Top 5 claims risks affecting architects and engineers in 2024

Source: Howden

Original author: Clarisse Robbins

Read time: 5 minutes

The success of any construction project is dependent on the professionals involved adopting effective risk management practices to minimise unexpected challenges. It is vital that firms educate themselves as to the risks likely to be faced in any project to reduce potential issues which could in turn lead to claims. ?

Firms must work closely with their insurance brokers to safeguard the business’ assets, reputation and commercial relationships. Appropriate cover should be in place for any insurable risks and increasing knowledge of the cover in place prevents firms from inadvertently assuming uninsured liabilities.

We briefly discuss below the main risks likely to affect the construction sector, this year.

1. Economic instability

Whilst the rate of inflation in the UK has decreased since the record high figures in 2022, inflation and interest rates remain high and the construction sector is struggling to overcome the recent and ongoing financial pressures since the aftermath of the pandemic and the war in Ukraine.

The increase in the cost of labour and materials has also notably led to delays in major public developments such as the new high speed line (HS2). In the private sector, large housing developers are reporting a decrease in profit and revenue and are cutting down on the number of new houses being built due to funding challenges and high mortgage rates putting off potential purchasers.

2. Sustainability and environment, social and corporate governance (ESG)

Sustainability is still at the forefront of discussions surrounding risk management in construction, as recent changes to the Environment Act will require certain developments to have a minimum of 10% net gain of biodiversity. The new rules are now coming into force in 2024, after being postponed by the government.?

In conjunction with this, there is an industry wide push to reduce carbon footprint and make buildings more sustainable and firms’ ESG policies are being scrutinised more closely by developers and insurers alike.

Firms should also be wary of express guarantees within their contracts to deliver biodiversity net gain of 10% and meet other sustainability criteria as developers could seek to transfer liability on to the project team. Claims flowing from breach of such express guarantees may not be fully supported by a professional indemnity insurance policy.?

3. Building Safety Act 2022 - limitation and the new role of the Principal Designer

Recent changes to the Building Safety Act (“BSA) has created some uncertainty amongst construction professionals as to the impact from an insurance perspective. From 1st October 2023, the Act has introduced a new Principal Designer role whose main role is to ensure compliance with Building Regulations. It is important to distinguish this from the established Principal Designer role under the CDM Regulations as different knowledge, expertise and competence will be required for both roles.

Insurers often take a reactive approach to risk, looking at previous claims and losses when reviewing their risk appetite. Until claims materialise it can be challenging to predict how undertaking this new role will influence an underwriter’s risk assessment so firms should seek guidance from their broker.

Firms should also be wary of contractual obligations relating to the new Principal Designer role without seeking appropriate guidance and should provide staff with relevant and ongoing training to ensure continued compliance with the new statutory obligations.

It is important now more than ever to ensure that documents are retained for at least 15 years in the event there is a claim under the BSA, to ensure any contracts with sub-contracts are back-to-back in particular with regards to limitation periods and also to improve contract management practices to ensure that obligations signed up to are reasonable and insurance supported.

4. Shortage in skilled workforce

Many firms report difficulties in attracting new talent within the construction sector and this looks to remain as the skills shortage is set to continue in 2024.

It is important for firms to be more pro-active and plan ahead, as inflation remains high and wages rise and therefore staff retention becomes a more widespread problem. For any employer, it is setting yourself apart from competitors and diversifying recruitment practices that will minimise the impact of the labour shortage.

High staff turnover can lead to mistakes and issues being missed due to lack of continuity. Senior managers should therefore get ahead of the curve and reconsider their current recruitment practices and prioritise engagement with the younger generation to improve perception of the industry as a whole.

5. Cyber Risk

Cyber threat has been on the rise across all sectors, including construction.?

The Cyber Security Breaches Survey was a government research study published in April 2023 which reported that construction firms are “among the most likely to fall victim to cyber-facilitated fraud” and are one of the top three sectors that fell short on having technical cyber security controls.[1]

Remote access, use of personal devices and cloud servers as a result of working both on and off site as well as home/hybrid working models following the pandemic, exposes firms to cyber vulnerabilities.

It is therefore important that all firms adopt sufficient cyber protocols including delivering adequate cyber risk training to staff and implementing internal policies such as multi-factor authentication, strengthening passwords, data back-up and encryption and updating software regularly.

Failure to do so not only poses a risk of financial exposure but also damage to reputation, in particular if an attack leads to project delays or even derailment of a project. The ICO are also entitled to impose fines if personal data is compromised, as occurred in 2022 following a phishing attack against Interserve.

An incident response plan is crucial and this should involve having a robust cyber insurance policy in place that will respond quickly to such threats. It is worth noting that policies such as professional indemnity and directors & officers insurance now look to fully exclude any cover for cyber liabilities.

For further information or assistance with your insurance cover, please get in touch: UKGlobal Broking Group Limited

[1]?Cyber security breaches survey 2023 - GOV.UK (www.gov.uk)