Blog Question: new exclusion on professional indemnity policies in respect of non-compliant building materials
I recently received this email:
Further to your posts regarding issues with shoddy building products, unfortunately insurers are now seeking to exclude this risk in a very heavy handed manner.
In particular, exclusions to professional indemnity insurance for building surveyors, architects etc that removes all cover irrespective of fault.
The below clause for example is extremely onerous & removes all cover even in instances of counterfeit products, where the surveyor has been wronged just as much as anyone else.
‘We will not cover the insured for loss, defence costs, legal representation costs or other amounts in respect of any claim, investigation or liability arising out of or in any way connected with a Non compliant or Non conforming Building Product, or the approval, the use or installation of a Building Product in a manner which is Non compliant or Non conforming.’
Surely in these sorts of instances, it is in the public interest to ensure that building professionals have insurance that responds to claims against them.
I was wondering what your thoughts are on this ?
Thanks, John [surname and email provided]
This is a very real and complex problem. One which I can see both sides and have sympathy for both positions.
On the one hand, it looks like an insurer who sees a bush fire or cyclone on the horizon then writes to their customers cancelling the risk. This is not good for the insurance industry but we have done it before with issues such as terrorism, Y2K and pandemics. This, of course, does not mean it is necessarily right.
The difference between property insurance and professional indemnity is that the property policy covers damage during the period of insurance and if the risk materialises and results in loss or damage during the period of insurance then the insurer bears the loss. A Professional Indemnity policy is a ‘claims made and notified policy’ and as such this allows insurers to change their risk appetite each renewal and limit risks that are emerging but have not yet fully materialised.
The Grenfell fire certainly has brought this issue to front of mind, and along with the fires in Australia and the Middle East helped identify the number of buildings globally with the problem of combustible cladding.
With professional indemnity, it is my experience the limits are often way too low when compared to say public or products liability and the risks professionals take on.
Therefore, I would have thought that this genuine risk could have been addressed by either a sub-limit and or higher premium for those involved in this industry rather than making the policy a Clayton’s policy, that is a policy you have when you do not have a policy.
Having said that, I do not think the insurance industry should be picking up the tab for professionals or builders who have knowingly used or allowed such products to be used, to the determent of the consumer and or to feather their own nest.
All professionals need to do their job properly. Lord Atkin rightfully set the position that we still use today in Australia when he said:
At present I content myself with pointing out that in English law there must be, and is, some general conception of relations giving rise to a duty of care, of which the particular cases found in the books are but instances. The liability for negligence, whether you style it such or treat it as in other systems as a species of “culpa,” is no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay. But acts or omissions which any moral code would censure cannot, in a practical world, be treated so as to give a right to every person injured by them to demand relief. In this way rules of law arise which limit the range of complainants and the extent of their remedy. The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.
Donoghue v Stevenson, 1932 SC (HL) 31 (26 May 1932).
What the exclusion is effectively doing is saying to these professionals that there is a very real personal risk to you if you allow non-compliant building materials.
This very real risk is one that I would not like to take on myself either as a professional or as an underwriter. As an underwriter I would need some comfort from the Insured that they have not knowingly allowed the products to be used. If there were allowed knowingly then this I would suggest would be a known circumstance that would need to be declared at next renewal in any event.
At the same time, building owners, whether they be commercial, industrial or domestic, may be left holding the bag if their own insurer does not cover the replacement which is in itself not covered and nor does the builder’s nor the professionals involved.
There are so many areas in the claims we are handling at LMI Group where we are finding non-compliant building materials. These include:
- Electrical wiring and cabling,
- Electrical switches,
- Rain heads and some other plumbing fittings,
- Products containing asbestos, and of course,
- Combustible cladding and or insulation.
At this stage I do not believe the exclusion is universal and each insurer will be making their own decision on it.
I hope this helps.