Cladding and fire-safety issues are pushing up the cost of construction-related professional indemnity claims, according to new research from a law firm.
A report from CMS found that 12 of the 13 highest-value requests made since 2022 related to cladding and fire-safety concerns, which have been in the spotlight since the Grenfell Tower fire in June 2017.
The biggest of these claims was for £28m, CMS said in its report, which was published last Monday (10 February).
It added that the average amount demanded rose from under £3m in 2021 to more than £6.5m in 2022.
This average has since fallen slightly but remained close to £5m in the first half of last year.
“Our analysis suggests that while the volume of new construction PI [professional indemnity] claims is stable (or even falling), cladding claims are driving up the average value of claims,” the report said.
CMS partnered with litigation analysis platform Solomonic on the report, which analysed 114 construction professional indemnity claims in the English and Welsh courts.
The research covered a four-and-a-half year period from January 2020 to June 2024.
Professional indemnity insurance covers the cost of compensating clients for loss or damage resulting from negligent services or advice.
More than £3bn of such insurance premiums are paid in the UK annually and almost 800 claims have been made across England and Wales in the past five years across all industries.
The report calculated there were 12 construction claims in the year to June 2024 – down from 34 the year before.
All of the 12 claims were settled without the need for litigation, the report added.
Construction claims typically took 18 months to resolve and often involved multiple defendants, said CMS, incentivising early settlement.
“We might hope that the drop-off in the number of new construction professional indemnity claims since 2023 will continue into 2025,” said the report.
But it added: “We think that any such drop-off is likely to be offset by a rise in cladding recovery actions as parties seek to pass liability down the supply chain.
“While many of those claims may not be professional indemnity actions – we expect to see a rise in recovery actions under the Defective Premises Act [1972] and against cladding manufacturers under Section 148 of the Building Safety Act [2022] – most will involve construction professionals.
“Those claims may well prove more difficult to defend as the rise in construction insolvencies leaves defendants unable to seek contribution from responsible parties and insurers defending insolvent insureds [organisations covered by a policy].”
Quentin Fox, head of the professional risk team at law firm Weightmans, said that insurers and contractors must be cautious “as clouds of uncertainty linger over professional indemnity” in the wake of the Grenfell Inquiry’s final report.
But he told CN that the report “set out a few recommendations that, if implemented, will have a positive impact on professional indemnity claims”.
These recommendations included the introduction of a licensing scheme for contractors working on high-risk building projects that would ensure they have adequate skills and expertise to undertake such projects.
The report also recommended that it be made a legal requirement for all building control approval applications to be supported by a personal undertaking from a director or senior manager of the principal contractor.
“These changes could significantly reduce the future risk of claims and improve the competency of the industry as a whole,” Fox said, while cautioning that it will take time for the benefits to filter through.
“It is important that we keep a watchful eye on how others, in particular government bodies, react to matters,” he noted. “It seems likely that further guidance from the courts will be on the way, which may provide additional clarity.”
Devonshires partner Michael Wharfe told CN: “New or extended remedies granted by the Building Safety Act are leading to claims that would potentially fall within PI policies, but post-Grenfell policies generally exclude or severely limit cover.”
He described these post-Grenfell policies as “claims-made, so the exclusions apply, meaning that whilst cladding claims are common, the PI aspect of a claim is not there”.
