Changes to RICS Professional Indemnity Insurance (PII) arrangements in the UK and Ireland

The RICS has this month announced its decision to proceed with important amendments to its Professional Indemnity Insurance (PII) Requirements and Minimum Approved Wording for regulated firms in the  UK and Ireland. The amendments, relating to fire safety and the assessment of external wall fire risk, received broad support during the RICS’s industry consultation, reflecting the revival of insurer appetite for writing surveyors’ PII after several cautious years.

Background to the changes

The RICS requires that all regulated firms obtain ‘adequate and appropriate’ PI cover from one of a number of RICS Listed Insurers, the parameters of which cover are primarily determined by its Approved Minimum Wording (Wording). The Wording is, a balance between ensuring consumer (and firm) protection whilst preserving a sustainable PII market, a balance that has proven challenging to arrive at in recent years.

From 2019, the pool of Listed Insurers has shrunk, premiums have risen and restrictions have been imposed to keep the PII market sustainable following the deluge of post-Grenfell claims. 2019 also gave rise to exposure concerns following the introduction of the External Wall Fire Review form (EWS1), a process devised to enable any required fire safety remediation works to be reflected in a building’s valuation. In 2020 came the COVID-19 pandemic, bringing with it many potential pitfalls for surveyors providing professional services in completely uncharted territory.

These factors inevitably prompted change to the Wording. From 1 April 2020, the RICS provided a blanket dispensation for insurers to apply fire safety exclusions, leaving many firms exposed. It also prompted a new definition of ‘Professional Business’ enabling the exclusion of cover for claims arising from the completion of EWS1s (triggering government intervention in the market to enable essential building safety checks to proceed).

Some relaxation came in 2021 when insurers were required to provide cover for professional services concerning buildings of up to four storeys or less (though insurers remained free to exclude above that level).

Last autumn, the RICS again consulted on new changes to the 2024 Wording, marking 2023 as notable for there being no departures from the pool of Listed Insurers and for one new arrival. It observed a revival in underwriting appetite and fewer insurers seeking to restrict fire safety cover. With a broad industry consensus that the market was ripe for change, as of 1 July the RICS has enhanced fire safety cover in its Wording, and at the same time taken the opportunity to make cyber cover consistent with other PII wordings.

Fire Safety Coverage

Since 2021 insurers have been required (unless granted a dispensation) to provide cover on an aggregate, defence costs inclusive basis for professional services on buildings of four storeys or less (with a blanket dispensation in place above that height). The market was understandably reluctant to provide greater cover in the prevailing climate. The advent of the Building Safety Act 2022 (Act) and the introduction of new roles and responsibilities for those involved in building design, construction and management – along with the significant extension to the limitation period for claims – brought with it the potential for significantly increased claims exposure. Larger firms had more success negotiating appropriate fire safety cover whilst smaller firms struggled.

However, the Act also brought with it a system of robust controls for work on ‘Higher Risk Buildings’ (18 metres or taller), including as to those permitted to work on such buildings, providing comfort to insurers that those working on Higher Risk Buildings ought to be fully competent to do so. Whilst the RICS was initially minded merely to plug the gap in cover for work on buildings between four storeys (up to which level cover could not be excluded) and 18 metres high (below which buildings were not considered higher risk), the consultation in fact revealed an increasing market trend towards affording cover for work on Higher Risk Buildings.

Accordingly, effective for polices issued from 1 July 2024, Listed Insurers must provide prospective fire safety claim cover in the UK and Ireland for professional services carried out on buildings of five storeys or more on the following basis:

• Negligent act, error, or omission (not full civil liability);
• Applicable to professional services undertaken on or after 1 July 2024;
• Cover can be in the aggregate, with defence costs included in the limit of indemnity;
• The uninsured excess may be applicable to defence costs.

Cover remains on a full civil liability basis for buildings of four storeys and below and is not subject to the 1 July retroactive date.

External Wall Assessments (EWS) and Fire Risk Appraisals of External Walls (FRAEW)

The RICS had also permitted insurers to exclude cover for claims arising out of completion of EWS1s since their introduction. This was due to insurer concern as to the potentially significant and long-tail exposure resulting from inadequate fire safety assessments of external wall systems, particularly given their initially disproportionate use and where there was a shortage of qualified professionals and no standardised training for providing the service.

The problem was partially alleviated with the development of the RICS Professional Standard ‘Valuation of properties in multi-storey, multi-occupancy residential buildings with cladding’, intended to limit the use of EWS1s to buildings above 18 metres and which used specific types of cladding, thereby eliminating unnecessary EWS1 requests for low risk buildings. To ensure EWS1s were fit for purpose, the RICS also implemented a training programme leading to a Level 6 OfEqual accredited qualification, developed to align with BSI PAS 9980 which sets out a comprehensive assessment process for evaluating external wall fire safety. The course pass rate of approximately 50% should provide comfort to insurers that those qualified to complete EWS1s will do so competently and consistently, thereby limiting potential claims exposure.

The RICS has determined that completion of EWS1s and Fire Risk Appraisals of External Walls (FRAEW) are core surveying services which must be afforded cover. Accordingly, effective for polices issued from 1 July 2024, Listed Insurers must provide (in the UK only, and save in cases of specific dispensation) prospective cover for claims relating to EWS1s and FRAEWs for buildings up to 18 metres and where the work is signed off by RICS members who have successfully passed its External Wall Systems Assessment Training Programme on the following basis:

• Negligent act, error, or omission (not full civil liability basis);
• Applicable to professional services undertaken on or after 1 July 2024;
• Cover can be in the aggregate, with defence costs included in the limit of indemnity;
• The uninsured excess may be applicable to defence costs.

Cyber clause

Finally, the RICS has removed from the Wording its own cyber exclusion clause, enabling insurers to adopt the International Underwriting Association’s model clause (IUA 04 017 Professional Indemnity Cyber and Data Protection Law Endorsements) so as to ensure consistency of approach in PII underwriting.

Comment

Whilst changes to the 2024 RICS Minimum Approved Wording will still leave a number of firms exposed to fire safety claims arising from pre-July 2024, they reflect a more optimistic outlook regarding future fire safety exposures and will doubtless be welcomed by RICS members and brokers alike, along with the news that the RICS has secured three new signatories to its Listed Insurer Agreement for 2024, Chaucer Syndicate 1084; Folgate Insurance Company Limited and Tokio Marine Kiln Syndicate 510. The RICS has also sought to address concerns that the changes will lead to any significant premium increases and observes that in fact insurance premiums and net premium worth across the sector is now similar to 2004 levels, notwithstanding claim inflation.