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Unacceptable Solutions Episode 4: The Insurer Give and Take Dilemma

The cladding crisis presents a unique dilemma for the insurance industry. On one hand the property insurers want to insure buildings that are free of defects including ACP and they want expert opinions to back that up. On the other hand, the professional indemnity insurance market has failed because claims have been too high, and these insurers won’t stand behind any consultants giving opinions on ACP. 

Insurance is perhaps the ultimate numbers game. Insurers provide policy cover for buildings and set premiums according to the risk of damage occurring and a claim being made against the policy on a case by case basis. One of the things they do to manage their risk of a claim is to exclude anything they reasonably can that is an unacceptable risk. So, you might have building insurance cover but when you read the policy wording you might not have all the cover you think you have. 

Buildings defects will be one of the things that will be excluded from cover. ACP with 100 % PE is a building defect, that much is certain since the Lacrosse judgement. Other types of cladding are being tested in the courts one by one. A wooden look cladding product called Biowood, is the most recent to be held to be a building defect because of combustibility. ACP with less than 100 % will one day be tested by the courts and it might go down as well, we don’t know. 

So, with that cloud of uncertainty overhead, property insurers quite understandably are saying you prove to us your building is free of cladding with PE or is otherwise safe. If not, we might insure you if you are working towards getting rid of it but there are two important provisos’. The first is crystal clear, we won’t cover you for replacing defective cladding in any circumstances. The second of the insurers provisos is less clear, but potentially more dangerous. Every property insurance policy says something like we won’t cover you for things directly or indirectly caused by building defects.

This leaves owners, or more to the point their lawyers, with 2 very important questions– is cladding with less than 100% PE a building defect? And secondly, has the fire been caused at least indirectly by PE within the panel? ACP doesn’t self-combust; it needs some heat source applied to it, like the cigarette in Lacrosse or the short circuiting fridge in Grenfell, but the evidence is clear that ACP makes fire behave in different ways to other fires both vertically and horizontally and falling debris is a real risk to life and spot fires. In the murkiness of all this lies a monster of a court case if an insurer decided to deny a claim based on the ‘direct and indirect defect’ exclusion clause. 

The only entity with the power to preempt the courts and give us certainty about what products are building defects for insurance purposes and what products aren’t are the state governments and they don’t appear in any hurry to act in unison or to be definitive about the future of the remaining types of ACP. 

The only entity with the power to fix the failed professional indemnity market is again the state governments. Insurance experts estimate it will take 3 – 5 years before the professional indemnity insurers return to the property design and construction market, and then only if new measures to reduce defects in future-built apartments are proven to be effective. 

That’s a long time for us to be in limbo and during this time property owners need to work carefully with their insurers and become comfortable with the policy wording – don’t assume everything will be alright and don’t leave this to the wishful thinking.