Building in progress

The construction industry's appalling accident record has seen it subjected to some fairly rigorous health and safety legislation over the past 10 years. These changes have been applied to all areas of the industry - not just the contractors that carry out the physical works on site, but all the professional consultants involved in the planning, design and specification of a building project. Simultaneously, professional indemnity insurance rates have gone through the roof, and those professional firms involved in the construction industry - such as architects, engineers, surveyors, project managers, planning supervisors and design-and-build contractors - have all been hit particularly hard. So, have these changes resulted in improved practice in the construction industry? And what impact are improvements so far, if any, likely to have on future rates?

The riskiest trade?

While the construction industry still has one of the worst health and safety records, perhaps the status of the industries that might challenge for this dubious honour ought to be examined before condemning construction out of hand. How much deep-shaft mining is done in the UK today? How many truly heavy industrial factories do we have? Where are the world's big ships built? What has happened to the UK fishing fleet? In fact, is there anything left in the UK industrial sector that is more risky to health and safety than erecting or demolishing a building that may go hundreds of feet up into the sky?

It must be said that improvements have been made. More and more firms now have formal written working procedures and health and safety requirements. Admittedly, some of these are a direct result of legislation - such as the regulations set out by global construction and engineering consultancy CDM, and more recently the Approved Code of Practice for the CDM regulations published by the Health and Safety Executive - but generally there does appear to be an increased degree of control and supervision in relation to site activities.

It might therefore reasonably be assumed that if health and safety on construction sites is improving, there is bound to be a corresponding reduction in insurance premium rates. However, this is not the case - at least not for certain insurances. For the foreseeable future at least, there is no prospect of rate reductions for employers' liability risks, although for public- and product-liability risks and professional indemnity insurance there does at least appear to be a reduction in the rate of premium rises.

One of the main reasons why EL rates will continue to increase is that claims costs during the past five years have increased by approximately 100%. This would seem to be a contradiction, given that there has been an improvement in the number of accidents on site. But claims are growing for a variety of other reasons. For example, the average claims settlement is increasing by approximately 10% per annum, and legal costs involved in claims have increased by up to 50% in the last two to three years.

Also, industrial disease claims are increasing and there are a number of entirely new types of claim that insurers are having to deal with. And on top of all that, Law Commission reforms relating to pain and suffering awards have also pushed up claim and settlement costs.

Although disease claims have long been associated with the construction industry, they would appear to be becoming more of a problem from insurers' point of view. Now, the premiums being quoted have to take into account, not only incidents that have occurred during the policy period, but also diseases that may have been contracted by employees during the policy period, but which may only result in a claim in the future. You only have to look at the effect asbestosis claims have had on the industry to understand insurers' concerns in this respect.

Design team exposure

In the professional indemnity field, we are starting to see the first examples of insurers subrogating other types of covers, such as public liability or contractors' all risks, against members of the professional design team. Recently, after an accident had resulted in the death of a person on site, a public liability insurer decided to go after the planning supervisor, who is now being accused of negligence in the preparation of the health and safety plan.

If this action is successful, it will have serious consequences for all members of a design team. While the planning supervisor has the responsibility of co-ordinating and producing the final health and safety plan, the entire professional design team and the contractor have a responsibility under current regulations to ensure the health and safety of everybody working on or visiting the site. This includes the maintenance and cleaning of the building after completion.

The construction industry may not have produced the headline-making, multi-million-pound claims of certain large auditors or accountants in recent times, but it has had some bad moments and has rarely made a profit for its insurers. And this kind of development is not going to help to reduce rates for construction professionals.

The cycle

Another factor is the current much-reported 'hard cycle' in the insurance market. The problem is that, whereas during past hard cycles there was sufficient capacity in the market to allow everyone to obtain terms, even if they were expensive, this time some firms have been unable to obtain any coverage at all. This can, of course, cause insurmountable problems in some cases, as firms can be rendered unable to trade without certain insurances, whether because of legal requirements or contract conditions.

The whole sector has been hit by the drastic increases seen in specialist and high-risk areas such as scaffolding. But there is a distinction between drastic increases in premiums and not being able to obtain terms at all. Refusal of business is, fortunately, still rare, but when it happens it can shut a company down.

When a big firm of consulting engineers that provides a wide range of services suffers an exclusion in respect of one part of its business under its professional indemnity policy, this will undoubtedly cause problems, but it is unlikely to put it out of business. The same certainly cannot be said for the small specialist scaffolder that provides no other services and which cannot find any of the relevant liability cover that it is compelled by law to have.

However, it would be unfair to suggest that the insurance market, being as diverse as it is, has written off whole sectors across the board. In most cases, there will be a carrier somewhere that is prepared to offer terms. While those terms may not be on the basis requested, this is better than a flat refusal.

The broker's role

It is not fair that a reputable client of a broker should be forced out of business merely because it is classed as high risk. Having said that, of course, the insurance industry is not a charity, and like all commercial businesses is there to make a profit. This begs many questions, but surely one of the most important is: are we brokers managing the expectations of our clients?

Brokers like the praise and the pat on the back when clients tell us what a good job we have done in keeping their premiums down. However, how many are brave enough to tell them during soft-market conditions that they should be expecting some major increases in years to come?

There are no easy solutions to the problems thrown up by hard market conditions. As a broker, your ability, and even your sanity, may be called into question if you advise your clients that the time may come when they won't be able to buy liability cover - although perhaps the publicity given to the recent hardships of some firms will help the connection to be made.

Given all this, one might think that construction companies would see little point in trying to manage their risks. However, our experience has been that clients are keen to do almost anything that might endear them to their liability insurers. As brokers, we have educated our own clients to 'sell themselves' to their insurers; to show them that they are professional, that they undertake specific actions to minimise the number of accidents on site and have formal health and safety and risk management procedures in place. Those companies that are best able to demonstrate all the foregoing to insurers should receive the best terms currently available from the market. Even then, the client may not be best pleased with the insurance package offered - but, as their brokers, we will know we have done the best we could for them. Most clients do really appreciate it - even if they don't tell you until later.

- Grateful acknowledgement to Bob Wallace, director, construction and engineering division, Aon Ltd, for his invaluable input.