PI Insurers confronted with increased exposures?

David Jones, Consulting Underwriter at Peach (NPA Insurance).

There’s no hiding from the fact that the extended statute limitation period for claims under the Defective Premises Act, from six to 30 years, will increase PI Insurers exposure to risk. To what extent, only time will truly tell.

As Harry McNeil notes in his article ‘Retroactive Reckoning: Construction PI Faces its 30-Year Shadow’ in Insurance Times, it will be interesting to see what effect this has within the market.
Parallels can be drawn to the 1986 Latent Damage Act. For PI Insurers this legislation increased in an entity’s statute limitation from 6 to 15 years from the date of negligence that caused a latent defect.

Actuarial statistics for Construction Professionals would suggest the increased statute limitation for latent defects has not really increased the tail pattern for Construction related PI exposures. The statistics would suggest the tail finishes at the 10-12 year point for all Construction PI losses. This precedent could be indicative that the DPA will not have as severe an impact on exposure as the theory might suggest.

Secondly the trigger for a claim on a PI policy is negligence. If the consensus is that other professionals would have taken a different course of action at the time, then negligence is probable. Applying current day knowledge to designs that were state of the art when they were introduced some 30 years ago does not represent negligence.

PI insurers are also responsible for the cost of defending what are often speculative claims. Claims notified 15 years after the alleged negligence can often involve a lack of maintenance rather than negligence. The extended limitation period under the DPA is likely to see opportunistic claims by property owners caused by a lack of maintenance rather than negligence. However, such claims will be difficult to substantiate, especially in cases where physical records and documentation are no longer available.

Harry McNeil in his article draws comparison to Asbestos exposures. Asbestos claims were largely bodily injury and fell under Liability policies written on a “Losses occurring” basis, compared to PI that is written on a “claims made” basis. In the event a systemic issue arises PI policies can exclude the cause, with any exposure attaching to 2/3 years of account prior, as occurred with cladding, compared to the stacking of multiple years of account as occurred with Asbestos on Liability policies many years after the occurrence.

The Defective Premises Act has introduced an exposure that did not exist prior to the Act. Proving negligence many years after the event will be difficult and an increase in defence costs is likely. A significant increase in claims or a change in tail pattern did not follow the Latent Defects Act and as this is a realistic comparison I would expect the same to occur following the Defective Premises Act.