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Surveyors and fire safety — Important changes

On 1 July 2024, RICS amended its stipulations for mandatory professional indemnity insurance for surveyors.

The changes increase the cover for fire safety claims, but it is important to understand that gaps remain.

Alex Marler outlines the changes, and what they mean for surveyors and their insurers.

Background — surveyors’ compulsory PI insurance, and the competing pressures

RICS-regulated firms are required to hold professional indemnity insurance. RICS stipulates the minimum terms of cover, and maintains a list of approved insurers. This intention is to ensure that there is suitable cover for the firm, and money available to compensate clients if mistakes are made. 

There is a balance to be struck — the terms need to give appropriate protection, but not be so onerous that insurers are unwilling to offer cover, or the cost is prohibitive.

In recent years, issues around fire safety have been a particular factor in striking that balance.

Grenfell and the new fire safety regime

The risk of fire safety claims has been a significant issue for surveyors in recent years.

In the wake of the Grenfell Tower tragedy there was significant concern and uncertainty about how widespread such fire safety issues might be. 

In 2019, the ‘EWS’ (external wall survey regime) was devised — in short, a process to assess cladding on certain residential buildings, intended to reassure buyers and lenders as to safety, or to identify the need for remedial works, and factor this into valuation of the property. Undertaking EWS work presented new risks for surveyors.

At the same time, issues continued to be discovered in buildings around the country, and there was still no clear understanding of the scale of the problem. The EWS regime was tweaked and re-tweaked — and then the covid-19 pandemic hit, presenting new practical challenges for surveyors.

Needing to keep insurance commercially viable, RICS responded by loosening the minimum terms of insurance. From April 2020, insurers were allowed to exclude cover for EWS work, and fire safety claims more generally. Many insurers did add such exclusions, and/or increased premiums. Others decided to stop offering insurance to surveyors. 

The requirements then swung back a little: from 2021, insurers were required to provide cover in relation to buildings up to four storeys.

New legislation and guidance gave new issues to consider. The Fire Safety Act 2021 and the Building Safety Act 2022 created additional roles and responsibilities to understand and meet, and increased limitation periods for certain claims. The Fire Risk Appraisal of External Walls (FRAEW) was developed as the standard for assessing the safety of the exterior of buildings. Major uncertainties remained around how to interpret and apply the growing collection of rules and regulations. There was also a shortage of suitable professionals to undertake EWS and FRAEW work, and no standardised training and guidance on how it should be done.

By 2023, the situation had settled somewhat. There was greater understanding of fire safety issues generally, the areas of greatest risk, and the new legal framework.  Standardised training and qualifications had been developed. 

At that point, the minimum terms still only required insurers to provide cover for fire safety cover claims regarding buildings up to four storeys, not taller ones.

RICS noted that some insurers were offering greater cover than the minimum allowed, and also that no further insurers had left the surveyors’ pool (and one new one had joined). It launched a consultation, to assess whether it would be viable to increase the mandatory cover. 

Following that consultation, RICS has now made further to the minimum terms of cover.

July 2024 changes to RICS minimum terms of cover

Following its consultation, RICS has expanded the scope of mandatory cover.   

The key changes are as follows, effective from 1 July 2024:

  1. The position for claims relating to buildings up to four storeys is unchanged (cover for full civil liability; no retroactive date exclusion permitted; limits of indemnity permitted to be on an annual aggregate basis and to include defence costs; excesses are allowed to apply to defence costs).
  2. New: in the UK and Ireland, there is now mandatory cover for fire safety claims arising from work on buildings of five storeys or more (excluding EWS and FRAEW work - see below):
  3. New: in the UK only (not Ireland), PI insurance must now cover claims relating to EWS and FRAEW work – but only for buildings up to 18 metres, and so long as undertaken by a professional who has passed the RICS External Wall Systems Assessment Training Programme.

The following caveats apply to the new mandatory cover at 2 and 3 above:

  • Applies only to negligence (excluding other bases of civil liability, e.g. contract);
  • Applies only to work undertaken from 1 July 2024;
  • (as with the existing cover, the limit of indemnity is permitted to be in the annual aggregate and include defence costs, and the excess can apply to defence costs).

Various other mandatory requirements remain as before, including the minimum limits of indemnity and maximum excesses allowed (sliding scales based on a firm’s turnover).

(RICS has also taken the opportunity to adjust the permitted cyber exclusion: for consistency with the wider PII market, the International Underwriting Association’s model clause replaces the previous bespoke RICS wording) 

Implications

Firstly, the responses to the RICS consultation and the resulting changes are a positive sign for RICS members and their insurers. They reflect increased understanding and confidence in the new legal regime, and in the training and controls in place for fire safety work. Surveyors understand the regime and their part in it, and in turn their insurers can feel more confident offering cover.

This is reflected in three further insurers entering the scheme, which will increase capacity and competition.

The changes to the minimum terms mean that there will be greater cover for fire safety claims — but the compulsory cover is something of a patchwork and it will be important for firms to understand what is now covered, and what is still not.

The cover for buildings over four storeys applies only in the UK, not Ireland (due to differences in the new rules), and it does not apply to EWS or FRAEW work.  This is still a significant expansion of the cover, given that fire safety claims can arise from a wide variety of surveyor work, even if it was not specifically related to fire safety.

Of greatest significance is the retroactive date of 1 July 2024 applying to the expanded cover. As PI insurance operates on a ‘claims made’ basis, this means that surveyors may still face uninsured liability for new claims relating to earlier work.

Surveyors will wish to review their exposure — and by reference to not only the work they are presently undertaking, but their activities over recent years. When their policies come up for renewal, they will need to carefully consider what different insurers are offering and find the best fit. They should take care to give prospective new insurers full and accurate information, to ensure they get the best price, and to avoid problems down the line. Brokers will have an important part to play in this process.

For their part, insurers will need to carefully review that information. They may wish to adjust the questions they ask in proposal forms — different types of work have varying levels of risk, and a proper understanding of the work undertaken should allow them to form a proper understanding of the risk, and so offer suitable cover, at a price that works for both parties.

Depending on how things develop — and as the arrival of new insurers increases competition — we may also see insurers being willing to extend cover beyond the mandatory terms, to win business. 

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