The Building Safety Act 2022 (the Act) has finally been passed, over two years after first being proposed to address issues in the building standards and regulatory regimes following the Grenfell Tower Fire, with many of its provisions entering into force this week.
While the Act was primarily directed at England and Wales, some late amendments have significant implications for construction in Scotland and so for insurers in this market. Our construction colleagues wrote here about the overall changes introduced by the Act, which we consider here from the insurance perspective.
What are the key Scottish implications?
When the Building Safety Bill was originally introduced to Parliament, there were few provisions that applied to Scotland. However, certain provisions were introduced late in the Bill’s passage to address issues around liability for defective construction products, and cladding products in particular, and these provisions have been extended to Scotland.
In particular, the Act creates a new right of action for losses relating to construction/cladding products where four conditions are satisfied:
Condition A: Where (a) a person fails to comply with a construction or cladding product requirement, (b) a person who supplies or markets a construction or cladding product makes misleading statements, or (c) a person manufactures an inherently defective construction or cladding product.
Condition B: The construction/cladding product is installed in or applied or attached to a building in the course of works. For cladding materials, this relates to the external wall of a building.
Condition C: Once completed, the dwelling is unfit for habitation.
Condition D: The facts in Condition A are the cause (or one of the causes) of the dwelling being unfit for habitation.
Where all four of these conditions have been satisfied, the relevant person in terms of Condition A becomes liable for losses suffered as a result of the dwelling being uninhabitable. Importantly, this right extends to anyone ‘with a relevant interest’ in the property and covers liability for personal injury, damage to property and, crucially, economic losses.
A key feature of this new right is the length of time for which it can be enforced. Liability runs for 15 years from the date of completion of the building (or the date when the relevant works are completed). However, for certain cladding products there will be a longer, retrospective, 30-year liability period. This will arise where the relevant works were completed prior to the commencement date of the Act (which, in relation to these particular provisions, was 28 June 2022).
Any agreements which purport to exclude this liability (such as liability caps in appointment agreements) are void.
While these provisions are primarily directed at manufacturers and suppliers, the Act has significant implications for any professional whose services include specifying or advising on the use of construction products, including architects, engineers, and Lead Consultants.
Taken together, these amendments represent a significant change from the current position under Scots law. Claims in relation to construction and cladding materials will no longer be limited to those who can show they were owed a contractual or common law duty of care but are open to anyone with a current interest in a dwelling. Liability is therefore extended well beyond the original parties to the relevant construction works. This takes the position in Scotland closer to the English position under the Defective Premises Act 1972.
The extended time limit of up to 30 years for these claims is also a notable departure from the current position in Scots law, where the standard liability period for reparation claims is five years. The five years runs from when the loss or damage occurred, albeit with scope to argue for a longer period in certain circumstances, including where there has been inducement by fraud or error not to bring a claim. Given the evidence presented to the Grenfell Inquiry, it is clear arguments could be made in this area.
The imposition of a new right of action with a retrospective liability for claims is significant. In theory, this is balanced out by a requirement in the Act for the Courts to dismiss any claims which would have been time barred but for this retrospective rule if the court is satisfied that this is necessary to avoid a breach of a defender’s Convention rights under the Human Rights Act 1998. That is a legally complex question which is likely to be the subject of considerable litigation.
Professional Indemnity (PI) Claims
The outcome is likely to be increased claims in relation to defective construction materials, and cladding materials in particular. From an insurance perspective, these will not be easily resolved.
Professional indemnity insurance is written on a ‘claims made’ basis. Claims made under the Act will therefore fall to the PI policy held by a professional in the year the claim is made. The last few years have seen a hardening of the PI insurance market, reflected in the application of cladding exclusions and stricter policy terms. It could now be that these policies need to deal with claims going as far back as 2007, where there was a very different market in the construction industry. This is likely to result in a further tightening of the market, with more focus on the retroactive dates in policies.
Professionals also need to be aware of the length of this liability for their current projects, as their liability could end up lasting for 15 years from completion. That liability cannot be excluded through any appointment agreement, and so this risk will need to be managed. This will be particularly difficult for firms whose practice has changed (in size or sector) since then. It will also represent a risk for any firms who have merged, and potentially acquired a longer tail risk than first anticipated.
The impact of contribution claims in Scots law (which allow claims for two years from the date of decree at the end of court proceedings) stretches this liability out further into the future.
This is a significant change to the Scottish construction market which seems to have taken place with limited, if any, industry consultation. Its approach also doesn’t appear to align with statements the Scottish Government has made in the past on intended changes as a result of the Grenfell Tower tragedy.
The full implications of these changes remains to be seen, however for now, the potential for further (and broader) claims to be made under this Act should be taken into account by firms to manage their risk profile going forward.