UK: Predictions For 2009: What Construction Insurers Need To Know Now

Last Updated: 4 February 2009
Article by Patrick Perry

2009 could see some major legislative changes which will impact upon construction professionals and their insurers. This briefing looks into the crystal ball, and sees what the year may hold...

1. The Credit Crunch Bites

While some contractors have managed to diversify their business lines and are predicting a reasonable year, in the large part 2009 is likely to be a year to forget for the UK construction industry. Commercial property values are plummeting. Difficulty in finding available funding for projects is causing developers to hit the brakes. Many large-scale projects are being "moth-balled". There is a significant reduction in new build housing. Tenant demand for commercial office space is at a record low. The UK construction industry is now expected to decline in 2009 by up to eight per cent. Fees for construction professionals are also expected to diminish in value. This is not only bad news for all those in the construction industry, but it also potentially spells trouble for their insurers...

2. 2009: The Year Of Disputes?

The last quarter of 2008 saw some major disputes being launched against construction professionals. Architect Grimshaw was joined as a party to the multi-million pound dispute over the £40m Bath Spa complex. Multiplex brought one of the largest ever claims against a construction professional in relation to the construction of Wembley Stadium. All the indications are there that 2009 may be the year when parties to construction contracts stop talking and start suing.

Cash flow problems are already leading to claims between suppliers, contractors and sub-contractors. Where the developer has found itself short of funds, there is the risk of claims against construction professionals for failing to provide accurate costing information on large projects, or to administer a project properly. Construction management procurement or any form of "cost plus arrangements" seem to be being shelved in favour of fixed price contracts. The lessons learned from the early 1990s are that the greater the pricing risk that is placed on the contractor, the greater the potential for claims. Inevitably, these client/contractor disputes will suck in members of the professional design team. With the threat of contractor insolvencies, the architect risks being seen as the only potential defendant with deep, "insurance-lined", pockets. Expect claims for failing to supervise or adequately inspect the works which give employers a roundabout route for suing for compensation for defective workmanship by the contractor.

3. Adjudication Continues

Adjudication remains the most popular form of dispute resolution in the construction industry. The draft Construction Contracts Bill which is proposing amendments to the Housing Grants, Construction & Regeneration Act 1996 is slowly moving towards the statute books. The Bill was included in the Queen's Speech on 3 December 2008 and is proposed to be part of the legislative agenda for the year ahead, forming a section of the Local Democracy, Economic Development & Construction Bill. One of the most significant impacts of the Bill, if it becomes law as expected later in 2009, will be to extend the adjudication provisions of the Act to cover oral as well as written contracts. This will lead to a significant increase in the number of adjudications, particularly on smaller projects where, frequently, written contracts are not entered into. Inevitably, the changes will also result in a significant amount of time and expense being incurred at the front end of the dispute in resolving the precise terms of the contract in place.

It is obviously well established that claims against construction professionals can be adjudicated, provided the adjudicator is able to reach a fair decision within the time allowed by the parties. In 2009, construction professionals can expect to be involved in more adjudications (and potentially more challenges to adjudication decisions). Insureds (and their insurers) have to be ready to act quickly whenever there is a threat of a Notice of Adjudication in the air.

4. Fall-Out From Kidsons

2008 saw the insured's requirement to notify circumstances closely examined in Kidsons v Lloyd's Underwriters and Kajima UK Engineering v Underwriter Insurance Company. In Kidsons, the requirement in the policy for the insured to notify circumstances "as soon as practicable" was deemed to operate as a condition precedent even though it was not expressly described as such. The Court of Appeal also viewed the test for what constituted a notification as "fairly loose and undemanding" on the particular wording. Kajima illustrated how the courts will critically examine the claims and losses that have actually arisen to see if they can properly be said to relate back to the original notification. Both cases caused significant ripples throughout the insurance industry and highlighted to insureds and brokers the need to make prompt, adequate, and ongoing notifications in relation to any developments in the underlying claim. What this means in 2009 is that insurers can expect more notifications, potentially in broader terms, and with repeated notifications being made in respect of the same "troublesome" prospect. For insurers, this creates the problem of claims potentially relating back to more than one year, with the difficulties that creates.

5. The Price Of Pollution

The UK is shortly expected to implement the Environmental Liability Directive in the form of The Environmental Damage (Prevention and Remediation) Regulations 2009. The Regulations are designed to ensure the prevention and remediation by operators of wide categories of "environmental damage". Liability, for the most part, is strict. The Regulations will allow regulators to order far more wide ranging remediation steps to be taken than has previously been the case. Businesses in the construction sector need to pay close heed to the proposed Regulations, and those involved on the operational, waste management and transportation side of things are particularly at risk. Although many construction professionals will not be directly involved in the potentially "dirty" activities, the Regulations could create knock-on exposures. They specifically allow those that are made to pay remediation costs by a regulator to claim against others who they consider to have been at fault but who have not been pursued by the regulator. Inevitably, this could include the construction professionals who may have been involved in the design or supervision of the project that has caused the environmental damage.

6. Health And Safety

The Health & Safety Executive has been sharpening its sword of late. In early 2009, the first court hearing for the prosecution of the companies involved in the Buncefield explosion will take place. Later in 2009, the Health & Safety (Offences) Act 2008 should come into force. The Act will increase penalties and provide courts with greater sentencing powers for those who flout health and safety legislation. The maximum fines that can be imposed will be increased along with the courts' powers to impose prison sentences. The HSE has made it clear that it will prosecute whenever it is in the public interest to do so, for example where death has resulted from a breach of the legislation, there has been reckless disregard of health and safety requirements, or there have been repeated breaches. Construction professionals (designers and CDM Coordinators) already have increased duties (and exposures) under the CDM Regulations 2007, and these are now likely to start making a meaningful impact on projects that are under construction.

Most construction professionals' indemnity policies will exclude cover for any fines or penalties but frequently will provide an indemnity for costs and expenses incurred in the defence of any HSE prosecutions (where there is the risk of a civil claim). While the construction industry has, in many cases, improved its safety record, insurers need to be alert to the threat of increased prosecutions by the HSE and increased costs exposure as a result.

7. Costs Under Scrutiny

Litigants can expect their costs bills to be rigorously scrutinised and potentially hacked down by the courts in 2009. Proportionate costs orders will be imposed, as occurred in the Wembley dispute, where Multiplex was awarded only 20 per cent of its costs for the final stage of the case (which saw legal fees for all parties in excess of £20 million). If claimants exaggerate their claim, and end up recovering only a fraction of the amount sought, they can expect to be penalised in costs (see Earl of Malmesbury v Strutt & Parker (2008) for a salutary example). Expect continued pressure on the courts to settle; book your mediators now for 2009.

Throughout 2009, Lord Justice Jackson will be carrying out his civil litigation costs review, with his final report due at the end of the year. He will be considering issues such as rates, costs capping, proportionality and whether fundamental changes are required to the current procedural rules on costs. Is there a danger of moving to a US system, where each party can expect to bear all of its own costs? 2009 will be the year to find out.

8. Tips For 2009 For Construction Professionals

In this difficult market, insureds need to resist pressure from employers to accept more onerous terms of engagement. Liability caps, where possible, should be negotiated. With the threat of contractor insolvencies, agreeing a "net contribution" clause limiting the architect's potential exposure should the contractor prove unable to pay, could be crucial. Disclaimers of liability to third parties who may seek to rely upon the consultant's advice can be effective, and should be sought, as the 2008 case of Galliford Try Infastructure v Mott McDonald illustrated.

While this may sound like doom and gloom, there are some positives: a significant investment by the Government in healthcare, schools and infrastructure is expected over the next three years, and we can all start looking forward to the Olympics...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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