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Building Safety Bill: Professional Indemnity Implications

January 2022
Joanna Lewis

Following the Grenfell tragedy and in response to the Independent Review of Building Regulations and Fire Safety led by Dame Judith Hackitt, the Government published the draft Building Safety Bill (“the Bill”) in July 2020. The final version of the Bill was introduced in the House of Commons on 5 July 2021 and will likely receive royal assent later this year.

The Bill proposes wide-ranging changes setting out a pathway on how residential buildings should be constructed, maintained and made safe. The proposed changes impose greater obligations on designers, contractors and building control bodies. Although the framework in relation to these enhanced obligations and duties has now been set out, much of the detail is awaited.  Whilst theories relating to liability are being discussed and developed, we consider below some of the key concerns for professionals and their Professional Indemnity (PI) Insurers.

High Risk Buildings

The proposed changes in the Bill have a huge impact on those that design and build “higher-risk buildings” (buildings at least 18 metres in height or have at least 7 storeys and contain at least 2 residential units). The Bill sets out a dutyholder regime which places the responsibility and safety of higher risk buildings on key individuals.  Key dutyholders include the Client, the Principal Designer at the design phase, the Principal Contractor in the construction phase and the accountable person (usually the owner) at the occupation stage. The Bill introduces the concept of a “golden thread” of information, which the dutyholders will be responsible for providing and maintaining, to demonstrate compliance with building regulations. The Government has created a new Building Safety Regulator (BSR) which will sit within the Health and Safety Executive and will oversee compliance and enforcement of the new regime (see our related Webinar, “Where will the Golden Thread Lead” here).

The dutyholder regime will be in place for the whole life cycle of higher-risk buildings and goes hand in hand with the Bill’s “gateway regime”. Gateways two and three are stop/go decision points where approval must be obtained from the BSR before development (after gateway 2) or occupation of the building (after gateway 3) can proceed.  To progress through Gateway 3, the Client, Principal Designer and Principal Contractor will be required to co-sign a declaration confirming that the building complies with building regulations to the best of their knowledge. At all stages, dutyholders will be required to inform the new BSR of any safety risks that could cause a significant risk to life.

The Bill provides that the BSR will have wide-ranging enforcement powers over dutyholders. The BSR will be able to carry out misconduct investigations and will be able to issue compliance notices (requiring issues of non-compliance to be rectified by a set date) and, in design and construction, stop notices (requiring work to be halted until serious non-compliance is addressed). There are a wide number of potential criminal offences under the Bill including failure to comply with compliance and stop notices and the provision of false information to the BSR. Offences under the Bill will attract prison sentences of up to two years and the BSR can also levy unlimited civil fines.

The Government has made no secret of the fact that the introduction of the dutyholder regime is about accountably. Where there is accountability for errors and omissions, professional indemnity claims will undoubtably follow. Consideration of cover will no-doubt start with any intervention by the BSR. On typical PI wording there may be cover for defence costs involved in responding to BSR intervention in the following circumstances:

  • The Policy has investigation costs cover.
  • The Policy covers the costs of criminal proceedings.
  • The Policy covers representation costs.
  • The Policy provides for mitigation costs cover.

Cover under (1) is reasonably unusual under a professional indemnity policy and cover under (2), (3) and (4) are typically tied to the likelihood of a civil claim (as defined under the Policy) arising. We consider that it is reasonably likely that if a dutyholder is found to be in breach of the new building regulations, they will also be in breach of contract (an express or implied duty to exercise reasonable skill and care) and so a civil liability claim may arise. However, the likelihood of such a claim arising will not always be easy to assess and will undoubtedly depend on the type of breach alleged and the extent of intervention by the BSR. We are awaiting the detail in relation to the BSR’s use of enforcement powers, regulatory tools, and sanctions (which is due to be set out in an Enforcement Policy Statement (EPS)). One observation however is that the purpose of the BSR being on board throughout the gateways is to achieve a collaborative approach with information and instruction going back and forth between the BSR and dutyholders. After collaboration, the BSR may issue “informal advice” before any formal notice or investigation is undertaken. Such interaction with the BSR is unlikely to trigger Policy response under the typical extensions sited above because no investigation, criminal proceeding or official enquiry has been instigated. The key coverage consideration in these relatively early stages of intervention will be whether and when mitigation costs might be triggered.  Even if there is no mitigation costs cover, Insurers may nonetheless consider it better to assist Insureds in these early stages to mitigate the likelihood of a civil claim arising, but that will be highly fact specific.

Notification of a circumstance in relation to BSR interaction will likely generate coverage disputes in the future. With such close scrutiny of design and construction throughout the life-cycle of higher risk buildings there will be a sizable paper-trial of documentation for Insurance claims handlers and their coverage solicitors to review in the event a claim is made. Whether any particular BSR communication warranted earlier notification under a PI Policy, may also generate future coverage disputes. Similarly, in cases where notification is made to an expiring policy, whether such a notification is accepted as valid will no doubt fuel disputes going forward. The difference between notification of circumstances which “may” as opposed to “likely” give rise to claims will be a key consideration in such instances.

Although, there may be defence costs cover for BSR invention, whether there will be any appetite for Professional Indemnity Policies to provide full or restricted cover for the costs imposed by the BSR remains to be seen.

Limitation under the Defective Premises Act 1972

The Defective Premises Act 1972 (the “DPA”), applies to all dwellings in England and Wales. It enables subsequent tenants and owners and anyone else who has a legal or equitable interest in a property to bring a claim for defective work, where the work renders the dwelling unhabitable. In our related article (here) we discuss the key changes the Bill proposes to introduce to the provisions of the DPA. In short, they are:

  • Clause 125 –which inserts a new section 2A into the DPA so that the DPA will also apply to any extension or refurbishment works to existing properties.
  • Clause 126 – As currently drafted, the limitation period for action under section 1 of the DPA is extended from the current six years to fifteen and will apply both prospectively (in relation to future work) and retrospectively (to work which has already taken place). However, on 10 January 2022, Michael Gove MP made reference to a 30 year period so although we know that the first attempt to have the period extended to 30 years was rejected in October we await to see if at Report stage this 30 year period is accepted. We are yet to see the proposed amendments to the Bill for this stage.
  • The limitation period under the new section 2A will be 15 years but will not apply retrospectively to works undertaken before the clause comes into force.

The obvious concern for design and construction professionals and their PI Insurers is that the type of work that is subject to the duty under the DPA has been significantly expanded as well as the time for bringing such claims. Furthermore, the Bill’s proposed amendments to section 1 of the DPA mean that proceedings can now be brought for claims under the DPA that were previously considered statute-barred by virtue of the previous six-year limitation period.

A particular concern for professionals and PI insurers will be the associated problems caused in defending claims which are being brought on the basis of works which were undertaken a long time ago. For example, relevant personnel or documents may have been lost. In addition, there may be problems with pursuing third parties for contribution claims based on contract, where the limitation period is 6 years.

However, whether the changes introduced by the Bill provide as much increased protection as intended remains to be seen. It is becoming more and more frequent that those who were involved in the design and build process of developments comprising combustible cladding are no longer trading, have become insolvent as a result of the number of claims, and/or lack insurance cover for the relevant period and/or type of claims being made. Even if the entity exists and has the backing of PI insurance, any claimant will need to show that the defects complained of make the dwelling unfit for habitation, which will not be an easy hurdle to overcome in many instances. This uncertainty, coupled with the costs of pursuing claims may deter many claimants.

Section 38 of the Building Act 1984

Section 38 of the Building Act 1984 (“Section 38”) has not, as yet, been brought into force.  Section 38 provides for a statutory right of action to anyone suffering physical damage caused by a breach of building regulations. The explanatory notes published with the Bill state that the Government intends to bring this provision into force. The Bill proposes at clause 126 that causes of action under section 38 are subject to a 15-year limitation period (which will apply prospectively).

The right of action under Section 38 will apply to:

  • any building (not just residential buildings).
  • Any Claimant suffering physical damage (e.g. injury or damage to property or person).

The above is clearly of potential concern to design and construction professionals and their PI Insurers, because it opens up the type of building in which direct civil claims can be made against them for breach of building regulation and it also expands the nexus of potential claimants who can bring these claims. However, the impact on future claims is difficult to gauge. As yet, the government hasn’t published what defences and restrictions will be placed on the clause. In particular it is unclear whether section 38 will be interpreted as imposing strict liability. Although there is much uncertainty, our view is that it is likely that liability under s.38 will be interpreted strictly, and it will not be possible to argue, as a defence, that it was reasonable to believe that the work was adequate, nor will it likely be possible to contract out of the clause. However, we consider that this strict liability will only extend to those breaches of regulation which were in force at the time the building works were undertaken. This is supported by the example section 38 claim provided within the Government’s “Redress Fact Sheet” updated 8 November 2021. Therefore, if developers can prove that they followed building regulations at the time of construction (which is a defence many professionals are currently utilising in relation to fire safety), a section 38 claim will not assist claimants. Nevertheless, because section 38 is likely to be interpreted as imposing strict liability, where there is even a small chink in the armour of such a defence (for example, corners/materials were in fact cut in relation to building regulations) claimants may consider that such claims are worth pursuing.

Compensation under section 38 can be claimed from the person whose breach of building regulations caused the damage and can only be in relation to the damage, it does not cover financial losses. This will vary depending on the facts of the case and could clearly include a direct claim (regardless of whether any contract exists) against a design or construction professional. However, currently, instances where there is physical damage arising from breach of building regulation often find their way to design and construct professionals by way of a contribution claim for breach of contract. Therefore, whether the impact of section 38 will really represent a huge sea-change remains to be seen.

Unfortunately, much like everything associated with the myriad of expansive changes coming into force in relation to building safety, their impact and interpretation will not be fully understood until the claims and court cases start coming in.

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