By Emily Monastiriotis (opens a new window) (Partner and International Head of Dispute Resolution), Sharlmaine Willetts (opens a new window) (Of Counsel) and Kirsty Oliver (opens a new window) (Senior PSL) of Simmons & Simmons LLP
The Building Safety Act (BSA) and related developments will bring significant change to what is required when designing and constructing buildings, in particular high-rise residential blocks. It will also introduce changes to the regulation of construction professionals, the regulation of construction products, and to the regime for remedying historic fire safety defects. Some of these changes will increase the prospect of civil claims, regulatory action, or even criminal sanctions against construction professionals. In an already hard professional indemnity (PI) insurance market, this has the potential for significant ramifications for the availability, extent, and cost of construction PI insurance..
The provisions of the BSA have been, or will be, coming into force in several phases since it received Royal Assent on 28 April 2022, and much remains to be clarified by secondary legislation and guidance.
A consultation process will run until 12 October 2022 (opens a new window) for example, in relation to proposed regulations which cover, amongst other things: (i) the “dutyholder” roles and competency requirements that will apply to contractors, designers and their clients in relation to all types of building work; and, (ii) the new “gateways” building control and construction regime for “higher risk” buildings(note that “higher risk” is currently defined as buildings at least 18m / 7-storeys in height, with detail to follow; a consultation (opens a new window) on that issue has recently closed). As part of the new regime, those responsible for designing, constructing, maintaining, refurbishing or managing “in scope” buildings will, at the appropriate time in a building’s life cycle, also be responsible for updating and holding a “golden thread” of key building safety information.
These new regulations, when enacted, will form part of the Building Regulations, which means that – unless the regulations provide otherwise - a breach of them will be a criminal offence. The BSA will extend the relevant existing criminal offence provisions in the Building Act 1984, with penalties of 2 years imprisonment and/or an unlimited fine, and, in certain circumstances, extending criminal liability for an offence committed by a body corporate to its directors, officers or managers. Your PI policy will, of course, not provide cover for criminal fines and/or penalties although you may find that you have cover for defence costs in such a criminal prosecution.
The Government has also confirmed that it intends to bring into force s.38 Building Act 1984, which will allow “damage” due to breach of Building Regulations to be actionable. This cause of action will have a 15-year limitation period.
Those key provisions of the BSA already in force include:
Defective Premises Act (DPA) claims: as a reminder, s.1 DPA imposes a duty upon those carrying out work on, or in connection with, “the provision of a dwelling” to perform such work in a professional or workmanlike manner, and to use proper materials, so that the dwelling is “fit for habitation” when completed.
Extended limitation period for s1 DPA claims: Previously, DPA claims could only be brought within 6 years from the date the dwelling was completed. The BSA has extended that period retrospectively for 30 years prior to 28 June 2022 (potentially now catching projects from the 1990s), and, for future works, prospectively for 15 years.
New cause of action for works to existing buildings under s2A DPA:a similar duty to that under s.1 DPA has also now been created for works on existing dwellings (whereas s.1 applied only to new or converted dwellings). For works after 28 June 2022, claims can be brought for up to 15 years from completion.
Building Liability Orders: BLOs are designed to extend liability beyond the entityinvolved in the original build (which in many cases may no longer exist). The Court will have the power,if it considers it “just and equitable”, to order that ”associated” entities of an entity have “relevant liability” in relation to a building. (A relevant liability is one incurred under the DPA, s38 Building Act 1984 or “as a result of a building liability risk”.)
Leaseholder protections: the BSA seeks to protect leaseholders from costs relating to remedial works required to remove and replace defective cladding systems.
Potential claims and insurance issues
The industry is braced for more building safety claims in relation to historic issues with existing buildings. These claims will come partly through greater regulatory and stakeholder scrutiny, and partly due to the BSA’s changes to the limitation period for DPA claims, and the potential expansion of building safety claims to catch “associated” companies. We recently saw the first substantive judgment on post-Grenfell fire safety issues (Martlet Homes Ltd v Mulalley (opens a new window)) , by which a defendant building contractor was held liable in breach of contract for the costs of removing and replacing defective external cladding; the cladding did not meet applicable fire safety standards as at the date of the contract.
Looking forward (although not yet in force), the imposition of potentially extensive new obligations by way of new Building Regulations, as well as new civil liability obligations under s.38 of the Building Act 1984 and the extension of criminal offences for breach of the Building Regulations, for example, also create new risks.
Knowing your contractual and statutory obligations and keeping a robust paper trail - recording and explaining decisions made on any building project in terms of design, materials or otherwise - will be essential for those looking to defend building safety claims, whether in relation to historic works or going forward. Some entities whose liability was thought to have extinguished long ago may now face claims, whether under the DPA or “as a result of a building liability risk”. For historic claims, and for those against “associated” companies, there will often be practical difficulties; papers may not have been retained, and witnesses will likely have moved on long ago. The potential for issues arising out of the ‘golden thread’ of information in relation to a building are significant. It is easy to see a scenario for a PI claim brought against a party who has been unable to keep all documents relating to the safety of a building; we await updated detail on the ”golden thread”, but at the moment this key requirement is fairly nebulous.
Even so, if a claim is intimated or made against you, your first thought should be to check, and obviously then to comply with, any notification requirements in your insurance policy.
The second step will be to consider the scope of your insurance cover. PI cover is purchased in the UK PI market on a claims-made basis, therefore it is the policy in force at the time that the notification is made that may provide cover for a potential claim. As a consequence of the tragic events at Grenfell, and the subsequent discovery of widespread building safety issues, almost all PII policies for construction professionals now limit or exclude cover for fire safety defects.
Your PI cover should respond to claims, including those for professional negligence, in the use and/or specification of materials, but it will not pick up any workmanship issues (unless those workmanship issues arise solely in the course of your professional services). You may also wish to discuss with your broker the implications of any potential breaches of statutory duties that may arise, such as under the DPA or under any new “dutyholder” or other regulations that will be enacted in future and will impose various obligations upon designers and contractors.
Finally, as noted, the extension of criminal offences under the Building Act 1984 and the BSA to directors and officers etc in some instances is also worthy of note: while criminal fines or penalties themselves are not insurable, you may want to consider directors & officers’ cover that may still assist with defence costs for individuals in such situations.
For further information, please contact:
David Isherwood, Senior Vice President Global Professional and Financial Risks
T +44 (0)20 7933 2195