylene filler (category 2 in screening tests) with phenolic foam insulation – Failed
Case study: Dane Architectural Systems
Dane Architectural Systems specialise in the design, manufacture and installation of façade solutions and architectural metalwork. The company was forced to accept even worse excess and premium costs than Stanmore.
“Our [PI insurance] renewal was in December 2016. Our normal cover for £10m liability cost £24,000 in 2016 and our quote for 2017 post-Grenfell was £240,000,” says the hugely frustrated director of Dane Architectural Systems Billy Field.
“When you consider that Dane are in their 50th year of business, they’ve never made a claim or had a claim made against them, obviously we were very shocked.”
Following the initial quote from its previous insurer, the company shopped around but still ended up paying £177,000 for the same cover it had the previous year, and had to increase its excess from around £5,000 to £500,000.
“It’s another erosion of profit, [which] causes people to make bad decisions and it’s just another nail in the coffin for the UK construction industry. I wonder how many European [firms] coming into the UK as cladding companies are having the same problem insuring themselves through European insurance agencies?” Mr Field asks.
The £30m turnover business was able to absorb what Mr Field describes as “exorbitant” insurance fees, and continue trading.
The company has also had issues with clients following work that was completed to specification, but in the aftermath of intense scrutiny of cladding materials post-Grenfell, it wanted changes made even though the work was signed off by building control. Dane and the main contractor have had to share a “high six-figure sum” between them, because the client said they “were responsible for putting that product forward [even though] there is a precedent to say there is nothing wrong with it,” Mr Field says.
Government guidance on what materials and combinations of materials are safe to use have so far been limited to the tests conducted by the BRE.
“The whole situation now is an absolute bloody mess. Nobody knows what’s happening”
Billy Field, Dane
Where a combination of materials has passed the test (such as test combination number four), the government’s report says: “This result shows one way in which compliance can be achieved and offers an indication of how remedial works could be specified.”
But this is followed by various caveats: “There are many different variants of this cladding and insulation and it is possible that products from different manufacturers may behave differently in a fire.”
This lack of official endorsement has created a lack of clarity, which in turn has bred doubt. It’s also important to note these test results were intended to be used by housing authorities and building owners, letting them know whether their building’s cladding is fire-safe or not – they were not intended to act as an update to the Building Regulations and to be used by the construction industry.
“We need direction from the government,” Mr Field says.
“They need to change the Building Regulations to make them more understandable because that will allay any fears that these insurers have and the public has.”
Government and industry response
The lack of guidance from government or any trade association has meant that the cladding being used in ongoing developments could be torn out at a later stage, as companies can’t simply stop all work until further notice.
“It’s not a nice position to be in because we want to continue to secure work and continue to work with our clients successfully, but there are still a lot of unanswered questions. There are people who are trying to make morally correct decisions but they don’t know if they are right or wrong,” Mr Baker says.
Mr Field adds: “We are having to make decisions to pre-empt the slow, lumbering government who have given us no direction whatsoever.
“The whole situation now is an absolute bloody mess. Nobody knows what’s happening. The guidance out of the preliminary report doesn’t realty say anything and we have still got to progress because we’re still installing and designing buildings now.”
The only significant government report to emerge so far is Dame Judith Hackitt’s Independent Review of Building Regulations and Fire Safety: interim report (referred to above by Mr Field) published on 18 December 2017, with the full report due to follow in Spring 2018.
Etex Building Performance Siniat Promat Avignon plasterboard 4
In her foreword, Dame Hackitt notes: “As the review has progressed, it has become clear that the whole system of regulation, covering what is written down and the way in which it is enacted in practice, is not fit for purpose, leaving room for those who want to take shortcuts to do so.
“There is plenty of good practice but it is not difficult to see how those who are inclined to take shortcuts can do so.”
She goes on to call for a “universal shift in culture” and sets out the direction of travel for the full review later this year. But given that Dame Hackitt has been set the task of reviewing the regulation of the whole industry, the interim report is understandably light on guidance for envelope specialists who need immediate direction on what will be deemed acceptable combinations of cladding materials.
“I know that lots of manufacturers are choosing to use the BS 8414 testing rig now,” says Build UK communications director Laura Smith – BS 8414 is the safety test the ACM cladding materials have been subjected to by the BRE.
“There is also a testing rig in Dubai, so those tests are being undertaken by manufacturers who want to know whether their systems pass that test or not,” Ms Smith adds.
“Everyone is still talking about ACM materials and there are obviously a lot more building products that are used on facades”
Peter Baker, Stanmore
Build UK is part of a group established by government to coordinate the construction industry’s response to the challenges of implementing recommendations from the Independent Expert Advisory Panel, set up on 27 June to advise government on immediate steps to ensure building safety.
Ms Smith confirmed she is not aware of any further work being done by government to test the many different cladding and insulation combinations used across buildings, and that it’s not something the industry response group is specifically looking at. She added that Build UK is launching a survey to understand the extent of the PI insurance problem and how it might impact capacity in the sector.
What next for the industry?
Looking ahead, Stanmore’s Mr Baker thinks the industry’s problems are only just beginning.
“I still think we’re at the tip of the iceberg. Everyone is still talking about ACM materials and there are obviously a lot more building products that are used on facades for buildings that are over 18 metres tall,” he says.
“The actual testing resources are dire. There’s only one rig out in the UAE and there are two in the UK. The resources aren’t there to get all these products tested in every different situations, and then there’s the question of money. I think we’re a long way away from a time when we can sit comfortably and have all the answers.”
Mr Baker’s prediction is likely to be proven correct. One of the key areas Dame Hackitt’s interim report singles out for change is the system of product testing, on which she notes: “Products must be properly tested and certified and there is a need to ensure oversight of the quality of installation work.”
This will no doubt involve more than the testing of cladding materials. With the final report not due to be published for another few months, and considering the time it will take the industry to take stock of and respond to its findings, implementation and direct results will be further away still.
Until then, the cladding industry will continue to exist in a state of extended limbo, not knowing whether work done today will be torn out tomorrow.
A broker’s view – Q&A with Ian Gregory, director of MPW Insurance Brokers
How is the market changing?
We have a number of clients who cut across this industry in various shapes and forms, but certainly [for those] with any involvement in cladding, and I’m looking at this solely from a professional indemnity angle, insurers are certainly playing hardball now – there is no doubt about it.
The market has hardened quite dramatically insofar as there are a number of players who would have done it but no longer do it, or what they’re offering now is based on quite a detailed question set. They’ll look far closer at the types of properties they’re working on and the type of cladding that is being used. One of their key concerns is the height of the property and anything over 18 m is proving to be an interesting battle.
Why is ongoing PI insurance required?
It’s pretty evident there is a problem in the market for these particular risks and I’m sure the majority of people who are involved are aware of that. Word gets around but it doesn’t make it any easier and doesn’t soften the blow.
Clients are certainly worried about the additional cost they are likely to incur and it’s a difficult one because you take out PI for two reasons: you want to protect yourself and there’s probably a contractual requirement to have it as well.
A contractor may require you to purchase continuing PI after the completion of a project for a period of six years or 12 years.
What happens if you can no longer afford PI?
There is normally a [part] of the contract that will state “as long as the cover is available at acceptable commercial rates.” There is an element of ‘get out’ (what is considered ‘acceptable’) there but of course, what it’s not doing is protecting you.
I haven’t come across a case when I client has invoked this, but I think it would be an interesting conversation because technically they’re in breach of their building contract because when they were instructed, they agreed to continue the insurance and it’s really a question of deciding [are you] in agreement that the cost is now prohibitive?
The policy holder may say it’s far too expensive but the client may not think it’s too expensive at all, so it might be a situation where it would have to go to arbitration.
The underlying problem is if they do not continue that insurance and there is a claim at a later stage, they are not protected.
When will things go back to normal?
I’ve heard that it’s going to be unsettled for the next 12-24 months and possibly beyond, with claims arising from previous cladding installations. With that in mind, insurers are taking a very cautious approach.