Risk & Insurance
Cladding complexities in PI/ PL insurance
Why cover for cladding for design professionals is a grey area

It was a tragedy that made headlines around the world….the sight of a high rise apartment complex on fire in 2017 was one which had not been widely witnessed before. And as devastating as the consequences of the Grenfell tower fire in 2017 were, it shone a light on an important matter which had not received a lot of focus from designers, builders, and insurers in the past – combustible cladding and the fire safety implications. So why does the material used in a building’s exterior cladding impact professional indemnity insurance for Design Professionals? 

The challenges with cladding materials

Cladding can consist of different materials, including wood, brick, vinyl, and composite materials, and the fire safety of these materials also vary. Modern day architecture and materials developed offer cheaper, yet just as durable options when building. Yet somewhere along the line, the fire safety of materials used in cladding became less of a consideration, leading to cheaper, more flammable options becoming the preferred choice of homeowners and architects.

It is understood that the Grenfell Tower fire became as severe as it did due to such combustible cladding. Although the fire itself started from a faulty refrigerator, the rapid spread was attributed to the building’s exterior cladding, which consisted of aluminium composite panels. This problem is also not limited to London – reviews conducted in Australia have revealed that a significant enough portion of buildings in Australia also have combustible exterior cladding.  

Response from Governments & insurers

This growth in the use of combustible cladding and the very public unfolding of the Grenfell tragedy led to action from the government in the form if legislative changes, as well as insurers adjusting their risk appetites and pricing these risks accordingly. Changes to legislations vary between each state and territory, and continue to develop, so it’s important to ensure you’re staying up to date with the latest developments in your state.

Some of the changes to legislation include:

  • Mandatory insurance for certain professions (where it was not mandatory previously)
  • Increased powers given to some authorities to audit, regulate, and facilitating finance to high-risk apartment owners to rectify their cladding
  • Increasing the indemnity period during which an apartment owner is able to bring action against a building professional for using combustible cladding So, what do these changes mean for insurance?

The cost of an insurance policy is determined by many factors, one of which is the degree of risk, or likelihood of an event occurring. The higher the likelihood of something going wrong, the higher an insurance premium is likely to be. Because combustible cladding increases the likelihood of a building being damaged by a fire, insurers are now asking extra questions when it comes to providing Professional Indemnity Insurance to design professionals.

Insurers are being increasingly scrutinous of insuring professionals designing buildings with certain types of cladding materials. In some cases, insurers have also ceased offering cover for some types of structures altogether. Even where a level of cover is provided, many design professionals have seen significantly higher premiums. In addition, the fact that current legislation allows for homeowners to make claims against building designers and architects for work performed in the past (in certain cases), it introduces an additional degree of risk with regard to retroactivite cover.  

Is cladding automatically excluded from PI insurance policies?

This varies based on the type of occupation you engage in and the policy you hold. Some policies will exclude negligence claims related to certain types cladding, such as Aluminium Composite Panels, and Polyethylene core. At the other end, some policies will exclude PI claims arising from any building materials. When selecting your insurance policy, it’s important to ensure you take the time to understand what coverage you have under your policy. For professionals operating in the building industry, getting PI/PL cover without cladding exclusions has been extremely challenging for a number of years. You may not even realise that your policy has this exclusion and the impact it can have and you and your business unless you carefully check all policy details and, in some cases, ask further questions.

How to ensure you understand your cover and its implications on your work

The insurance market is complex in nature, but significant events like the Grenfell fire and the resulting focus on certain materials add to this complexity. It is important for Design Professionals to exercise due diligence when selecting their cover and to carefully understand all applicable inclusions, endorsements, and exclusions. This is even more important given recent amendments to the legislation allow claims for past work involving combustible cladding to be brought against design professionals. Speaking to an insurance broker who understands the needs of the design industry may help understand available coverage in greater detail.

Recently, Aon have negotiated changes to the application of the cladding exclusion on the Design Professionals Professional Indemnity and Public Liability insurance product. If you are interested in learning more call 02 6190 0958 to speak to an insurance specialist in our building, construction & design team.