04 October 2022
Cladding Crisis
Insurance and legal developments provide welcome insight for fire safety disputes, but jury is still out on who will fund the cladding crisis.
Five years on from Grenfell, a new model insurance clause, a proposed reinsurance pool, and a landmark ruling could prompt a more collaborative approach to the cladding crisis – but industry bodies are at odds with the government over public funding commitments.
'Clause' and Effect
The new fire safety clause for high-rise repairs, published at the start of September by the International Underwriting Association (IUA), aims to “speed up the removal of unsafe cladding, encourage a greater safety culture within the construction industry and provide insurers with increased confidence in risk management processes employed by the construction sector”. The clause was developed in collaboration with the Department for Levelling Up, Housing and Communities to address the existing cladding and fire safety exclusions prevalent in many PI policies. It can be incorporated into professional indemnity policies for those within the construction industry as such policies renew. As the clause is confined to remediation work undertaken by professionals through the Building Safety Fund, it does not apply retrospectively to any previous project or policy of insurance. The new model clause sets out a number of key risk management processes to ensure work being carried out is in accordance with the Building Safety Fund rules. Chris Jones, IUA Director of Legal and Market Services said the move would help improve accountability for safety measures and foster investment in quality construction.
The market for construction professional indemnity insurance has been difficult in recent years, and Jones said this reflected concerns about the potential for historic liabilities to develop into future claims following the Grenfell Tower tragedy in 2017. Each new risk must continue to be assessed on a risk-by-risk basis, but Jones said the clause should provide underwriters with greater confidence to offer effective insurance solutions for professionals undertaking remediation work through the fund. The Financial Conduct Authority (FCA) also issued a report in September stating the creation of a cross-industry reinsurance pool would limit the risk to individual insurers posed by certain buildings affected by flammable cladding or other material fire safety risks, helping reduce the price of insurance for these buildings.
'Since the Grenfell tragedy, hundreds of thousands of leaseholders have had to endure the difficulties of living in buildings with known fire safety issues, and these problems have been made worse by increases in the cost of their insurance,” said FCA Executive Director of Consumers and Competition Sheldon Mills.
The FCA’s review found that average premiums for multi-occupancy residential buildings rose 125% to £15,300 between 2016 and 2021. While the mean premium across buildings with identified flammable cladding increased even more, by 187%, going from £26,300 in 2016 to £75,600 in 2021. The FCA also warned of “significant concern” over some broker commissions in the multi-occupancy buildings insurance market and the lack of transparency by the insurance sector in its dealings with leaseholders. The Association of British Insurers and the British Insurance Brokers Association have both issued statements in broad support of the FCA’s recommendations.
Meanwhile, Martlet v Mulalley, the Technology and Construction Court’s first combustible cladding judgement since Grenfell, could encourage parties in disputes – particularly where no works have been undertaken to replace combustible materials – to opt for remedial schemes earlier to resolve prospective litigation. The full judgement can be read here.
Since the Grenfell tragedy, hundreds of thousands of leaseholders have had to endure the difficulties of living in buildings with known fire safety issues
The Ripple Effect
Despite these developments, the legal arguments over whether those who designed and/or specified materials to be installed are as responsible as the main contractors are likely to continue. Everyone in the contractual chain will be impacted by the recent judgement, particularly design and build contractors, architects, fire engineers, and specialist cladding sub-contractors. Recent developments may give developers additional support with some cases where they are seeking contributions from the Building Safety Fund. Ongoing disputes where the main contractor and their supply chain are taking legal advice to defend their positions and resolve matters on the best possible terms may also become less protracted.
A number of design and build contractors are concerned by the possible exposures they may face in the event of any liability existing, particularly in relation to the potential costs and extent of remedial works, the prospects of obtaining contributions from their supply chain and the legal costs of all parties – and the professional indemnity insurance market echoes these concerns. The recent developments may influence how these claims progress; many of them are already well advanced, and we may see increased activity in this area as design and build contractors seek to expedite negotiations with their supply chains.
In any dispute, the issue of whether the installed cladding was compliant with the building regulations applicable at the time the design and construction was undertaken has been a pivotal issue in attributing responsibility. Architects and design teams could well be concerned by the comments and findings of HHJ Stephen Davies in Martlet v Mullaley. The judgement ruled that the specification of EPS insulation still shouldn’t have been made, even without installation errors.
Mulalley had attempted to rely on the BBA certificate for the cladding system but, the judge held that the certificate was not a route to compliance with building regulations and that the system failed to meet the functional requirements of B4 (1). HHJ Stephen Davies confirmed at paragraph 256, “in a case such as this the only way of clearly demonstrating compliance or non-compliance with the performance standard is to carry out a BS 8414-1 test”.
The conclusion is that those buildings that have been tested in accordance with BS-8414 or BR135 are likely to be determined as being compliant with building regulations, and, therefore, any contractors facing claims of this nature should ensure that they have evidence of the relevant test passes.
While a professional indemnity policy may provide indemnity (subject to individual facts and policy conditions) to a policyholder, it is not the responsibility of the insurance industry to resolve the problems of the past or to provide solutions for other industries. Yet, it is possible the Martlet v Mulalley decision and the IUA and FCA’s proposals may encourage a more philosophical approach from insurers. Many carriers in the London market have a broad range of professional indemnity clients and potentially face exposures in relation to developers, design & build contractors, specialist sub-contractors as well as architects and other professionals.
In our experience, while insurers of each party have rightly investigated those matters in dispute from the perspective of their clients, this does necessitate involving a number of solicitors and appropriate experts, and the costs for each party can be significant. Whether the case now leads to more cost-effective investigations, such as joint expert appointments or earlier resolutions to disputes, relies on insurers of all parties being willing to adopt a similar approach to any negotiations.
One reason Martlet v Mulalley was the first case since Grenfell is a lack of appetite to take cases to court. Litigation is considerably more costly than the initial investigations undertaken. When remedial work is necessary, rather than spending money on prolonging a dispute, the judgement might now urge parties to direct their funds and energy towards contributing to the remedial works.
Gallagher has seen a number of cases where remedial schemes have already been proposed. Our experience shows that a collaborative solution can be much more cost-effective than those where the developer instructs another party to undertake the remedial works. Broadly it is hoped the potential for increased legal spend is recognised by all parties and, in matters where the facts indicate potential non-compliance with building regulations, that consideration is given to the overall prospects of success in defending a party’s position within the design and build team. Nevertheless, it is the case that Martlet v Mulalley is very fact-specific to the project, the contract and ultimately the judge’s findings. The potential for solicitors (acting for any party contracted to undertake any aspect of the design and/or construction) to reference any of these elements in defence of parties in resisting a claim should not be overlooked.
Government Action
The Martlet v Mulalley verdict was not entirely surprising given how the Grenfell Inquiry has developed, alongside the government’s introduction of the Building Safety Act 2022 and amendments to the Defective Premises Act.
The position with cladding and fire safety is rapidly evolving. It’s clear the government intends for all high-rise buildings where the exterior wall as originally constructed may present an increased fire safety risk to be remediated, particularly those in residential use. It is a concern for both the construction and insurance industries, but it has long been the direction of travel.
Most recently, the government has issued the Building Safety Act 2022 (Commencement No. 2) Regulations 2022, which bring into force sections 126 to 129 of the Act from 1 September 2022. These sections outline the creation of the Building Industry Scheme “for any purpose connected with (a) securing the safety of people in or about buildings in relation to risks arising from buildings or (b) improving the standards of buildings” which is specified to include securing such safety or improving such standards by “securing that persons in the building industry remedy defects in buildings or contribute to costs associated with remedying defects in buildings”.
Section 128 of the Act allows the ability for prohibitions to be placed on those seeking building control approval or planning permission.
According to law firm Simmons & Simmons, the move allows the government to begin the process of creating regulations to introduce Building Industry Scheme(s) that could require members to remedy defective buildings and/or contribute to the cost of doing so; and to impose prohibitions on those in the industry as it considers necessary to do so, including those who may choose not to sign up to such schemes.
The government has also launched a new scheme to allow leaseholders to apply directly for a “Remediation Order” using a BSA1 form and in accordance with the Building Safety Act. The applications for a Remediation Order would be made to and dealt with by the First Tier Property Tribunal and if the tribunal approves an application, it would require a building owner or a developer to remedy defects in a building that would put people’s lives at risk within a specified period. It is not currently known whether a failure to do so could result in significant fines or even custodial sentences against developers or if the failure would only be enforceable civilly, but the intent to ensure remedial action is taken is clear.
Who will fund the cladding crisis?
Where original developers or building owners are not funding works, the government has allocated £5.1 billion, including £4.5 billion through the Building Safety Fund, in public funding to address life safety fire risks associated with cladding systems on high-rise (over 18 metres) residential buildings. Yet the cladding crisis could cost more than £50 billion.
According to government figures, an estimated 11,000 buildings are involved in the building-safety crisis. Latest Government figures show that just 50 buildings that qualified for financial assistance under the government’s Building Safety Fund for the remediation of unsafe non-ACM cladding in England have had their works completed. A further 245 have started remediation work. After Grenfell, 486 high-rise buildings (those over 18 metres) were identified as having ACM cladding; as of May this year, 111 of those were yet to complete remediation.
At the end of June, 45 of the largest residential developers signed a pledge to take responsibility for all necessary works to address life-critical fire safety defects in buildings over 11 metres that they had a role in developing or refurbing in the last 30 years. The intent is to negate the need for legal action on a building-by-building basis.
While developers will likely look to those who constructed these properties to recover or to contribute to the costs, they also have concerns over the agreement itself. The House Builders Federation (HBF) stated that the contracts issued by the Department for Levelling Up, Housing & Communities do not reflect what its members pledged to do and are impossible to sign in their current form. The deadline for the HBF to sign the contract was 10 August, and at the time of writing, an agreement had not been reached.
Discussions between the government and the Construction Products Association over making a similar public funding commitment stalled in April. While negotiations with developers have advanced further, there is now an impasse between the government and both parties.
On September 22, Levelling Up Secretary Simon Clark stated his commitment to building safety and protecting leaseholders. He promised that the housebuilders’ pledges would be shortly turned into legally binding contracts, and that any housebuilders failing to act responsibly may be blocked from commencing developments and from being granted building control sign-off for their buildings.
Clark added, “But this was never about heaping blame on one part of the sector. It’s about making the whole industry, including construction product manufacturers, play its part in fixing the wrongs of the past.”
If you should have any questions or wish to discuss any of the issues raised, please direct these to your usual Gallagher contact.
The opinions and views expressed in the above articles are those of the author only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision based on the information.
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