Why new safety laws could do more harm than good

On 21 February the House of Lords began the committee stage of considering the Building Safety Bill, and it will sit at various sessions into early March. It will be a challenge: the bill, as brought from the Commons on 20 January, has 234 pages; and an 87-page list of amendments to be moved in committee was published just four days before the first sitting.

The proposed legislation has already been subject to 18 months of exhaustive scrutiny (a draft bill was published in July 2020) and this plethora of last-minute, knee-jerk amendments is bound to have unintended consequences. The worst of these is likely to further restrict the industry’s capacity to both remediate unsafe buildings and build safe new housing.

The amendments already look likely to hasten the lemming-like withdrawal of insurers from the construction professional indemnity insurance (PII) market, which in turn will mean that many construction businesses will no longer be able to operate in housing development. This will have a deleterious impact on the capability to remediate unsafe buildings, exactly the opposite of the bill’s primary intention. It will also greatly reduce the capacity to build new housing (including affordable housing) in an era where demand for new homes has lagged way behind supply for decades, creating an ever-increasing aggregate gap in housing provision.

The Construction Leadership Council commissioned a survey of PII in Q1 2021 (a follow-up survey for the same period in 2022 is under way). Over 1,000 businesses responded and almost 50% had been declined insurance by three insurers or more. Premiums had increased nearly fourfold at the last renewal, having doubled the year before.

Although less than 5% of respondents carried out any work in relation to high-rise buildings, a third were unable to buy the cover they required. Over 60% had some form of restriction on cover relating to cladding or fire safety, with a third of the total respondents having a total exclusion in place for cladding claims. Over a quarter of respondents said they had lost jobs as a result of inadequate PII and a third could not do remedial work if they wanted to.

Competent businesses are being excluded from providing services due to unfettered risk aversion in the insurance sector

In an industry suffering skills shortages, these insurance restrictions have exacerbated the struggle to meet capacity demands. For these reasons, 21 months after the government made £5.1bn available for remediation work through its Building Safety Fund, very few projects have actually commenced. Competent businesses are being excluded from providing services due to unfettered risk aversion in the insurance sector.

State intervention will be necessary to ensure the provision of insurance to those undertaking the remediation works via the Building Safety Fund if insurers continue to insist on excluding cover for fire safety or cladding. If government doesn’t intervene, the remediation programme will either grind to a halt because firms cannot get the necessary insurance or it will only be carried out by very few of the largest businesses with the necessary buying power or capability to self-insure. This will exclude competent SME businesses from the marketplace.

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The situation will be worsened by proposals to extend the limitation period under the Defective Premises Act 1972 (DPA) and the changes to section 38 (s38) of the Building Act 1984. Though well-intentioned, these changes are in danger of hurting the wrong parties and being unenforceable through the courts. They will apply to all dwellings and will introduce extended strict liability against which firms will be unable to obtain adequate PII, since this only protects against negligence-based liability (failure to exercise the normal standards of skill and care) and not against strict liability (failure to achieve a result, often termed “fitness for purpose” liability).

A retrospective application of strict liability over 30 years does not align with contractual obligations and could lead to an unfair allocation of risk through the supply chain to those with least control over the extent of their contractual obligations. It will further restrict the ability to purchase PII and also to pay claims under the DPA. Documents required to make and defend claims from up to 30 years ago are no longer likely to exist, since there has been no reason to retain documents for that long (GDPR rules require certain documents to be destroyed).

The consequences of the massive increase in liability will render insurance cover impossible to obtain except for a few very large firms

Many developers use special purpose vehicles (SPVs) for building projects, and if these have been dissolved by the time leaseholders bring a claim then they will not exist to pay though they may have been responsible. The current legislative proposals are likely to encourage the increased use of SPVs for construction, motivated to avoid future claims.

Discussions with insurers indicate that they may simply walk away from construction. The consequences of the massive increase in level and extent of liability will render insurance cover impossible to obtain except for a limited number of very large firms. This will negatively affect levelling up policy, by supporting the largest firms which are mostly located in the South-east and excluding smaller firms in other regions from participating in the large amount of construction work that is urgently needed. It will also inevitably drive up building costs across all sectors of construction, including housing, schools and hospitals.

The latest government amendments to the Building Safety Bill are necessary to give effect to Michael Gove’s “reset” announcements of early January. The secretary of state is absolutely right to demand that leaseholders should not have to pay to remediate buildings that are unsafe and that businesses which have profiteered at the expense of life safety should be removed from government schemes that provide them with work, grants, subsidies or loans.

However, the devil is in the detail and his blunt proposals to avoid either leaseholders or taxpayers footing any part of the remediation bill will have the counterintuitive consequence of restricting competent businesses from carrying out the necessary work. This will open the door to incompetent businesses filling the void at bargain basement prices, inevitably leading to corner-cutting that will once again compromise fire safety and building quality.

Graham Watts is chief executive of the Construction Industry Council, a director of Building a Safer Future and the Considerate Constructors Scheme and co-chair of the Construction Leadership Council’s building safety workstream