In this article, we provide an overview of some of the recent developments in the sector and the related implications, whilst offering insights into what we expect to see this year and beyond.
PI Insurance
In recent years, we have witnessed a softening of the market after the significant premium hikes and restricted coverage options experienced between 2017 and 2021. This was a consequence of reduced competition and underwriting appetite related to events such as the Grenfell Fire Tragedy and the Covid-19 Pandemic. Market softening, in general, continued into 2024 and was primarily attributable to improved loss ratios for insurers and increased market competition, leading to rising underwriter appetite to include a willingness to reconsider established exclusions such as those relating to fire safety and business interruption. This was welcomed by policyholders, although with a degree of trepidation in what remains a relatively volatile market.
The competitive drive among insurers is expected to persist in 2025, prompting further innovation in policy offerings and underwriting strategies. The ongoing integration of AI will continue as insurers seek to improve risk assessment, streamlining operations and customer service. The technological progression is expected to result in even more accurate pricing models and efficient claims handling processes. However, as always, the broader economic and political climate will continue to shape market dynamics and continued unpredictability in this respect may result in some levelling off.
Construction
Grenfell Inquiry – Phase 2 Report
September 2024 saw the publication of The Grenfell Inquiry Phase 2 Report. As expected, the Inquiry was highly critical of systemic failures in oversight and a lack of clarity over responsibility between construction professionals for building safety matters. Amongst its recommendations, the Inquiry made a number of proposals designed to improve safety standards with respect to the role of particular construction professionals. We summarise the key takeaways below.
Fire Engineers
The Inquiry noted that the title 'Fire Engineer' does not require formal qualifications, allowing unqualified individuals to practice, and that evidence suggests that many self-proclaimed Fire Engineers lack the necessary competence and understanding of the field's complexities. Given the crucial role of fire engineering in ensuring safety, the Inquiry recommended that the profession should be formally recognized and protected by law. The Inquiry considered that this would establish a body of registered Fire Engineers who could contribute to safe building design and educate other construction professionals on fire safety strategies. The Inquiry stated that an independent body should regulate the profession, set membership standards, maintain a register, and oversee conduct. The establishment of such a body would probably introduce minimum insurance requirements for Fire Engineers, as is the case for other regulated professionals such as solicitors and architects. Given that this is a relatively high-risk industry, minimum insurance requirements would likely include relatively high premiums and limits of indemnity. This may push many smaller policyholders out of the market and result in market consolidation and less competitive premium offerings.
The Inquiry also recommended that the government increase places in accredited master level fire engineering courses. This suggestion will be welcomed by insurers as the shortage of fire engineering experts is continuing to have a negative impact on the progression of many fire-safety related claims, albeit, even if such a recommendation is adopted, it will take several years to bear fruit.
Architects
The Inquiry recommended that it should be a legal requirement for building control approval applications for projects relating to higher-risk buildings to include a statement from a senior manager of the principal designer, confirming that "all reasonable steps have been taken to ensure that on completion the building as designed will be as safe as is required by the Building Regulations". This would encourage greater scrutiny given the risk of senior managers/directors themselves being potentially subject to civil and/or criminal prosecution. Greater scrutiny is of course a positive development, but such a statement is vague and will leave those in senior positions vulnerable to prosecution. It remains to be seen if this recommendation will be adopted and/or if the proposed statement will be amended to be more specific. However, if it is adopted, the risks to policyholders and senior management will seemingly increase and so in advance of implementation they should critique internal policies, and also their insurance portfolio in order to assess whether they have adequate cover. Insurers may, however, not be willing to provide cover for such statements.
Contractors
It was recommended by the Inquiry that a regulated licensing system be introduced for contractors wanting to work on higher-risk buildings to ensure that only experienced firms are involved, resulting in improved standards. The Inquiry further opined that building control approval applications should include a personal undertaking from a director or senior manager of principal contractors, that all reasonable care has been taken "to ensure that on completion and handover the building is as safe as is required by the Building Regulations". This is similar to the recommendation referred to above in relation to Architects, but it places additional responsibility on senior management at an individual level. And again, it would expose those individuals, meaning that insurers may be unwilling to cover the risks associated with such undertakings. A further possible effect of this proposal would be an increase in recovery/contribution claims, given that it would render obsolete standard contractual terms making provision for the transfer of primary liability from a principle contractor to its appointed sub-contractors.
Approved Inspectors
The Inquiry proposed that an independent panel consider whether building control functions should continue to be performed by those with a commercial interest and whether these functions should be performed by a national authority instead. The news of this recommendation could prove to be the final straw for some private Approved Inspectors who may now decide to withdraw from the market altogether without waiting to see if this proposal is actually adopted. This would, in turn, significantly increase the burden on already stretched local authority building control departments leading to further delays with fire-safety related remedial works and increased costs for insurers involved in such claims.
Building Liability Orders ("BLOs")
In 2024 we saw what is understood to be the first reported case of a Defendant seeking its own BLO via the TCC's interlocutory decision in Willmott Dixon Construction Ltd v Prater & others [2024] EWHC 1190. The dispute involves a mixed-use development in Woolwich, where Willmott Dixon, the design and build contractor for the project, is claiming alleged losses against its appointed subcontractors and consultants relating to alleged fire safety defects in the construction of the external wall. AECOM, the appointed building services engineer (D4), is bringing contribution claims against Prater Limited (D1) and Lindner Exterior Holdings Limited (D2), but issued Part 20 additional claims for BLOs against four other companies within the Lindner Group, due to concerns about the financial stability of D1 and D2 following corporate restructuring. Applications were made requesting AECOM's claims for the BLO be heard separately from the main claim and stayed until after judgment in that claim. The Court refused the application, stating that hearing the claims together would be sensible and efficient, and would allow parties facing a BLO to participate in the main claim and to understand the issues they face.
Whist not finally determinative of the main issue, the Court's decision provides useful procedural guidance regarding the bringing of BLOs and we expect to see the increased utilisation of this relatively new recovery mechanism in 2025 and beyond. This could result in coverage issues relating to renewals and claim notifications for non-group policies. A further possible knock-on effect of this development is on the use of SPVs. These are primarily incorporated to protect participant companies from future liability, but under a BLO those entities which are deemed to be associated with such participating companies will not escape liability.
AI
2024 saw the continued investment by many businesses in AI in an attempt to boost efficiency and profitability, and also to act as a differentiator in the market. This trend is, in turn, transforming the risk profiles of many professional service firms.
Until relatively recently, many liability scenarios involving professional service firms related to relatively straightforward tasks which went wrong due to some basic human error. However, AI is increasingly being used to eliminate such errors, making certain firms more attractive to insurers and potentially leading to lower premiums. However, if AI does not perform as intended, it could lead to complex and expensive disputes between clients and their IT consultants and AI suppliers. Furthermore, if appropriate training and internal governance policies are not implemented by businesses using AI, they leave themselves open to costly and damaging disputes relating to matters such as intellectual property infringements, data breaches and breaches of contract.
Insurers are also increasingly using AI to allow them to assess risks with greater accuracy and efficiency, leading to more informed underwriting decisions, reduced operational costs, and increased underwriter capacity.
In terms of coverage, depending on the particular circumstances, any one of a number of a firm’s insurance policies could respond to an AI-related claim such as cyber, D&O or PI policies. However, as the use of AI grows along with the related risks to insurers, it is expected that insurers will create bespoke AI related insurance products.
Ultimately, while the increasing adoption of AI holds much promise, it is not without challenges. Both businesses and their insurers must understand and adapt to these changes. Transparency between insurers and policyholders regarding the use of AI and proper risk management implementation will be essential to navigate the journey with some security and harness the full potential of this transformative technology.
D&O
Last year many businesses continued to prepare for pending changes to their applicable regulatory frameworks. In particular, much attention was focussed on the EU Corporate Reporting Sustainability Directive ("CSRD") and the Economic Crime and Corporate Transparency Act ("ECCTA").
Whilst the CSRD is EU legislation, by 2028 it may become relevant to non-EU headquartered companies that do business in the EU. For example, if a non-EU headquartered company generates an annual net revenue in the EU which is in excess of EUR 150million in each of the last two years, or if it owns an EU subsidiary/branch which generates an annual net turnover in excess of EUR 40million in the previous year, it will be required to report to the relevant EU member state(s) on the impact of its corporate activities on a range of ESG related matters. Such matters include diversity, climate change, worker and consumer rights and sustainability. Whilst it is not currently clear what the consequences will be for non-compliance, they are likely to include fines, enforcement orders and other sanctions. Therefore, qualifying companies would be well advised to evaluate their ESG strategies and policies to ensure that they do not contain any statements which could be interpreted as being misleading or deceptive. A knock-on effect of such pending regulatory change may add to the growing demand for outside assistance from specialised ESG consultants, which has in turn heightened the need for suitable insurance protection for such professionals. This increase in demand was recognised by the market in 2024 via the introduction of specialised ESG related insurance products. We expect that more and more insurers will enter this niche market in 2025 to service the likely increase in demand.
The ECCTA introduces a new corporate offence of "failure to prevent fraud", which will come into effect in September 2025. In essence, a company may be criminally liable if an employee, agent, subsidiary, or other "associated person" providing services for or on behalf of the company, commits a fraud intended to be for the benefit of the company (or a client of the company, in certain circumstances). The offence applies to large, incorporated bodies and partnerships, but the principles outlined in the published guidance are considered to represent good practice for other organisations. For criminal liability to attach, it does not need to be proven that directors or senior managers ordered or were aware of the fraud. This development demands significant focus from risk managers and boards, who should re-evaluate internal policies and procedures, risk profiles and insurance cover well before the implementation date of September 2025.
In conclusion, the PI sector in 2024 continued to evolve in the form of falling premiums, ongoing regulatory developments, the growing influence of ESG and AI, and changing risk profiles. As we look ahead, we can anticipate further regulatory adjustments. The conclusions of the Grenfell Inquiry will likely play a crucial role in shaping the construction industry's landscape, ensuring higher standards of safety and accountability, but also increased risk for policyholders and insurers. The integration of AI is expected to continue evolving, offering more sophisticated tools for risk assessment and claims processing, whilst ESG related matters are likely to become more and more prevalent. These advancements collectively signal a transformative period for the PI sector, promising a more regulated, efficient, and technologically advanced future, albeit with change comes new risk. Such factors set the scene for an intriguing year ahead.
Written by John Gibney.
