Tougher codes and penalties are putting pressure on the building industry’s insurance cover, while raising questions over how far down the line liability should go

The series of inquiries that followed the Grenfell tower disaster have greatly widened the insurance implications relating to high-rise residential accommodation, affecting just about all those responsible for the design, construction, maintenance, management and ownership of tower blocks of all kinds.

As a result of the findings to date, building codes are being rewritten, enforcement tightened and penalties for breaches increased. In short, commercial entities all along the chain of command are in the firing line in the event of any failure to meet considerably broadened legal responsibilities.

In the UK, tighter enforcement, tougher penalties and more closely scrutinised accountability will result from the independent review of the building and fire safety regulations issued in mid-May 2018.

Applying to residential buildings of 10 or more stories, among other recommendations the review urges clearer responsibilities and accountability be imposed on “duty holders” – those in designated positions of oversight. Additionally, new enforcement powers will be given to a Joint Competent Authority composed of the health and safety executive, fire and rescue authorities, and local authority.

Under these imminent new laws, law firm Clyde & Co notes, duty holders will likely be in the firing line for up to twice as long as currently. And the time limit for taking action “should increase from two years to five to six years from the time of the offence”.

In theory, a number of organisations could face ongoing legal action. In the case of Grenfell, that could be the tenant management association, companies involved in the refurbishment work, suppliers, and designers and manufacturers of any materials deemed to be suspect.

We must all learn something

The lessons being learned – and the inquiries are far from complete – have spilled across international borders. In the wake of the tragedy, other countries are taking a long hard look at the safety of high-rise accommodation, particularly but not exclusively in terms of aluminium composite cladding, which has become one of the most debated issues.

As far away as Australia, for instance, state governments are drawing up laws that have significant downstream implications for liability. As a result, Australian companies involved in construction are re-examining their cover in terms of professional indemnity, directors and officers, and corporate manslaughter (see box for more on this).

“The key is to obtain cover for the entity because D&O often has limits in terms of legal costs. Not everybody has a spare half million to two million pounds lying around to cover their legal expenses.” Martin Bridges, British Insurance Brokers Association

In the UK, the debate continues about who pays for the removal of cladding deemed to be at risk, another important insurance matter. Following a ruling in the London’s First Tier Tribunal involving the Citiscape block in Croydon in early 2018, the onus seems to have fallen on the leaseholder.

However, liability is likely to go further down the line. As Victoria Dacie-Lombardo, managing associate at law firm Mischcon de Reya, pointed out in a report in May: “Many leaseholders will therefore look to recover these costs elsewhere,” citing a string of likely targets that include landlords, developers, building contractors and engineers, local authorities as well as the government.

Spreading the net further, the report adds to this: “Another potential target could be home construction warranty and insurance providers such as the National House-Building Council. In each case circumstances are unlikely to be clear-cut and leaseholderswill need to establish a claim in either negligence or breach of contract.”

Rather than risk damage to their reputations, some construction companies may simply decide it’s more prudent to do the work anyway, as Barratt Developments has promised in the case of the Citiscape block. Although Barratt pointed out the building conformed with the regulations current at the time of construction in 2001, it will undertake retrospective and future safety measures at a cost of several millions of pounds.

Indemnity has its limits

In such open-ended cases as Grenfell, with so many inquiries still taking place, there is considerable uncertainty about the extent of indemnity. “There is often a concern as to whether there are sufficient limits in place,” explains EC3 Legal in a prescient report. “If not, then insureds will be looking for other policies that might pick up some of the losses, or other deep pockets to offload blame and liability.”

Charges of corporate manslaughter present catastrophic financial and reputational risks. The construction industry accounted in 2017–2018 for the highest number of fatal injuries.

Without adequate cover though, directors could face financial ruin. “D&O cover for individuals and entities is important, especially for smaller companies with limited liability as well as for smaller PLCs,” Martin Bridges, technical services manager for the British Insurance Brokers Association, told StrategicRISK. “The key is to obtain cover for the entity [because] D&O often has limits in terms of legal costs. Not everybody has a spare half million to two million pounds lying around to cover their legal expenses.”

EC3 Legal agrees, particularly given the possibility of criminal investigations. “In our experience, companies historically have not bought sufficient limits of such cover,” says EC3 Legal, pointing out that investigations and representation in criminal proceedings or tribunals can be expensive. Some insurers limit cover, for example, to £5m. But that normally provides for legal costs and not fines.

Convictions do happen

Charges of corporate manslaughter present potentially catastrophic financial and reputational risks. As data provided by Protector Insurance shows, citing statistics from the UK Health and Safety Executive, the construction industry accounted in 2017–2018 for the highest number of fatal injuries as well as having the highest annual average for 2013–2014. Construction was followed by agriculture, manufacturing, transportation and storage.

Although convictions for corporate manslaughter have been far from common in Britain since the appropriate laws were passed in 2007, they do occur. Construction firm Martinisation was convicted of the corporate manslaughter of two workers who died in a fall from a first-floor balcony in London in 2014 while trying to hoist by ropes a sofa from the pavement. The court ruled the deaths to result from a substantial breach of duty.

“There must be a breach of duty by the company,” Protector Insurance risk engineer Donal O’Hanlon told StrategicRISK. “And the way in which the business’s activities are managed must be considered to be a substantial element of the breach.”

Deaths can however happen in seemingly unlikely industries, such as finance. That’s why O’Hanlon suggests: “I would say that corporate manslaughter cover is important across all sectors and industries.” 


Australia: litigation on the rise

Stirred into action by Grenfell and their own high-rise fires, Australian authorities are piling more responsibility on the construction industry.

In mid-May, a year-long inquiry in Queensland found that flammable cladding may have been used on as many as 12,000 buildings in the state. Nearly 50 buildings are under investigation, including several hospitals. In Victoria, an audit of 170 buildings established that 51% of high-rise buildings failed to comply with the building code. In New South Wales, 58 high-rise residential buildings with aluminium cladding are also under investigation.

As a result of these sweeping audits, legal reforms are being introduced that are putting pressure on builders and owners, reports law firm Gilchrist Connell, an insurance specialist. In New South Wales, for instance, new laws empower the government to order rectification work at owners’ expense and impose penalties. Further, considerably more onus is placed on owners of clad buildings in other ways, for instance to produce reports confirming the cladding used does not present any risks.

As in the UK, the findings increase the exposure of landlords, owners and other responsible parties to claims and penalties. “Insurers will have seen, and can continue to expect to see, an increase in claims for investigation and representation expenses,” warns Gilchrist Connell’s report. “There has been a spike in litigation against engineers, architects, builders, surveyors, valuers and certifiers where minimum [building code] standards have not been met.”

At the same time, insurance premiums for owners of non-compliant buildings have shot up, with some buildings deemed effectively uninsurable. As a consequence, underwriters in Australia have started to write exclusion clauses relating to combustible cladding. “Brokers will no doubt now arrange more vigilant inspections and investigations of buildings owned by large insureds,” predicts the firm.