The impact of narrowing cover in the hardening insurance market: construction professionals & claims made policies

In our recent articles we set out issues associated with the hardening insurance market (see here).

On the face of it, the hardening market presents Policyholders with the immediate concern of significant increasing premium and excess structures. This article focuses however on the third limb of a hardening market: more restrictive cover. The impact here is most significant to “claims made” (for further information refer here) insurance, and particularly so having regard to construction professionals’ risk.

In a ‘soft market’, insurers may look to attract premium on price and/or providing better coverage benefits. A major coverage benefit is writing back cover for “contractual assumed liabilities”. Professional indemnity insurance policies generally exclude express liabilities assumed by the policyholder under its contracts. Insurers apply this clause to manage their exposure in circumstances where their insured has provided unreasonable contractual undertakings.

If such exclusions apply the insurer will not indemnify an insured for liabilities assumed expressly and by virtue of the existence of the agreement they have signed. The law will imply duties into contractual undertakings, for instance the duty to exercise reasonable skill and care in the services provided under a contract. But insured’s may take it upon themselves to assume liabilities of others (for instance under deeds of novation), contract out of legislation (where permitted, such as proportionate liability), waive the insurer’s rights to recover against parties, indemnify others (for instance their principals), provide express warranties or guarantees or undertake that their services will be provided under a ‘super’ duty of care.

The “soft market write-backs” mean insureds will not prejudice their insurance policy by assuming some, or even all of these contractual undertakings. Alternatively, an insurer will extend cover on a “blanket basis” to cover the insured for assuming such obligations.

If this cover is available in the market, policyholders become more willing to assume liabilities that they otherwise would not have assumed in the absence of insurance.

In a ‘soft market’, drafters of construction contracts and consulting agreements include the ‘write-backs’ as minimum professional indemnity requirements and/or otherwise, impose broader liabilities which, for all intents and purposes, are ‘insurable’ because the insurance market is offering to provide cover for such risks.

Now, in a hardening market, insurers are pairing back or not offering any of the contractually assumed liability write-backs. It remains, however, that contract administrators and drafters are still requiring (for new contracts) coverage that is no longer available to insureds or that is cost prohibitive. But more critically, the contractual undertakings that were made (because cover was available during the soft insurance market) are no longer covered. Even worse, the absence of contractually assumed liability write-backs may prejudice the policy that is in place at the time that a claim is made, resulting in a declinature of cover: remember, professional indemnity insurance is claims made rather than occurrence based.

A risk to an insured arises where a contract is entered during a period when insurers are offering write-backs to cover liabilities assumed under that contract but a claim arises in a later policy period. In such circumstances an insured may subsequently find that the relevant policy that is on foot, at the time that the claim is made on the policy, may not respond. This is because, by the time the claim is made on the relevant policy, the policy does not ‘write back’ such cover.
Key Points:
  1. Commercial Lawyers: make sure you balance the overarching obligation you have to protect your client with the risk that imposing onerous contractual terms for them may prejudice the insurance which they ultimately are intended to have the benefit of.

  2. Policyholders should work with their lawyers and simultaneously their insurance brokers to make sure they understand covered and uncovered risk. They must also understand the risk identified above, where they may have assumed liabilities in past years, When renewing their policies, policyholders should take steps where possible to ensure a similar level of cover is maintained.

    Some insurers are offering write-backs for Principals’ Indemnity, waivers of subrogation, contracting out of proportionate liability, express fitness for purpose, novated contracts cover and mitigation of loss, but, they are charging for it.

    Where policyholders are attempting to continue to meet onerous “professional indemnity requirements” in contracts, they may not have factored in the insurance costs for subscribing to these requirements.

  3. Insurers going to extremes in the coverage the offer, presents sever ramifications for policyholders. Offering broad cover and then restricting it when the market turns (particularly with claims made policies) has severe implications for insureds. Lack of consistency and pricing may otherwise induce insureds into bad contractual practices.