Building safety 2021 – the policy difficulties
What are the recent developments and the impact on the insurance industry?
The draft Building Safety Bill (“the Bill”) has now been published for pre-legislative scrutiny by industry, law makers 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 (“MHCLG”) 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.
All of these recent developments indicate a serious attempt by Government to press forward with the resolution of these issues, and the impact on the insurance industry is potentially very significant.
Funding of remedial works
There is increasing public and political concern as to the situation of the residents of buildings affected by unsafe cladding. Stories abound in the local and national press of leaseholders suffering very severe financial consequences as a result of the costs associated with unsafe cladding to the exterior of their properties.
The Government has recently floated the idea of a low-interest loan scheme for leaseholders to access funds for remedial works arising from building safety issues including 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, a number of MPs added their voices to these objections during debate in the House of Commons.
If the Government intends to press ahead with a loan scheme in the face of such vocal opposition, then 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. One likely option, already adopted by some Australian states, is a levy on future construction projects.
Another possibility is the issue of legal claims for breach of contract and/or breach of a tortious duty of care against developers, contractors and professionals. However, 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.
Impact on the insurance industry
The Bill itself has potentially very significant ramifications for the insurance industry, and, in particular, the professional indemnity market. The creation of new professional dutyholders, and the increase in scope of the duties and obligations that fall to existing professionals, may well cause headaches in an already-challenging area of the market. The availability of insurance to such dutyholders will be critical to the success of the Bill’s proposals in this regard, but underwriters’ appetite for such new and untested risks remains to be seen. There is little doubt that Government will be watching the insurance industry’s response closely.
There is, however, a more immediate reputational issue facing the insurance market as a whole. While public and political ill-will is currently directed primarily at developers or the Government, the insurance industry is increasingly being criticised for its perceived role in the deepening crisis. On 20 December 2020, Lord Stephen Greenhalgh, Minister of State at MHCLG, asked on Twitter:
“Are insurers profiteering from the #GrenfellTower tragedy? @JeremyClarkson can afford a hike in his insurance from £8k to £60k for his West London high rise clad in safe material with a sophisticated fire-prevention system. Many can’t.”
Allegations of this nature from within Government and the press risk undermining public confidence in the insurance sector, and increase the prospects of Governmental policy intervention. While the increase in buildings insurance premiums on high-risk properties may be justifiable in many instances, underwriters should be careful to consider whether, in any particular instance, further increases on premiums is objectively justifiable in light of the true risk to the property. A market response to allegations of profiteering, and proposals for ensuring a common and coherent approach to premium-setting, may also need to be considered to alleviate concerns in this regard.