Who'll protect us from our protectors?

contractors are facing a double whammy from their insurers. As reported in Building recently, increases in premiums have, in some cases, risen 500% (9 August, page 19). This finding was backed up by a slightly less apocalyptic survey by the National Specialist Contractors Council, which reported increases of up to 300%.

The other problem is that these hiked premiums are buying less and less cover. It is common for contractors to be required to obtain cover for "each and every" event. This means that the limit of the indemnity applies to each claim, regardless of how many there are. This is, however, becoming difficult to achieve. Many insurers will now offer only aggregate cover, which caps the amount of money that can be claimed in a given year.

Obviously, these factors are going to increase the cost of carrying out building projects. Risks formerly covered by insurance will have to be priced into the contract. Already, those involved in planning projects are having to revise their expectations of the level of insurance cover available, and if the contract has been signed, it is possible that one of the parties will be unable to fulfil their obligations with regards to the nature and extent of insurance cover required.

The problem is particularly acute in the PFI sector. This was in any case under pressure from rising bid costs, and it has resulted in some big players, such as Amey, taking a far more cautious approach to upcoming projects.

This change in mood is threatening to disrupt the government's targets for public services. For example, in the health sector the emphasis is increasingly on smaller capital value projects, allied with a drive to improve primary healthcare. However, the rise in bid costs and insurance will force experienced PFI consortiums to concentrate on the larger projects.

The latest government guidance, drawn up by Partnerships UK on behalf of the Office of Government Commerce, does not appear to be helping in this regard.

One of the main questions arising out of the OGC guidance is that of who is to cover the rising cost of insurance. Some sources suggest that the private sector will be expected to pay for premium increases of up to 200%. Hopefully the final position will be more positive for bidders, but there is already disappointment in the private sector that the OGC guidance has not contemplated the benchmarking of insurance costs. Inevitably, the increased risk will mean that bid costs are raised across the board, resulting in the public sector having to pay more for its projects.

This all makes for gloomy reading. Is there anything that can be done? In the short term, the answer is probably no, unless the OGC changes its approach to risk insurance.

In the medium term, however, there are more hopeful signs. It has long been appreciated that there should be a move towards project insurance on a wider basis than that presently available. In addition, the strategic forum's latest report, Accelerating Change, recommends a move to "whole-life" insurance that will cover the first 35 years of the life of the building. There is also the existence of latent defects insurance, typically covering the first 10 years.

There are issues to resolve in relation to the interplay between these proposals and existing schemes and these were reviewed in Christopher Hill's Building article "Heading for Cover" (19 July, page 64). As Hill points out, the hope is that that more jobs will in future be carried out using project insurance and latent defects cover. This should mean that fewer professional indemnity claims are made, and that therefore premiums are reduced. It may well also be the case that the concept of whole-life insurance finds favour and is developed further.

Nevertheless, the immediate outlook is more pain to come.