Construction Law

Legal issues, news, and regulations concerning the construction industry

1
AAA AMENDMENTS TO THE COMMERCIAL ARBITRATION RULES AND MEDIATION PROCEDURES
2
CLARITY IS KEY – HOW DO YOU SERVE A VALID PAY LESS NOTICE?
3
REGULATING HEAT NETWORKS:  Energy security bill to the rescue? 
4
When is a Collateral Warranty a “Construction Contract”?
5
Clarity is Key – How do you Serve a Valid Pay Less Notice?
6
Building Safety Act 2022 – What’s Changed?
7
Construction Executive Ranks K&L Gates Among The 2021 Top 50 Construction Law Firms™
8
Construction and Projects in Qatar: Overview
9
Qatar – An Opportunity for Operation and Maintenance PPPs
10
“Hardening” Market for Professional Indemnity Insurance

AAA AMENDMENTS TO THE COMMERCIAL ARBITRATION RULES AND MEDIATION PROCEDURES

By: Justin Leonelli and Rich Paciaroni

Effective 1 September 2022, the American Arbitration Association (AAA) has updated its Commercial Arbitration Rules and Mediation Procedures, representing their first revisions since 1 July 2013. These amendments provide key updates and improvements to the commercial arbitration process, including with respect to the following:

CONSOLIDATION AND JOINDER

In likely the most significant revision of the amendments, under revised Rule R-8, parties can now request to consolidate arbitrations or join additional parties. The decision to permit consolidation or joinder rests with the case arbitrator (if one has been appointed) or a special arbitrator appointed by the AAA for the sole purpose of deciding consolidation or joinder. In assessing a request to consolidate, the arbitrator will consider (a) the terms and compatibility of the agreements to arbitrate, (b) applicable law, (c) whether the arbitrations raise “common issues of law or fact,” and (d) whether consolidation of the arbitrations would serve the interests of “justice and efficiency.” While consolidation and joinder have been available under the AAA’s Construction Industry Arbitration Rules for years, this is the first time such a procedure will be available under the Commercial Rules.

DISPOSITIVE MOTIONS

The amendments to Rules R-34 and R-49 now give arbitrators the ability to limit dispositive motion practice and award fees and expenses in accordance with any dispositive motion decision. Therefore, parties should be weary of excessive motions practice and confer on issues outside of formal submissions when possible.

CONFIDENTIALITY

Under new Rule R-45, the AAA has made clear that all matters relating to the arbitration and final award are confidential. Thus, attorneys and clients should be cautious publishing or disclosing any information related to ongoing or completed arbitration proceedings before the AAA. In addition, arbitrators may now issue confidentiality orders related to any matters in connection with the proceeding.

PROCEDURES FOR LARGE, COMPLEX COMMERCIAL DISPUTES

Under revised Rule R-1, the amount-in-controversy to qualify for the “Procedures for Large, Complex Commercial Disputes” has increased from US$500,000 to US$1,000,000. The key features of these procedures include, among other items, a mandatory preliminary hearing with the arbitrator(s), broad authority of arbitrator(s) to control and limit the discovery process, and a mandatory requirement that hearings take place on consecutive days to maximize efficiency and minimize costs. Moreover, absent an agreement of the parties, in order for a large complex case to qualify for a panel of three arbitrators, the amount-in-controversy must now be at least US$3,000,000 (up from the previous US$1,000,000 threshold). Otherwise, one arbitrator will hear the case.

PROCEDURES FOR EXPEDITED ARBITRATIONS

In order to qualify for the Expedited Procedures, revised Rule E-2 provides that the amount-in-controversy must not exceed US$100,000 (up from the previous US$75,000). Furthermore, the new amendments further restrict discovery in cases governed by the Expedited Procedures. Except for exchanging exhibits that each parties intends to rely on at the hearing, no further discovery is permitted unless expressly allowed by the arbitrator upon a finding of good cause.

CONDUCT OF PARTIES

The AAA’s expectations for professionalism of all participants in the arbitration have been codified at revised Rule R-2. In fact, the AAA may now decline further administration of the case if the parties’ and their representatives fail to uphold the AAA’s Standards of Conduct.

REMOTE HEARINGS

Likely as a result of the manner in which hearings took place during the COVID-19 pandemic, amended Rule R-25 now expressly allows arbitrators to conduct hearings remotely by electronic means.

IMPACT ON ONGOING ARBITRATIONS

Unless otherwise stipulated to by the parties, the recent amendments to the AAA’s Commercial Arbitration Rules and Mediation Procedures will not apply to any arbitrations initiated prior to the amendments’ effective date of 1 September 2022.

CLARITY IS KEY – HOW DO YOU SERVE A VALID PAY LESS NOTICE?

By: Kevin Greene and Ruth Chang

Advance JV (A Joint Venture between (1) Balfour Beatty Group Limited; and (2) MWH Treatment Limited); and Enisca Limited [2022] EWHC 1152 (TCC)

The parties in this case carried out works pursuant to an amended form of NEC3 Engineering and Construction Contract (Option A). The works consisted of the supply and installation of LV electrical equipment for design and construction of a new water treatment works and hydro-electric power generation facility in Cumbria.

The relevant timeline is as below.

Timeline

  • Enisca Limited (“Enisca”) submitted an application for payment (AP24) on 22 October 2021 for approximately £2.7million;
  • Advance JV (“Advance”) failed to issue a pay less notice against that application;
  • On 19 November 2021, Enisca made a further application for payment (AP25);
  • On 25 November 2021, Advance issued a pay less notice, making reference to AP 25 only.

The pay less notice issued in November made reference to AP25 only and Enisca’s argument was that no notices were issued by Advance against AP24, and as such Enisca was entitled to the notified sum (i.e. £2.7million) listed in AP24.

Advance argued that the pay less notice was a valid response to both AP24 and AP25, and that the pay less notice issued in November time indicated that Advance did not intend to make any further payment in respect of either applications.

Enisca issued an adjudication for payment of the sum in AP24 and won the adjudication.

Before the adjudicator’s decision was issued, Advance however commenced part 8 proceedings in the Technology and Construction Court (“TCC”) seeking declaratory relief in respect of the validity of the pay less notice.

Decision

The TCC held that:

1. The crux of the matter is that – or the issue is that – “how a reasonable recipient would have understood the notices”, and in this case no reasonable recipient in Enisca’s shoes would have understood, or construed the pay less notice as a response to AP24;

2. The Court will always take a common sense approach, and adopt a practical viewpoint in respect of the contents of any notice issued (as required under the Construction Act) and an unduly restrictive interpretation is not to be welcomed;

3. The TCC also rejected Advance’s argument that there was nothing in the Construction Act precluding a pay less notice from responding to two different payment applications.  The TCC responded saying this is a “novel proposition for which no support can be found” either from the wording of the Construction Act, or from the drafting of the relevant contract as between the parties;

4. The TCC reiterated that any pay less notice must make specific reference to that individual payment cycle and rejected firmly the contention put forward by Advance that the Construction Act is only aiming to regulate the time limits in serving pay less notices – that the Act did not command pay less notice to make specific reference of the relevant payment cycle in question. The TCC made this point clear in the judgment: “….. it is plain from a review of the payment regime under the Act that payment notices are required to be referable to individual payment cycles”;

5. The Court also found that, perhaps, even if the pay less notice was, as Advance argued, intended to respond to AP24, such intention was neither clear nor unambiguous, as evidenced by the parties’ overall conduct.

Analysis

This case makes it clear that a valid pay less notice must make clear reference to a particular payment notice and/ or payment application and must relate to a particular payment cycle. 

REGULATING HEAT NETWORKS:  Energy security bill to the rescue? 

By: Ben Holland and Ruth Chang

Issues with the current heat networks regime?

Heat network customers have reported price increases of up to 700% since late 2021.

Heat networks are not currently regulated, and most customers are not covered by the energy price cap (i.e. the Ofgem price-cap does not apply).

What are heat networks?

A heat network – sometimes called district heating – is a distribution system of insulated pipes that takes heat from a central source and delivers it to a number of domestic or non-domestic buildings. There are currently around 14,000 UK heat networks and half a million customers. Heat networks can cover a large area, or even an entire city, or can be fairly local supplying a small cluster of buildings. Most of the heat networks in the UK are concentrated in England (around 86%)

There are, generally, two types of heat networks: district heating and communal heating.

How does communal heating operate?

Communal heating is the supply of heat and hot water, from a source usually known as the energy centre, to a number of customers within one building only. The energy centre often consists of a single large boiler in the basement of a building with the heat and hot water distributed through the building via a series of pipes.  

About 85% of all heat networks are communal heat networks.

How does a district heating system operate?

District heating involves a local energy centre that supplies heat and hot water to customers in more than one building. District heating networks can range in size from a few hundred metres supplying just a few homes to several kilometres of pipe supplying heat and hot water to multiple buildings in a development.

What are the advantages of heat networks?

Generally the usage of heat networks will bring about these benefits:-

  • In urban areas it is cheaper to install than individual systems in each building
  • It is more resilient to fuel price shocks or individual generation assets failures
  • Easier to decarbonise
  • Delivery of cheaper heat to the end users

Who can be a heat network supplier?

The heat network supplier is the organisation that is contracted to provide heating and/or hot water to each property. They will provide the heat supply agreement (or customer charter) to each occupant on the heat network.

Various organisations can fulfil this role.  For instance:

  • A specific heat network company (ESCO);
  • Property developer;
  • Housing Association;
  • Local authority;
  • Management company; or
  • A company set up by the freeholder to operate the heat network

There are voluntary standards intended to provide consumers with some form of protection (most notably the Heat Trust scheme, which is a non-profit consumer champion for heat networks) and some standardisation around the minimum level of service customers can expect to receive from a heat network. 

Yet, looking at it on an overall terms, heat networks remain largely unregulated and dissatisfaction towards the transparency of information, or pricing aspects, or the collection of personal data, or billing and metering issues, remain some common complaints for all heat customers.

Is the government intervening (if at all)?

The recent Energy Security Bill (“the Bill”) is one of the government’s attempts in regulating heat networks.  The Bill was introduced to Parliament on 6 July 2022, aiming to deliver on the whole a cleaner more affordable and more secure energy system.

The Bill initiates important steps towards extending Ofgem’s regulatory oversight to cover heat networks. The Bill appoints Ofgem as heat networks regulator with a view to regulating heat networks, in similar ways to other utilities, with a general aim of delivering transparent information for consumers, fair and reasonable prices, minimum technical standards and  good quality services, alongside specific measures to comply with the government’s general objectives on decarbonisation. 

The Bill also provides the BEIS Secretary of State with powers to introduce various forms of price regulation, including a price cap. It also now seeks to enable heat network zoning to identify areas where there is provision for the lowest cost solution to heating buildings.

Whilst the contents of the Bill are yet to be finalised, it is expected that the relevant regulations may come into force, as soon as the earlier part of 2024 (or towards the end of 2023). However, this timeframe may prove far too late in helping the current crisis.

When is a Collateral Warranty a “Construction Contract”?

By Kevin Greene and Ruth Chang

Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823

The Court of Appeal in this case considered when a collateral warranty will be regarded as a “construction contract” under the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”). 

The key take away points are as follows:

1.  In deciding whether a collateral warranty is deemed to be a “construction contract”, one has to look at the obligations being warranted.  If a collateral warranty seeks to guarantee obligations in relation to “past and static state of affairs” only, it is more akin to a product guarantee and will not be construed as a “construction contract”.

To provide guidance on this, the Court provided an example of such “product guarantee” wording:

“We completed these works two years ago and we warrant that they were completed in all respects in accordance with the Building Regulations…”  

2.  To qualify as a “construction contract”, the collateral warranty will have to warrant both past and future performances.

In this instance, the collateral warranty in the Abbey Healthcare case relates to both future-looking and retrospective obligations (i.e. wording of “has performed and will continue to perform” is included); hence the collateral warranty could be construed as a “construction contract”. 

In deciding this, the Court also commented that the lack of certain words (for example, “acknowledge” or “undertake”) in the relevant warranty, had little relevance in swaying the Court in finding whether the collateral warranty was a “construction contract”, or not.

3.  In regards to the “payment requirement” under the Construction Act, the Court made it clear that a collateral warranty is likely to satisfy the payment requirements under the Construction Act where the collateral warranty includes a nominal payment arrangement.

 A typical example of a nominal payment arrangement in a collateral warranty will be the inclusion of the wording ““in consideration of the payment of one pound, receipt of which is hereby acknowledged by [the party]…the deed is agreed as follows:”

4.  Assuming that the collateral warranty fulfils the above requirements, it is immaterial as to when it has been executed.   The collateral warranty can even post-date the completion of the works.

5.  The Court of Appeal also emphasised that the definition of “construction contract” under the Construction Act should be given the widest interpretation whenever possible and it is the intention of the legislature to extend access to the adjudication regime to all, whenever possible.  The adjudication regime is very effective in resolving construction disputes (in particular payment disputes) and the 28 days timeframe has proven to be beneficial to the parties on many occasions. 

Commentary

The Court of Appeal has refused permission to appeal the judgment in Abbey Healthcare to the Supreme Court.

It seems, therefore, that a collateral warranty can be a “construction contract” for the purposes of the Construction Act. This will, however, always depend on the wording of the collateral warranty in question.

This case arguably opens up the possibility of adjudication claims in respect of collateral warranties. For beneficiaries of collateral warranties (such as tenants, funders, purchasers and developers) this represents positive news but the effect of the judgment in terms of those providing collateral warranties to such beneficiaries may be that third party rights are offered instead of collateral warranties (on the basis that adjudication may not be available under such third party rights).  

Clarity is Key – How do you Serve a Valid Pay Less Notice?

By: Kevin Greene and Ruth Chang

Advance JV (A Joint Venture between (1) Balfour Beatty Group Limited; and (2) MWH Treatment Limited); and Enisca Limited [2022] EWHC 1152 (TCC)

The parties in this case carried out works pursuant to an amended form of NEC3 Engineering and Construction Contract (Option A). The works consisted of the supply and installation of LV electrical equipment for design and construction of a new water treatment works and hydro-electric power generation facility in Cumbria.

The relevant timeline is as below.

Timeline

  • Enisca Limited (“Enisca”) submitted an application for payment (AP24) on 22 October 2021 for approximately £2.7million;
  • Advance JV (“Advance”) failed to issue a pay less notice against that application;
  • On 19 November 2021, Enisca made a further application for payment (AP25);
  • On 25 November 2021, Advance issued a pay less notice, making reference to AP 25 only.

The pay less notice issued in November made reference to AP25 only and Enisca’s argument was that no notices were issued by Advance against AP24, and as such Enisca was entitled to the notified sum (i.e. £2.7million) listed in AP24.

Advance argued that the pay less notice was a valid response to both AP24 and AP25, and that the pay less notice issued in November time indicated that Advance did not intend to make any further payment in respect of either applications.

Enisca issued an adjudication for payment of the sum in AP24 and won the adjudication.

Before the adjudicator’s decision was issued, Advance however commenced part 8 proceedings in the Technology and Construction Court (“TCC”) seeking declaratory relief in respect of the validity of the pay less notice.

Decision

The TCC held that:

1. The crux of the matter is that – or the issue is that – “how a reasonable recipient would have understood the notices”, and in this case no reasonable recipient in Enisca’s shoes would have understood, or construed the pay less notice as a response to AP24;

2. The Court will always take a common sense approach, and adopt a practical viewpoint in respect of the contents of any notice issued (as required under the Construction Act) and an unduly restrictive interpretation is not to be welcomed;

3. The TCC also rejected Advance’s argument that there was nothing in the Construction Act precluding a pay less notice from responding to two different payment applications.  The TCC responded saying this is a “novel proposition for which no support can be found” either from the wording of the Construction Act, or from the drafting of the relevant contract as between the parties;

4. The TCC reiterated that any pay less notice must make specific reference to that individual payment cycle and rejected firmly the contention put forward by Advance that the Construction Act is only aiming to regulate the time limits in serving pay less notices – that the Act did not command pay less notice to make specific reference of the relevant payment cycle in question. The TCC made this point clear in the judgment: “….. it is plain from a review of the payment regime under the Act that payment notices are required to be referable to individual payment cycles”;

5. The Court also found that, perhaps, even if the pay less notice was, as Advance argued, intended to respond to AP24, such intention was neither clear nor unambiguous, as evidenced by the parties’ overall conduct.

Analysis

This case made clear that pay less notice must make clear references to a particular payment notice and/ or payment application and must relate to a particular payment cycle. 

If this level clarity is not evident in a pay less notice, the party will risk paying a lot more because of the draconian effect of not having served a valid pay less notice.

Building Safety Act 2022 – What’s Changed?

By Kevin Greene and Ruth Chang

Background

The Building Safety Bill received Royal Assent on 28 April 2022, and has now completed all the parliamentary stages in both Houses to become an Act of Parliament – i.e. the Building Safety Act 2022 (the “Act”).

According to the Government, many of the measures included within the 262-page Bill are likely to take between a year and 18 months to introduce, as the Act will require the formation of secondary legislation to support actual implementation of the measures.

Who does the Act apply to?

The provisions set out in the Act will apply to building owners and the built environment industry. This includes those who commission building work and who participate in the design and construction process, including clients, designers, consultants and contractors alike. Given the wide and far-reaching implications of the Act, potentially any parties engaged in the construction process of a building will likely be affected by the Act in one way or the other. 

Whilst the Act will cover all buildings (and not just high rise residential), measures within the Act have a special focus on higher-risk buildings which are defined as buildings that are at least 18m in height or have at least 7 storeys and have at least two residential units.  Care homes and hospitals meeting the same height threshold during design and construction will also be classified as a “higher-risk building”.

Introduction of a Building Safety Regulator

Under the Act, a new Building Safety Regulator will be responsible to carry out the following three main functions:

  • Overseeing safety and standards and performance of all buildings;
  • Helping and encouraging the built environment industry and building control professionals to improve their competence; and
  • Leading the implementation of new regulatory framework for high-rise buildings

The Building Safety Regulator is to be established by the Health and Safety Executive (“HSE”).

Introduction of concepts of “Gateways”

 Three new concepts of “Gateways” are developed and these must be satisfied before occupation of a building can take place.

Gateway one  – Planning Gateway

 Planning Gateway one will:

  • Involve the HSE becoming a statutory consultee before permission is granted for development which involves or is likely to involve a high-rise residential building in certain circumstances.
  • Require relevant applications for planning permission to include a fire statement to ensure applicants have considered fire safety issues as they relate to land use planning matters (for example, access and layout issues).
  • Help inform effective decision-making by local planning

Gateway two – Pre-construction stage

Gateway two requires the Building Safety Regulator to be satisfied that a building’s design meets the functional requirements of the Building Regulations. Construction duty holders will need to submit essential information to the Building Safety Regulator to demonstrate how the building, once built, will fulfil all the requirements of Building Regulations.

Gateway three – post completion

Gateway three takes place when construction of the building is completed, and the building control body determines whether the work has been carried out in accordance with the Building Regulations. Documents and information on the final, as-built building must be submitted to the Building Safety Regulator who will then issue a completion certificate, if and when the specified requirements are being fulfilled.

All the gateways are put in place to create ‘golden thread’ of safety information required for a building, ensuring the appropriate information is available to appropriate personnel at all times.

Introduction of New Home Warranties

All developers will be required to provide a minimum of 15 year warranty for all new build homes. 

Introduction of New Homes Ombudsman Scheme

The main proposals in the Act are to introduce a New Homes Ombudsman to serve as a system of redress and develop a code of practice with developers to set standards on sales, marketing, and the standard and quality of workmanship. All developers of new homes will be required to join the scheme.

Limitation period issues under the Defective Premises Act 1972 (“DPA”)

One of the most notable focuses of the Act relates to the limitation periods for claims brought under the DPA. The current limitation period for a claim under s1 of the DPA is 6 years from the date of practical completion of the relevant works. The Act extends the limitation period to 15 years prospectively for claims under s1 and s2A (i.e. for claims that accrue after the Act takes effect) and up to 30 years retrospectively for claims under s1 only (for claims that accrued before the Act takes effect)

The provisions to give effect to the changes concerning limitation period (as detailed above) are intended to come into force as soon as 2 months after Royal Assent.

Fire Safety remediation

The Act made clear that historic remediation obligations now rest primarily with landlords and developers, and not leaseholders.

Under the Act, house builders are firmly held liable for paying for any cladding-related remediation works, and that the Government can prevent any house builder from building homes “for any purpose” connected with “securing the safety of people or improving the standard of buildings”.  Under a scheme named “Building Safety Pledge”, under which 53 of the largest house builders in the UK are invited to sign up to this, the house builders are required to rectify any “life-critical fire safety defects” on all buildings over 11m constructed by all these developers in the last 30 years.

Currently the Act has also in place a waterfall process with regards to fixing non-cladding defects, which will see leaseholders only pay towards costs if the developers cannot be found or freeholders are unable to pay. These are, so far, capped at £15,000 for those in London and £10,000 for those outside of the capital.

Quality of construction products

Under the Act a construction products regulator will also have powers to remove any dangerous construction products from the market. 

What next?

A recent survey by Construction Management found that only 23% of construction professionals think that they and their organisations are ready for the Act.

Given this Act is representing one of the biggest overhauls in building safety regulations in nearly 40 years, construction industry stakeholders will need to come together, understand one another’s perspective and viewpoints, before each and every stakeholder will be readily available to cope with any of the challenges that may arise in complying with the Act.

Construction Executive Ranks K&L Gates Among The 2021 Top 50 Construction Law Firms™

For the 2021 survey for the annual U.S. ranking of The Top 50 Construction Law Firms™, Construction Executive’s editorial team reached out to dozens of attorneys at the nation’s best construction law firms to learn how the legal landscape is changing, as well as how legal teams are aiding clients with sharpening contract language and pivoting in response to challenges in the wake of the COVID-19 pandemic.

To see the full list, CLICK HERE.

Construction and Projects in Qatar: Overview

By: Paweł Piotrowski, Matthew Walker, and Amjad Hussain

A Q&A guide to construction and projects in Qatar.

The Q&A is part of the global guide to construction and projects. Areas covered include trends and significant deals, the main parties, procurement arrangements, transaction structures and corporate vehicles, financing projects, security and contractual protections required by funders, standard forms of contract, risk allocation, exclusion of liability, caps and force majeure. Also covered are material delays and variations, appointing and paying contractors, subcontractors, licences and consents, project insurance, labour laws, health and safety, environmental issues, corrupt business practices and bribery, bankruptcy and insolvency, public private partnerships (PPPs), dispute resolution, tax, the main construction organisations, and proposals for reform.

Qatar – An Opportunity for Operation and Maintenance PPPs

By: Pawel Piotrowski and Hena Sial

According to MEED.com Qatar awarded projects worth over US$136 billion between 2011–2020. Over the last decade, the focus of Qatar’s investment has been on the development of infrastructure related to the FIFA World Cup to be hosted in 2022. This includes stadiums and ancillary infrastructure such as metro lines, an airport expansion, expressways, and hotels.

In light of the great investment made by Qatar and with much of this infrastructure already built and the rest well underway, it may be worth shifting focus to the future of such infrastructure. Some questions that may assist such inquiry include, what are the best means to utilize this infrastructure to its full potential and how to best fund and deliver long-term infrastructure improvements that may be required over the upcoming decades.

In this article we will consider:

  • What are the benefits of using PPPs in the context of long-term O&M and infrastructure rehabilitation
  • How Qatar may utilize the existing legal framework for PPPs to ensure proper maintenance and rehabilitation of the state infrastructure; and
  • How PPPs should be delivered in order to minimize the risk of potential failures.

“Hardening” Market for Professional Indemnity Insurance

By: Jim Alexander

Compelling evidence of the “hardening” of the professional indemnity insurance (PII) market post-Grenfell has been provided by a recent survey conducted by the Construction Leadership Council (CLC).

Significant cost increases and the introduction of new restrictions on PII are preventing companies from taking on projects and could delay essential work on building safety.

The CLC survey was carried out from mid-February to mid-March and covered 1066 responses from a mixture of consultants, contractors, and specialists. Respondents ranged in size, with half of the respondents being companies with an annual turnover of less than £2m and 10% of respondents having an annual turnover of over £50m.

Key findings of the survey include:

  • Over 60% of total survey respondents have some form of restriction on cover relating to cladding or fire safety.
  • One in three of the survey respondents have a total exclusion in place for cladding claims.
  • One in five respondents have a total exclusion in place for fire claims.
  • Over a quarter of the total survey respondents have lost jobs as a result of inadequate PII.
  • One in three respondents couldn’t do remedial work if they wanted to because of exclusions to their cover.
  • Almost a quarter of the total survey respondents have changed the nature of their work due to inadequate PII.
  • A majority of respondents buy £10m or less cover with very few buying over £20m.
  • Almost half of the respondents had been declined insurance by three insurers or more.
  • Two-thirds of respondents are carrying a claim excess imposed upon them by their insurers.
  • Premiums have increased nearly 4-fold at the last renewal, having doubled the year before; the average rate is 4% of turnover, but one in five who gave figures is paying more than 5% of their PI insurance turnover.

The results pointed to widespread incidence of companies having to change the type of work they do because of restrictions on cover, with a quarter losing jobs because of tough conditions and limitations placed on them by insurance firms. Even though two-thirds of respondents said that less than 5% of what they do is high-rise residential, almost one in three were unable to buy the cover they wanted or needed.

Although not covered directly by the survey, it is also apparent that many insured parties are facing difficulties in securing renewal of “any one claim” cover with “aggregate” cover being offered instead.

An “any one claim” policy provides cover up to the full limit for each individual claim made in the period of insurance, whereas an “aggregate” policy provides cover up to the full limit for all claims made in the period of insurance.

“The survey results confirm that there is a widespread problem for many firms in being unable to obtain essential PI cover, which is having an impact on the ability of the industry to work, and undermining efforts to deliver remedial work to ensure building safety.”

Andy Mitchell CBE, co-chair of the CLC

Samantha Peat, managing director, Wren Managers, and chair of the CLC PI Insurance Group, said that she was extremely worried by the extent of the PII problems and would be actively working with the Government and industry to identify solutions.

“The cost increases, exclusions, and claim excesses that companies are having to bear – even those that do not even work in high-rise residential – could make it unsustainable for them to stay in business.

“The survey results suggest firms will not be able to afford premiums and claim excesses, and they face the choice of refusing some work, or undertaking projects for clients with inadequate insurance cover.”

Samantha Peat

Increased PII premium costs will need to be met by contractors and consultants, but these are likely to be passed on to employers.

Typically, building contracts and consultant appointments contain a clause obliging the contractor and consultant to maintain PII cover at a defined level for a set period (usually 12 years for documents executed as a deed) provided that such cover is available on “commercially reasonable rates and terms.” If the contractually required level of cover is no longer available to the contractor or consultant, then breach of this obligation would (depending on the precise terms of the provision) potentially result. As PII is a “claims made” insurance, the key factor is the scope of insurance available when the claim is made, rather than when the contract is entered into, or the default occurs. This scenario could mean that any claim might not be backed by adequate insurance at the time that the claim is made, leaving a shortfall for the employer to be claimed against the assets of the contractor or consultant.

If the contractually required cover is still available in the market, but at a vastly increased premium cost and with exclusions to cover, then disputes may arise on the interpretation of “commercially reasonable rates and terms.” Often, building contracts and consultant appointments will contain provisions that oblige the contractor or consultant to notify the employer of such circumstances and to enter into dialogue to achieve a mutually agreeable solution.

Employers may wish to review the PII obligations of contractors and consultants on their projects and check that they are complying with the required obligations. Most PII clauses in building contracts and appointments allow employers to request such evidence, usually in the form of a current broker’s certificate.

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