The Carillion effect

19 February 2019

How the High Court ruling on Manchester’s iconic Beetham Tower recladding could demonstrate the true impact Carillion’s collapse on the construction supply chain and the Professional Indemnity insurance market.

Fifteen years of affordable, abundant Professional Indemnity (PI) insurance capacity is coming to an end for the design and build community. The professional activities undertaken by those in the industry are attracting higher premiums and reduced coverage due to catastrophic hits on insurers’ balance sheets.

As well as wider market losses such as natural catastrophes and insurance market consolidation, construction specific issues have had a negative effect on the sector.

The High Court recently announced that the Beetham Tower’s owner, Ground Rents Income Fund (GRIF), must replace more than one thousand glazing panels - just one example of high profile losses, and the impact that Carillion’s demise is having on the industry. With the estimated cost for the refit alone at approximately GBP 4m, GRIF have also announced that this does not include the additional costs applicable for the professional fees and damages due to any residents, including potential losses resulting from a closure to the Hilton Hotel.

At first glance, the potential effect on PI insurance and the supply chain as a whole, may not be clear. However, Malcolm Naish, Chairman of GRIF, has already issued proceedings against Carillion and specialist cladding subcontractor, BUG, through existing Collateral Warranties and Indemnities. In the absence of a valid policy for Carillion, the entirety of the claim could rest with BUG. What’s more, NWGR may also seek recovery from others in the supply chain if conditions permit.

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Without terms to protect from the concept of Joint and Several Liability and the likely presence of indemnity provisions impacting potential reliance on time barring, the subcontractors and consultants involved in the build could become embroiled in a costly case, even where they feel that they have little or no connection to the original issue.

Whether they are deemed liable for damages, sub-consultants and sub-contractors will likely see a scatter gun approach in an attempt to recover costs. Thus, a PI policy will be needed to support any defence and resulting legal costs, putting more pressure on an already difficult market. Those involved should look carefully at their contracts and speak with their brokers to ensure that their position is clear, particularly in the current PI market.

Even in the past six months there have been substantial changes to PI market conditions. This is a fast moving, dynamic environment, and it seems clear at this stage that the hardening will continue to deliver a more challenging market for insureds in the near future.

Our advice to clients is simple; whist the market has hardened significantly, there are strategies and techniques that can be adopted to mitigate the effect of these changes. Key to any renewal in such a situation is for a company to engage as soon as possible with their specialist construction insurance broker to assess the most appropriate course of action for your business.

Join us at our Construction Community – PI Hard Market Breakfast forum to discover how the PI market could affect you, and what strategies can be employed to mitigate the impacts.

For further information, please contact Tom Hopwood, Development Executive on +44 (0)161 957 8089