In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for construction.
Key developments in 2020
COVID-19 has dominated the news. However, the construction industry was facing a challenging time before the virus swept the world.
As anticipated in this review last year, the Grenfell tragedy and the subsequent Hackitt Review have led to a host of claims relating to, and investigations into, fire safety and the suitability of cladding on buildings. This made insurers nervous and many decided to pull out of construction insurance. Linked to this, the Lloyd's 2018 Thematic Review into construction insurance revealed big losses for some insurers and required them to take remedial measures or, in some cases, to cease writing construction insurance. The result of these two issues (and we have not even mentioned Brexit) has been a reduction in the availability of construction PI cover and, accordingly, large increases in premiums and more restrictive terms.
COVID-19 has added an extra problem - a cashflow issue. Many construction firms operate without large capital reserves and the pandemic has put many in a vulnerable position; many projects have been delayed or cancelled due to disruption within the supply chains and the practical issue of social distancing on site. In short, many firms are facing insolvency; insurance premiums have increased, COVID-19 has made it (even more) difficult to pay those premiums, and it only takes one company to cease trading for projects to fall into delay or be cancelled.
There are, however, reasons to be positive. During Lockdown 2.0 construction workers in the UK were again allowed to attend building sites, notwithstanding other sectors being told to work from home. In addition, the construction sector brought back almost 75% of those individuals on the Government's job retention scheme by 31 August 2020, faster than most other sectors. The sharp fall in construction work earlier in the year has eased considerably in the last quarter, in the face of enduring economic uncertainty.
What to look out for in 2021
We anticipate that insolvencies in the construction sector will, unfortunately, lead to problems with the progress of certain projects. As a direct COVID-19 related issue, we can see the potential for more claims resulting from Health & Safety on site (potentially against Principal Designers) and a continuation of the number of adjudications in professional negligence claims, as claimants try to recover losses quickly, before either they or the target of their claim become insolvent. More positively, the number of new cladding claims should start to fall away.
Finally, we continue to see a number of disciplinary investigations by the ARB and RIBA (and the RICS). An area for architects to keep an eye on in this regard will be the MHCLG consultation on proposed amendments to the Architects Act 1997. The consultation is seeking wide range of views on proposed reform to building safety. The recent publication of the draft Building Safety Bill details how the Government intends to deliver the principles and recommendations of the Hackitt Review and includes provisions to improve the competence of architects through amendments to the Architects Act 1997.
Download our full Annual Insurance Review 2021 for more insights.