The BSA 2022 received Royal Assent in April 2022, although the majority of its provisions coming into force in October 2023. The BSA 2022 introduces a new building safety regime for certain residential buildings imposing more onerous requirements on those identified as "higher risk buildings". The BSA 2022 creates new obligations that apply to buildings during their construction and occupation, new requirements for the competence of those involved with buildings, new buildings regulations and new means of enforcement for breach including criminal sanctions and the extension of the limitation period for civil actions. As a result, there are new roles and responsibilities for those involved in procuring, designing and constructing high-rise buildings including ensuring that specific factors are met at each stage of the construction process and ensuring compliance with building regulations. The regime is overseen by a new Building Safety Regulator which sits within the Health and Safety Executive.
One of the important changes introduced by the BSA 2022 is the extension to the scope of the Defective Premises Act 1972 ("DPA 1972") which applies to all dwellings in England and Wales and enables owners and those with a legal or equitable interest in a property to pursue a claim for defective works where the work renders the dwelling unfit for habitation. The BSA 2022 expands the scope of the DPA 1972 to include refurbishments (previously its operation had been limited to unacceptable work related to the provision of new dwellings) and extends the limitation periods to 30 years retrospectively for claims under the Act accruing before 28 June 2022 and to 15 years for such claims accruing after 28 June 2022.
The provisions of the BSA 2022 have only been in place for a short period of time so there is not yet a body of case law nor reliable indications of how the Courts are likely to interpret some of the Act's provisions. Nonetheless, there are obvious implications for the insurance sector. We will look at the possible impact on insurers in the immediate term and the longer term and provide some suggestions as to how to deal with notifications of claims arising as a result of the BSA 2022 and best practice for insureds to minimise the risk of claims arising.
Immediate term implications
(i) Potential increase in circumstances/claims
One subject generating the most discussion since the BSA 2022 received Royal Asset is the concern that the legislation will give rise to a significant increase in new notifications of circumstances and claims to insurers. Our (admittedly early and anecdotal) experience, however, is that whilst there has been some increase in claims brought under the DPA, a large increase in new notifications has so far not occurred.. In our view, this is likely to be due to the fact that most notifications of circumstances/claims relating to cladding and fire safety issues in historic projects were made in the immediate aftermath of Grenfell meaning these claims have already been notified. For those cladding and fire safety claims that have not already been notified, they are now likely to be excluded under wide exclusion clauses for these claims which have typically been included as a policy endorsement, meaning that any new claims arising from breaches under the BSA 2022 relating to cladding and building safety issues will likely be excluded under current policies.
For other historic claims which arise from issues other than cladding and fire safety issues, potential claimants and construction professionals may still be reviewing completed projects for possible BSA 2022 claims under the permitted extended limitation period. However, there are several factors that may limit such claims and consequent notifications. Potential claimants for example are likely to face real evidential difficulties with claims arising from very historic projects as files and records may be lost or no longer may available and relevant personnel no longer be employed by the relevant entities meaning that, whilst a claim could be brought under the extended limitation periods, practically speaking this is very difficult. The availability of personnel and records may also influence the Court's decision as to whether to permit an action under the extended limitation period, or to disallow it on the grounds that it would infringe the potential defendant's right because a fair trial would not be possible. Additionally, parties involved in a project several years ago may no longer exist meaning there is no entity against which to bring a claim (which will also prevent potential contribution claims being brought).
As to an upsurge in notifications, Insureds may be reluctant to make overcautious protective notifications in respect of historic projects where there has been no expressed intimation of a claim because of concerns about the impact of notifications on its claims record and the implications for future insurance. We consistently advise Insureds not to allow these sorts of considerations to influence whether or not to bring something to Insurers' attention, but the restricted availability of insurance and the significant increase in premiums has undeniably unsettled Insureds .
Notwithstanding the above, there still remains the possibility that nervousness by Insureds leads to a rash of notification of circumstances/claims relating to historical projects. It would be prudent for Insurers to undertake a degree of "horizon-scanning" for future issues that may represent a risk given the extended limitation period for bringing claims under the Act. The recent furore over the widespread use of RAAC cement is perhaps a case in point, although given that its use was most prevalent between the mid-1950s and mid-1970s, claims in relation to this would seem to be outside even the extended limitation period.
The bigger current concern, though, in our view, is the potential for a much greater number of future claims given the new building regime in the BSA 2022, the increased scope of the DPA 1972, the increased limitation periods for claims and the Building Liability Order ("BLO") regime which allows companies related to a defendant to be pursued for the defendant's liability. The BSA 2022 will mean that there is a much greater scope for claims against construction professionals and linked entities and an increased limitation period within which to bring such claim. Without existing precedent and available comments from the judiciary, it is very hard at this stage to predict the nature and number of the claims that will arise.
One direct consequence of the BSA 2022, however, may be claims against professions who assume responsibility as Principal Designer under the Act without appreciating the obligations that this entails and without having the proper qualifications for compliance. Whilst there are courses for enrolment at present, there does not appear to be any recognised approved qualification. Given that under the Act all members of the Project Team need to confirm their competence, it would be sensible for Insurers to make close enquiry of any Insured who is intending to take on the role of Building Regulations Principal Designer, particularly in respect of higher risk buildings, as to the steps they have taken to ensure their fitness for the same. There is also the possibility of claims developing as a result of refurbishment and renovation work under the expanded scope of the DPA (previously such claims would have only been able to be brought with regards to construction, conversion or enlargement, and excluded work undertaken on existing dwellings).
(ii) Reactivation of previously notified claims which were not pursued
A further concern about the implications of the BSA 2022 is that it allows some claims which had previously been notified but were ultimately not pursued particularly those not pursued due to limitation issues, to come back to life. Any claim that has been brought will not be re-opened but claims that were previously statute barred may now have several additional years in which to be brought. For example, buildings completed from 1992 until 2022 would now be within the 30 year limitation period of the BSA 2022. For those claims that were not pursued for reasons other than limitation, the reasons they were not pursued will likely remain meaning such claims are unlikely to be reactivated now.
Our general experience of disputes has been that there are generally a relatively small number of claims that are not pursued due to limitation concerns. On that basis, the pool of "abandoned" claims which could be reactivated would be fairly small, but it should be borne in mind that the legislation does very significantly extend the limitation period for some claims and at this stage the impact of that cannot be predicted with any degree of accuracy- hence the need for caution and vigilance.
For example, set against our present perception that the risk of a multitude of "re-activated" historic claims may be small is the fact that such claims were seemingly given encouragement by the Courts in a recent judgment which commented that the Defective Premises Act had hitherto been under-used.
(iii) Potentially increased avenues for seeking contributions
The BSA 2022 allows parties to seek a Building Liability Order ("BLO") against a group entity and as well as opening up avenues for potential claimants (meaning a potential increase in claims – see i above) could allow Insurers to pursue a BLO to seek a contribution as part of subrogated claims. BLOs essentially hold associated or parent firms of dissolved entities corporately liable for negligence claims. In order to facilitate parties identifying potential targets for a BLO, the BSA 2022 provides for any person intending to apply for a BLO to apply for an Information Order requesting information or documents to help identify who may have a relevant interest and may therefore be a potential target for recovery.
Our experience to date suggests that BLOs are being used as a threat by claimants against defendants in circumstances where there are issues with insurance cover or the insurance cover is not sufficient to meet the alleged quantum of a claim. In such cases, claimants threaten to seek a BLO against a defendant's sister or parent company to ensure recovery in respect of the defendant's liability. A recent reported case confirmed that BLOs can be sought by a defendant against companies related to another defendant in order to secure an effective contribution to any liability it may have so this decision may encourage defendants to consider seeking BLOs.
As with the BSA provisions generally, the BLO regime is untested. In our view, in the majority of subrogated recovery claims brought by Insurers they are likely to continue to prefer the security of knowing that the defendant has professional indemnity insurance that will meet a subrogated claim rather than obtaining a BLO against a linked company and incur the costs and risks associated with this. However it is another "unknown" and the possibility of BLOs has also affected consultants whose business plan (in light of increased premiums as a result of fire safety and other historic risks) may otherwise have been to close their existing practice and create a new company for work going forward.
Longer term implications
Our comments above can only relate to the present position, with the Act in its infancy. The longer term implications are likely to be an increase in the number of claims against construction professionals in the future – particularly claims relating to breaches of the new duties under the BSA 2022. One of the issues with the legislation is that it does not clearly define the level of duty and obligations for the different duty holders and this lack of clarity may, at least initially, encourage claims for breaches (including associated criminal proceedings). However, as the law in this area develops and claims reach Court, case law will provide guidance on how the duties under the BSA 2022 will be interpreted Greater clarity may ultimately (after a period of growth) actually serve to reduce claims under the BSA 2022. It is also not clear how the BLO regime will operate and how easy the process will be and only time will tell whether such orders will offer a real solution for recovery of liabilities from entities linked to a defendant.
The potential increase in claims may, however, be mitigated by the more onerous and exacting standards and regulations across the construction sector brought about by the BSA 2022; the stated purpose of the legislation was, after all, to improve standards
One interesting issue for the future will be whether the prospect of criminal liability under the BSA 2022 has any implications for civil claims. It remains to be seen what the appetite for criminal enforcement will be but if criminal proceedings are brought against a construction professional it could encourage civil claims and make such claims very difficult to defend. It may be that insurers seek to exclude any claims where there has been a finding of criminal liability against a construction professional employed by an Insured.
A further provision that could serve to increase the number of claims as part of the BSA 2022 reforms relates to the activation of Section 38 of the Building Act 1984. Section 38 provides that a breach of the building regulations, if it causes damage, is actionable and therefore creates a cause of action for those suffering damage due to a breach of the Building Regulations. Damage would potentially be restricted to physical damage to persons or property caused by a breach of the Building Regulations - pure economic loss is unlikely to be recoverable. Section 38 has not yet been brought into force – the provision's status is still prospective. However, when it comes into operation it will benefit the property owners whose contract documents do not have express terms regarding compliance with the statutory requirements and also those who do not have a contractual relationship with the original contractor/consultant such as leaseholders. Once in force, the extended limitation period and enforcement powers, such as BLOs (section 130) created by the BSA 2022, will also apply to this provision.
Insurers operating in the construction sector will likely seek to take into consideration any particularly onerous new liabilities and react accordingly, including by way of revised pricing. Insurers may also be reluctant to agree to provide policies for group companies due to the risks associated with BLOs and may insist that larger companies with more complex corporate trees obtain insurance for each individual entity as may be the case in any event. In addition, construction companies may adopt a greater degree of self-insurance assuming more of the risk of its operations. One possible result of the widespread impact of BSA 2022 on all participant in the construction sector may be that the sector, will seek to deal with more disputes in a more cost effective way, without recourse to legal proceedings. This would mean, in the first instance, a likely greater number of adjudications and other methods of resolving disputes quickly. Insurers may also consider whether they will cover claims brought under the longer limitation periods and could, for example, exclude claims arising from historical projects which completed over 12 years ago.
Advice for Insurers
(i) Policy coverage issues
On notification of any circumstance Insurers should pay close attention to the notification requirements in the policy wording. Issues to consider include whether the notification has been made in accordance with the provisions in policy wording and whether, for example, the notification meets any requirement to notify circumstances that are likely to give rise to a claim where this is included in the wording – some Insureds will seek to make protective notifications of circumstances that may give rise to a claim and these will fall short of a requirement that the circumstance is likely to give rise to a claim.
Where a claim that was previously notified and considered to be over is reactivated as a result of the BSA 2022, Insurers should be aware of the greater need to check whether the original notification covers the claim that is being pursued, since with the passage of time there is a greater propensity for the claim to "grow" beyond what was originally brought to Insurers' attention. Furthermore, older policies may have been written on a negligence basis rather than a wider civil liability basis and may therefore not cover DPA liability under the BSA 2022 reforms.
For both notifications of circumstances and claims, Insurers should assess whether there has been a delay to notification paying close attention to any correspondence that may suggest a notification could have been made earlier.
Insurers should also consider if the claim falls within any of the policy exclusions such as the cladding and fire safety exclusion and any exclusions in place for regulatory breaches or criminal matters.
(ii) Best practice for Insureds
Insurers should liaise with Insureds and their brokers and ensure the following best practices are adopted:
- Check that the companies Insureds work with (sub-contractors and others involved in projects) maintain their own professional indemnity insurance to ensure that contribution claims can be made going forward.
- Ensure that the contracts for projects are back to back so that the contractual terms are replicated throughout the supply chain.
- Where possible seek to cap liabilities included in contracts. Although such caps will not be operate against DPA liability (parties cannot contract out of DPA liability), they may be helpful in limiting liability in other circumstances.
- Ensure limitation periods are accurately set out in contractual documents.
- Review document retention policies with Insureds in light of the extended limitation periods – Insureds may need to retain their files and project drawings and documents for 15 years going forward.
Conclusions
The BSA 2022 has not resulted in a significant increase in claims at this stage. However Construction professionals and manufacturers involved in the construction of residential properties may potentially face liability to the subsequent owners and interest-holders. Contractors and developers will also need to consider the implications and risks of BLOs and may no longer be able to hide behind corporate structures. Meanwhile the controversial expanded and retrospective limitation periods are likely to increase the volume of claims, opening the door to historic defects dating as far back as 1992. How insurers respond to this is likely to depend on the nature, scope and number of the claims received and how the law develops but it is likely that amended policy wordings will be developed.
A wider consequence of the Act is that Insurers may now have a greater awareness of the potential for legislation (particularly where it has retroactive effect) to necessitate ongoing reviews of the wider impact on the professional indemnity insurance market.
