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09 SEP 2021

BUILDING A BETTER AND SAFER FUTURE FOR US ALL

Craig Roberts, professional risks director, Griffiths & Armour on the Building Safety Fund.

As was widely reported, February saw the Government bolster the Building Safety Fund (“BSF”) by an additional £3.5bn, as part of their initiative to fund the costs of replacing unsafe cladding on residential buildings 18 metres and over.

Just as widely reported was some robust criticism of the BSF, which focused on the insufficiency of the fund to meet the likely costs faced by leaseholders and the fact that many of those affected would miss out on any funding entirely. Recent reports suggest that a total cost of around £50bn may be the dizzying sum required to make problem buildings compliant.

A third figure, published in recent weeks, adds further colour to those who have voiced concerns about the fund simply failing to respond to those it is intended to help. At the time of writing in July, Government figures show that some £428m of funding under the scheme has been allocated to private and public schemes. Of the almost 3,000 applications to the fund, some 2,000 of those have been rejected, withdrawn or are deemed to have insufficient evidence to have their funding assessed.

Understandably, there are clearly strong feelings on the issue of who will pay for the remediation of unsafe buildings. Those issues will continue to play out as the Government and industry come to terms with where the costs should lie and the consultation on the nature of the potential tax on developers is but one other aspect to this process.

What is apparent is the yawning gap between the current funding and the potential overall bill to fix the problem of fire safety in our building stock. That is a significant concern for all sorts of reasons, first amongst them being the safety of those who live in and who are affected by these issues. It is manifestly clear that their safety will not be increased by yet again under-pricing the value of the works by billions and encouraging an approach which sees cost trump both quality and safety – yet again.

The one thing that the cladding crisis has taught us is that we are here because of the complex and interwoven threads brought about by the race to the bottom. Surely, the least that Government, industry and we all as a society can now do, is to understand the realistic costs that flow from that race, and to swiftly act to address the safety crisis the country now faces.

These arguments around quality will be well known to regular readers, and we don’t intend to go over them in too much detail. Our focus today is on two quite narrow aspects of the BSF, which have the potential to impact both clients who are involved in the remediation programme and the wider Professional Indemnity (“PI”) insurance market.

The BSF fund – a requirement to recover costs?

First, one of the conditions of the BSF is that recipients of the cash are, as a condition of their funding, required to demonstrate that they have “taken all reasonable steps to recover the costs of replacing the unsafe non-ACM cladding from those responsible through insurance claims, warranties, legal action etc.”.

At one level, this requirement shouldn’t be all that surprising.  The fact that Government want to recover their costs from parties who (at one level) might be responsible for the problem seems both sensible and just.

However, the requirement gives rise to considerable complexity for those making an application to the fund, in that they may find themselves needing to venture down the route of complex and costly multi-party litigation in order to access the BSF.  For many, the front end loaded (and potentially substantial) costs of this will continue to be an insurmountable hurdle.

There are other more nuanced aspects which could certainly be considered as having made significant contributions to the current situation, which can be clustered under the following headings:

  • Government and/or regulatory contribution

First, there is the thorny issue of the culpability of Government and appointed regulators in presiding over failings in this area for decades.  To what extent have the systems around public procurement and regulatory oversight failed and to what extent should the public purse be required to pay for those systemic failings as a consequence?

  • Legacy, successor and/or ‘state of the art’ considerations

For many of the affected buildings, claims against the original developer, contractor or professional team have become ‘time barred’.  If indeed all these parties are still solvent and trading.

Is it any wonder then that professionals who are invited to survey an old building and pronounce upon its ‘fire safety’, are faced with potentially significant exposures should they fail to couch their reports with appropriate clarifications of scope and necessary limitations?

In essence, the currently unaddressed question is: do they run the risk of starting off an entirely new limitation period in respect of the findings in the report and inheriting the problems of the past in doing so?

The EWS1 form was a classic example of a ‘certificate’ which did not have any of the usual protections and which is now the subject of a specific and market wide exclusion of liability in PI policies.

  • Risk allocation and insurers evolving perspective

Then there is the message that this sends to the insurers operating in the PI market.  A message which says that a key string attached to the Government intervention is that the recipients of funding must try to come after your insureds.  This aspect is linked to a line in the guidance to the BSF fund which states that:

“MHCLG does not rule out seeking an assignment of relevant rights of action where it considers it would be appropriate to do so.”

As a direct consequence of conditions on a fund designed to speed up making buildings safe, the insurers of those best placed to do that work now need to add the risk of the Government, with its infinitely deep pockets, becoming directly involved in litigation and further increasing claims costs, perhaps in a way which a ‘commercial’ claimant would find hard to justify on ‘cost v. benefit’ grounds.

Given the parlous state of the (current) PI insurance market generally and the critical issue of reducing (and disappearing) cover for fire safety, if these issues rise to prominence as insurers increasingly fear they might do, it could represent the final straw for the ability of professionals to secure the cover they need to undertake the safety critical work that so desperately needs to be done for society as a whole.

If that is how this plays out, does a Government backed insurance scheme for all the risks attached to ‘fire safety’ become inevitable?

The BSF’s PI requirements – are they reasonable?

A separate issue, but one which is equally troubling, are the PI requirements that are included in the contractual documentation that is being used for this work.  Again, looking at the Government guidance, this requires that:

“All members of the professional team must have Professional Indemnity (PI) Insurance, with a minimum limit of £1m or of no less than the total cost of the works (whichever is the higher). The insurance must not have any exclusions for fire safety or cladding-related projects.”

Along with our clients, we have argued for decades that PI insurance seldom needs to be set at a level which is equal to the value of the total cost of the entire works.  We know of several projects where the total cost of the remediation is well in excess of £20m and where professional consultants are facing demands to increase their cover to that level.

The unintended consequence is that the number of firms who can take the project on (and comply with the insurance requirement) reduces from a very small number, to virtually zero.  An outcome which potentially could lead to the very gravest consequences.

The BSF and the Construction Leadership Council survey – a reality check?

Whilst the second requirement (that the policies must not contain fire safety or cladding exclusions) is understandable, this misses the point highlighted in the recently published Construction Leadership Council (“CLC”) survey that one in three respondents to that survey have a complete exclusion for cladding and one in five have a much broader exclusion in respect of any claim relating to fire safety.

Startlingly, around half of respondents to the CLC survey have been declined terms by three or more insurers.

Other aspects of the survey are equally concerning amid reports of premiums in the wider market increasing ‘4-fold’ at the current renewal having ‘doubled the year before’. Cladding exclusions feature in policies of around 33% of those that responded.

The full CLC Survey results can be found here.

Those few firms that can buy cover on broader terms – such as many clients of Griffiths & Armour – are also finding the costs attached to that cover increasing. Whilst our clients have been shielded from the worst aspects of the problems illustrated in the survey results, we too are starting to see insurers’ appetites contract and we do have examples where they have refused to provide certain firms with our ‘standard’ cover specification.

It is therefore increasingly becoming our informed view that we don’t overstate the problem when we say it’s conceivable fire safety cover could be withdrawn entirely from those firms who present a significant risk to the market. As with asbestos in the 1990s, this can happen quickly and with no warning.

This time around, laid bare in the CLC survey results, that warning is already here.

Let’s “build back better”

In many ways, the BSF should present an opportunity to grab the ‘golden thread’ that Dame Judith Hackitt has demanded the industry adopt.  Yet, it does not appear that we are grasping at this opportunity.  That debate is no longer an issue confined to the construction industry.  Rightly, it is now featuring as a national issue and one which features regularly in the mainstream press.

In an article published on the 2 May in The Times, Graham Watts, chief executive of the Construction Industry Council (CIC), provided what was described as a “brutal assessment of the industry”:

“Grenfell has exposed those shameful truths. The industry is getting a battering yet an awful lot of people in the industry did not know how bad it was.”

“We talked about health and safety, sustainability, diversity, inclusion. Until Grenfell no one talked about making buildings safe. It was taken for granted but, to our shame, it was not the priority.”

“The Hackitt review [a report into the post-Grenfell future for building safety regulation] has called for independent construction inspection as it found the industry isn’t fit for purpose.”

“The largest of the many problems in the industry is the broken business model that promotes a race to the bottom in standards. Taken together that is a toxic equation.”

Would any of our readers disagree with key components of this CIC summary assessment?

If only we could but take stock and ‘reset’ the aims of the Building Safety Fund.  To put quality and safety at the heart of the project.  To encourage collaboration between professionals, contractors and manufacturers.  To remove the barriers to entry from the SME marketplace.  To share liability reasonably and appropriately between the parties.  These ideas must surely represent better guiding principles than lining lawyers’ pockets to ultimately pin the blame (on a joint and several liability basis) on whichever professional is still around and even only slightly to blame for the failings that were the fault of an entire industry, several Governments and various regulators?

Setting up a fund which acts as an exemplar of the Hackitt principles would evidence what  could be done with the right funding, the right culture, the right collaborative legal agreements and (yes) the right insurance products…isn’t that something which could be truly transformative?

If, as the experts suggest, we will need to spend £50bn to address our generation’s construction legacy, let’s spend it in a way which stands a chance of resetting the construction industry on pathway which will see its exponents, particularly those involved in the engineering and architectural professions, valued once again not for the cheapness of their quote, but for the help, advice, dynamism and flair they bring to each of our lives, as we emerge from Covid induced stagnation and once again start to explore and benefit from our built environment.

What better way to begin to emerge from the shameful situation where some four years since 72 people lost their lives because of a system which has failed, people still live in fear of the same thing happening to them.

Is that just fanciful thinking or is it a realistic goal?

From the same interview with The Times Graham Watts’s conclusion “is that nothing short of a revolution is needed”.  Whilst he agrees that rebuilding regulatory structures, gutted over the last 40 years by Governments of all colours, is critical, he rightly points to this being only one aspect of a much broader problem.

That problem is the same that industry is grappling with in implementing the recommendations of the Hackitt report, namely: cultural change.

The Times reports Graham Watt’s thoughts: “Our industry splits into two: those who are very responsible and who are doing the right thing, and those who are irresponsible and who only care about profit and executive bonuses,” he says.

“I have some faith that change can be effected,” and The Times reports Graham referencing the near elimination of construction site fatalities over the last two decades.

“The industry was challenged on that and now has an exemplary record. That can be extended to the cultural shift that is needed to change this industry.”

Armed with that outlook, is it unreasonable to ask those who are responsible for the BSF to do one thing: try not to repeat the mistakes of the past.

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Griffiths & Armour is a leading Professional Indemnity insurance and risk management adviser, providing a personal and responsive service to their clients. For over 75 years they have worked in close partnership with ACE.

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Craig Roberts

Craig Roberts

Associate Director

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