Professional Indemnity - How are Insurers & the Construction Industry Faring?
The professional indemnity crisis in Australia has led to calls for a national reinsurance scheme to be put in place, sooner rather than later. Is this the right solution and what does this mean for the insurance of the construction industry?
What is professional indemnity insurance?
This is the type of cover taken out by accountants, builders, certifiers, architects and engineers, people who provide services based on specialised knowledge. The policy is to protect their businesses against legal claims of alleged or actual negligence occurring during the performance of a professional duty.
Generally, these claims focus around giving people incorrect advice, or the client misinterpreting the advice given to them. It can also include instances when an unintentional mistake has been made, whether that’s overlooking a critical piece of information or misinterpreting a fact.
What is the professional indemnity insurance crisis?
The cladding crisis has resulted in rising premiums for building certifiers with a knock-on affect to the building industry. With many certifiers unable to obtain Professional Indemnity Insurance, projects have been delayed or not even completed.
The Grenfell Tower fire in 2017 was ground zero for this crisis, highlighting the risks of using combustible cladding on high rise buildings around the world. A recent government report found that more than 400 buildings in NSW and QLD are at risk, noting that some premiums for building certifiers have risen from $40K to $100K. All of this means that many construction projects worth billions of dollars may not be able to proceed, as rising premiums or reduced cover, force building certifiers out of business.
A further complication to this already escalating problem is that insurers are not only liable for historical cladding works, but also for liabilities resulting from remediation of these issues.
What is the National Reinsurance scheme?
Last December, the Victorian government called for a National Reinsurance scheme, but this was not taken up by the BMF (Building Ministers’ Forum). The BMF is composed of Australian government, state and territory ministers and oversees policy and regulatory issues for the building and construction industry.
The proposed national reinsurance scheme was meant to provide coverage for new construction, but no national policy changes have been made so far. What has happened is that insurers have ceased providing exemption-free insurance to building certifiers.
What insurance solutions have been put in place so far?
A ruling by VCAT (Victorian Civil and Administrative Tribunal) who investigated the Lacrosse building fire in Melbourne, caused by combustible cladding in 2014, has further lashed the building industry. The tribunal decided that the builders needed to pay more than $5.7 million damages to the apartment owners; 39% paid by the fire engineer, 35% by the certifying group, 25% by the architects, and only 3% paid by the actual builders.
This has led the insurance industry to put in place short term measures to ensure that certifiers can continue to operate, easing the construction industry away from this ongoing crisis. These measures include issuing building certifiers with cover that excludes non-compliant external cladding until June 30th 2021 in QLD and until June 30th 2020 in NSW. However, certifiers who continue to work on buildings with combustible cladding will need to pay much greater premiums to continue operating.
Long term solutions to the professional indemnity crisis have still not been tabled, but at least insurers now have a clear avenue for moving forward, even if it’s only in the short term.
To decide on what type of insurance may be suitable for your business, talk to Risk Guidance Insurance today.
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