The Building Safety Act 2022 introduces significant changes to building safety regulation, presenting numerous challenges for insurers, says insurance broker Clarke Williams
The Building Safety Act 2022, described by former Housing Secretary Robert Jenrick as a monumental shift in building safety regulation, aims to enhance safety and accountability within the construction industry.
This legislation was enacted in response to the Grenfell Tower tragedy and the subsequent Hackitt Report, which exposed critical deficiencies in building safety oversight.
The Act focuses on residential Higher-Risk Buildings (HRBs), defined as those with at least two residential units and standing over 18 metres or seven stories high.
It imposes stringent safety standards to protect both the buildings and their occupants.
Key challenges and need for clarity
The introduction of the Building Safety Act has posed significant challenges for the construction industry, highlighting the urgent need for clear guidelines and effective implementation strategies to ensure compliance and enhance building safety standards.
These challenges include:
Compliance confusion
Since its implementation, the Act has generated confusion among various stakeholders, including contractors, management companies, and real estate agents, due to its complex legal language and broad regulatory scope.
This ambiguity centres around compliance requirements and the precise obligations of involved parties.
Competence requirements
The Act demands that individuals carrying out building or design work are competent, but there is uncertainty about what constitutes ‘competence.’
Until legal precedents provide clearer interpretations, this will remain a contentious issue.
The Act has significant insurance implications
Increased scrutiny and accountability
The Act places heightened scrutiny on contractors and mandates greater transparency and diligence to prevent substandard practices.
This increased accountability impacts buildings insurance, as insurers will need to evaluate their clients’ competence and compliance more rigorously to assess risk accurately.
Non-compliance risks
With higher stakes for non-compliance, including legal and financial repercussions, there is a significant impact on professional indemnity (PI) insurance.
Insurers must ensure that their policyholders understand and meet the Act’s requirements to mitigate potential claims arising from regulatory breaches.
Personal liability for PAPs
The Act requires appointing a Principal Accountable Person (PAP) responsible for various safety and compliance tasks.
The uncertainty around this role, including who should assume it and their specific responsibilities, complicates the risk assessment and underwriting process for insurers.
Importantly, PAPs could be held personally liable for non-compliance and safety failures, highlighting the need for Directors and Officers (D&O) insurance to protect against personal financial liability.
Documentation and operational burdens
The Act necessitates meticulous documentation of safety risk management throughout the building lifecycle. For insurers, this means ensuring that clients maintain thorough records, which can be crucial in defending against claims.
Given that the PAP often juggles extensive operational duties, the additional responsibility of building safety management can be overwhelming.
Insurers might need to provide or recommend support services to help clients manage these burdens effectively, thereby reducing the risk of oversight and subsequent claims.
Market impact and industry response
Risk aversion and accountability
The Act’s ambiguity may lead to risk-averse behaviour or inadequate compliance as stakeholders navigate the unclear regulations.
This environment can increase the frequency and severity of claims, influencing insurance premiums and policy terms.
The industry seeks clearer definitions and standards to ensure effective compliance
Insurers have a vested interest in advocating for and contributing to the development of such clarity, as it directly affects their risk exposure and the efficacy of the insurance products they offer.
The Building Safety Act has profound implications for the insurance sector
The Building Safety Act represents a significant regulatory shift with profound implications for the insurance sector, particularly in terms of professional indemnity and liability coverage.
Insurers must adapt by enhancing their risk assessment practices, providing comprehensive support to their clients, and actively participating in industry discussions to drive clarity and effective compliance.
Additionally, the potential personal liability for Principal Accountable Persons underscores the importance of Directors and Officers insurance, ensuring that individuals are protected against personal financial loss.
This proactive approach will help mitigate risks and ensure that both insurers and their clients can navigate the new regulatory landscape successfully.
