Building Safety 2021 — a state-backed insurance for construction professionals
Looking at the state-backed insurance scheme created to tackle the obstacles faced by construction professionals in obtaining insurance cover.
10 February 2021 saw a major milestone reached in the government’s building safety programme, with the announcement of a £3.5 billion fund to finance the cost of unsafe cladding for all leaseholders in residential buildings 18 metres (six storeys) and over in England.
Hidden in the body of the announcement was another major but less-heralded policy: the creation of a state-backed insurance scheme to tackle the obstacles faced by construction professionals in obtaining insurance cover. This proposal is currently limited to professionals who complete ESW1 forms, which are currently the cause of a bottleneck in the property market, but it nonetheless amounts to a significant shift in the government’s engagement with the insurance market and the professional indemnity market in particular. It has the potential to ease the claims pressure on professional indemnity insurers, which has led to substantial premium increase in recent years. The advent of a state-backed insurance scheme for construction professionals might also address concerns that have been raised regarding the availability of insurance for new professional services created by the Building Safety Bill and specifically the key role of Building Safety Manager (for more detail on these new roles, see our previous article on the subject).
The scope of the insurance scheme, eligibility to apply for it and whether it will remain limited to the completion of EWS1 forms remains to be seen. We anticipate that there will be substantial pressure from construction professionals to expand the scheme to a wider range of professional activities.
As has been widely publicised, the draft Building Safety Bill (“the Bill”) has now been published for pre-legislative scrutiny by industry, lawmakers and interested stakeholders. The Bill is, however, just one part of a wider attempt to address building safety issues, which includes:
- The Ministry of Housing, Communities and Local Government has recently released preliminary details of its proposed leaseholder funding scheme for cladding and building safety issues;
- The Fire Safety Bill received its third reading in the House of Lords on 24 November 2020 and is likely soon to receive Royal Assent; and
- The Royal Institute of Chartered Surveyors (RICS) has released guidance as to the correct use of the EWS1 form to try to reduce the bottleneck of unsaleable properties.
Funding of remedial works
The government has now presented its policies for: i) £3.5 billion to fund the cost of replacing unsafe cladding for leaseholders in residential buildings 18 metres and over; and ii) a long-term and low-interest government-backed loan scheme offered to remediate buildings between 11 and 18 metres. Under the second scheme, no leaseholder will ever pay more than £50 a month towards the removal of unsafe cladding. Although details as yet are thin on the ground, there has been immediate and vocal resistance from pressure groups, property owners and the press to the idea that leaseholders should bear any responsibility for remediation costs (whether funded by way of loans or otherwise). On 1 February 2021 (and in advance of publication of the government’s funding proposals), a number of MPs added their voices to these objections during debate in the House of Commons.
As the government intends to press ahead with a loan scheme in the face of vocal opposition, it will be doubly important to demonstrate that active steps are being taken to reduce the sums which fall to leaseholders to pay by seeking funds from the construction industry. An industry levy on certain high-rise developments in England has already been announced, together with a new tax for the UK residential property development sector. One possible further option available to reduce the liability of leaseholders is the issue of legal claims for breach of contract and/or breach of a tortious duty of care against developers, contractors and professionals. Such claims will not, however, be straightforward: the government itself has no standing to bring such claims, and in many instances, the leaseholders will also lack that standing. Freeholders may have a right to sue, but in circumstances where government and/or leaseholders are bearing the cost of remedial works, it seems unlikely that many freeholders will wish to incur the risk and expense of issuing legal proceedings which have no guarantee of success. Limitation of actions is also likely to be an ever-increasing problem.
Given the current strength of feeling, the government’s proposals for a leaseholder loan scheme may need to be revisited. Whatever the outcome, however, the insurance sector is likely to find itself drawn ever-deeper into these issues, and it is possible that the government will look to impose requirements on the market if agreement cannot be reached on a sector-wide response.
It is clear that building safety issues are an increasingly high-profile topic, and the insurance sector is involved at almost every stage. The advent of a state-backed professional indemnity insurer is a very significant intervention in the operation of the UK construction insurance market and has the potential to affect both premiums and capacity. Developments in this area should be carefully tracked, therefore, and clear, consolidated responses to emerging issues should be agreed across the market where possible. Certainly, in light of the clear indications from the political sphere that the insurance market will be expected to be part of the solution to the various issues relating to building safety, any opportunity for stating the market’s case should be taken. Professional bodies will hold a critical role in discussions with government and stakeholders, and engagement with consultations and sector collaboration is to be strongly encouraged.
For further guidance or support, contact our construction law solicitors.
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