The first quarter of 2018 has been a challenging one for the construction industry. It saw a further decline in construction output in January, with the Office of National Statistics reporting that construction output fell by 3.4% in January from December. This stemmed from a decline in new work, mainly in the private housing sector. In addition, Carillion collapsed in mid-January, undoubtedly taking with it a number of sub-contractors who have yet to be paid.
What does this mean for the future? We anticipate an increase in SME insolvency. The procedures and risk management measures that these companies have in place for obtaining payment security will become increasingly important. Appropriate questions in proposal forms may help identify companies at risk. The risks to an insurer of a insured contractor becoming insolvent include: the possibility of a claim under the Third Parties (Rights against Insurers) Act 2010; an inability to pay the excess; difficulties in obtaining information to defend a claim; and the risk that claims can be brought for longer because insolvency can postpone the expiry of limitation.
Contractor insolvency is also likely to mean that employers will be looking directly to their subcontractors for alleged errors. The existence and terms of collateral warranties and third party rights agreements could therefore come under increased scrutiny.
Claims for overarching duties, such as a duty to warn, inspect and/or approve are likely to increase. If the contractor that made the alleged error is insolvent, then such claims provide another avenue of recovery for the employer. We have seen an increasing number of claims against architects and approved inspectors, which corresponds with this theme.
On a different note, in the last three months, we have also seen an increase in the number of disciplinary investigations by the Royal Institution of Chartered Surveyors and the Architects Registration Board. Insurers may wish to ensure that proposal forms include appropriate questions about disciplinary matters. Insurers, brokers and insureds may wish to consider whether sufficient cover is included in the insured’s professional indemnity policy. This might include the level of defence costs available, as the timetable for disciplinary investigations is relatively quick and can be expensive. The extent of any excess, the availability of any other insurance (for example, whether there is a relevant D&O policy) and exclusions for specific types of conduct may also be relevant.
Specific types of claims that we have seen a lot of in the last three months include claims for cavity wall insulation and claims against surveyors for failing to identify Japanese knotweed. These types of claim seem to be on the target list for claimant solicitor firms. It will come as no surprise that cladding remains firmly on the agenda.