Delivering flood resilience: minimising the impact of flood claims

January 15, 2024

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One billion people globally are at risk of experiencing a flood. In the UK alone, an estimated 5.2 million homes and businesses are at risk. And the probability of flooding is increasing with climate change. Increased winter rainfall — projected to increase 35% by 2070 — and more severe weather events will exacerbate an already untenable set of circumstances.

The impact of flood risk on businesses is also troubling. In the UK, once a flood hits and affects a business, only 60% of them ever re-open their doors. And for businesses that do, each flood claim entails, on average, 50 lost days of business. Meanwhile, government strategy is shifting, with a newfound acceptance that ‘we can only reduce the risk in some places,’ rather than eliminate the risk altogether.

Now, more than ever, we must harness solutions to proactively mitigate flood risks wherever possible.

Do you know the flood risk for your assets?

Investing in flood resilience is driven by an awareness of the flood risk by the key stakeholders (e.g. building owner / occupier / insurer / lender). For property owners, that means assessing a wide range of factors.

What sources of flooding are in the vicinity of the building? What are the flow routes and hazards i.e., how would the water flow to reach the building or asset you’re trying to protect? What’s the history of flooding at the property? Would potential floodwater likely be contaminated i.e., is a water source nearby fresh, or contaminated with sewage or farm waste? What’s the estimated frequency, duration and depth of potential floods specific to the property?

The basics of flooding

Each type of flooding has unique implications. Pluvial, or surface water flooding, occurs when the ground can’t absorb the water fast enough, so it runs over the surface. Fluvial, on the other hand, occurs when streams, rivers or small ditches overflow. Groundwater flooding occurs when the ground is completely saturated with water, and the water has nowhere to go. Finally, tidal flooding is the temporary inundation of coastal areas or areas around rivers during exceptionally high-tide events. An area not often considered is the risk of sewage backflow into a property when the combined foul and surface water system is overwhelmed. Compound flooding is a combination of any of the above flood types.

It may be counterintuitive, but more properties are at risk from surface water flooding than that flowing from a river or sea. If rainfall is prolonged or intense enough, and the ground can’t absorb the water it will flow over the surface and may flood properties which are often thought to be at low flood risk. 

Property flood resilience in practice

Property flood resilience (PFR) is a broad term capturing measures which minimise the impact of flood water on a property or asset — these can be both permanent measures built into the property or temporary measures deployed in a flood. 

PFR is two-fold: resistance measures, or those that reduce the amount of water entering a building (e.g. flood doors/barriers/automatic air bricks), or recoverability measures that limit the damage caused if water does enter a building (e.g. kitchens / floor and wall finishes not damaged when they get wet). The trick is in balancing both measures, and determining which are most effective and timely for a specific property.

When delivering flood resilience, there’s an important and clear methodology UK professionals follow: the code of practice (CoP) for property flood resilience (C790F), published by the Construction Industry Research and Information Association (CIRIA), an independent not-for-profit organisation.

The CoP lays out a six-stage approach that qualified surveyors should follow for effective delivery.

  • Flood hazard assessment – an assessment that reviews flood risk for the property; determines likely frequency, depth, severity and overall susceptibility to flood.
  • Property survey – a property survey and assessment of existing resilience (conducted by a qualified skilled surveyor).
  • Options development – deciding on PFR strategy and creating associated, detailed flood resilient design.
  • Construction – installing PFR products by appropriately skilled contractors or specialists.
  • Commissioning and handover – a post-installation audit conducted by an independent third-party surveyor confirming that measures operate effectively.
  • Maintenance – assigning responsibility for ongoing operation and explaining to customers how to maintain measures.

A separate document, ‘making your property more flood resilient’ (CIRIA C70C) is a helpful resource for home owners or business owners interested in at-home flood resilience guidance.

The importance of winning over customers

Much of the at-risk population in the UK doesn’t actively adopt mitigation measures even when they’ve been impacted by multiple flood events. Recent research found there are several psycho-behavioural barriers that subconsciously influence a person’s likelihood to pursue flood risk mitigation.

According to research commissioned by the Environment Agency, there’s a widespread lack of awareness among the public of the true extent of risk facing their properties. 

Many participants view themselves as being insufficiently at risk to justify any sort of flood mitigation investment. To that end, many misunderstand risk rates entirely. If a surveyor identifies a 1 in 33 annual flood probability, for example, many assume this means the property will experience a flood once in every 33 years on average. It actually means there’s a 3.3% chance of flooding each year — revealing the true risk to be much higher than perceived. This is made worse by homeowners and businesses not wanting to accept that there’s an ongoing risk.

Additionally, most participants didn’t feel empowered to act and had poor knowledge of which PFR measures were available to install. Self-efficacy also proved important in participant decision-making; those who felt confident in their ability to carry out PFR measures were more likely to do so. 

It’s critical to help customers understand their risk and further establish their appetite for risk. Customers must be able to understand the cost-benefit analysis of how much risk they might be willing to accept, and how much they’re willing to invest to protect their property. We must collectively distance ourselves from the belief that only properties near a river, or only properties in certain environments are at risk. All properties can be at risk — and the time to mitigate, using a holistic and strategic approach, is now.

Some of these concepts were previously shared in a recent webinar presented by Ian Gibbs.

Scotland’s hydro-electric schemes, severe flooding and insurer implications

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Hydropower has played a critical role over the past century in connecting vast swathes of rural Scotland to the power grid, all by using its plentiful natural resources to generate electricity: steep mountains and hillsides, lochs and reliably heavy rainfall. Scotland now provides 85% of Great Britain’s hydro-electric resource, with a total generation capacity of 1,500 megawatt units (MW). 

In recent years, there’s been a notable growth in small-scale hydro-electric schemes — that typically generate ~6 MW — installed by estate and property owners in the Scottish Highlands. The schemes take advantage of the hilly slopes and water runoff to generate clean energy, while simultaneously raising revenue and positive cash flow to offset the property’s expenses.

But as climate change perpetuates extreme weather events in both size and frequency, property owners and insurers alike face an unprecedented challenge: contending with the impacts severe flooding events are having on small-scale hydropower schemes. Is this renewable energy source truly insurable, and are the assets built robustly enough to withstand intensive weather patterns to come? 

The innerworkings of a hydro scheme

A typical small hydro-electric power scheme comprises a turbine and electrical generator positioned within a pump house located at a low-level where water run-off is collected. The water run-off flows into a mechanical turbine (essentially a propeller) resulting in its rotation and the production of hydro energy utilised to power an electrical generator. 

By nature, a pump house must be located at the bottom of a hill — as water flowing downhill is the mechanism that powers the turbine. As a result, there’s always potential exposure for the pump house to become flooded. 

Flooding is highly problematic for several reasons. Electrical assets, like the generator and control panels, can easily be damaged or destroyed altogether by floodwaters, necessitating costly repairs or full-on replacement. Secondly, it can render a scheme unusable until fixed properly, amounting to a costly business interruption (BI) during the period — often several months at a time — that energy generation is suspended.

Any viable solution would be as costly — if not more so — than bearing the consequences when flooding occurs. Either engineers must redesign pump houses to be more robust, or property owners must invest the necessary funds to install flood resilience measures and ensure a pump house is as watertight as possible. Few mitigation options remain in between. 

Climate change exacerbates severe weather patterns

Climate change continues to affect Scotland’s natural environment. Over recent decades, Scotland has experienced a warming trend that has both shifted rainfall patterns — including higher average annual rainfall and an increasing proportion of rain falling during heavy rainfall events — and contributed to rising sea levels. 

An evidence report, the third UK Climate Change Risk Assessment (CCRA3), found that the risk of flooding to people, communities and buildings remains among the most severe risks for Scotland and is the costliest hazard to businesses. It also found that water, energy and transport infrastructure networks are at imminent risk of “cascading failures,” and infrastructure services are at risk of river and surface water flooding. 

Such risks are expected to become more dire year by year. According to a March 2023 report published by the UK’s Climate Change Committee, by 2050 the UK is expected to have ~5% wetter winters on average, ~10% increased intensity of heavy rainfall, and a 10-30 cm increase in average sea levels — all making way for more acute river, surface and coastal flooding, and subsequent loss of transmission and distribution capacity due to flood damage.

Implications for insurers and insureds

For insurers, on the construction side, there is potential for large loss(es) to occur, and insurers must consider high-complexity risks to third-party property and the environment. Operationally, there is potential for large loss(es) to occur as well, due to inherent and environmental factors. Claims for small-scale schemes amount to around £1 to 2 million for site works, property damage works and BI. 

Insurers are increasingly concerned about policy limits, and if the BI sum insureds are high enough to cover a potential loss — particularly as energy prices soar. If flooding and subsequent damage occurs more frequently, insurers will ultimately need to decide: Is insuring hydropower assets disproportionate to the risk? 

Where hydro losses occur a multi-discipline team comprising of loss adjusters, forensic engineers, forensic accountants and environmental consultants with specialist training should be engaged. It’s critical to partner with an entity educated in emerging technology and local market/industry knowledge to assess repair versus replacement options and provide guidance.

Learn more — Read about Sedgwick’s recently-launched power and energy division in the UK.

The rise of claim severity and complexity

December 18, 2023

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Conversations around severe weather events, rising inflation and lingering labor shortages and supply chain issues have become commonplace; because these trends affect our lives, our businesses — even our insurance. Rising claim complexity and severity doesn’t seem to be slowing down, and it’s important to explore the factors driving this trend and its potential implications for the property and liability claims sectors.

The impact of climate change

Globally, we’re seeing more extreme weather events and conditions, occurring more frequently — resulting in an unprecedented number of claims and a higher percentage of them involving significant complexity and severity. 

The first half of 2023 saw elevated disaster losses, according to an Aon report, with the fifth-highest economic impact on record and the highest since 2011.The single costliest disaster was the February earthquakes in Turkey and Syria, although remaining insured losses were largely driven by severe convective storm activity in the U.S. 

This year, close to a dozen insurance companies in Florida went bankrupt, while others restricted coverage due to increased hurricane losses and litigation costs. Insurers are declining to write policies in hurricane-prone areas of Louisiana; one stopped issuing new policies in California altogether. Another carrier reduced its coverage to homes along the East Coast at risk of flooding and those in western states at risk of burning. 

Other contributing factors

The human drive to build bigger and better is fueling innovation in sophisticated building design and the use of new technologies and materials in construction. But stretching the bounds of aesthetic and technological precedents also leads to greater risk and more complex claims against the companies behind the work when something goes wrong. Whether it be traditional materials used in new ways or complex features like retractable roofs, the more companies deviate from standard procedures, the more risk they assume.

Labor shortages in the construction market coupled with wage inflation, high demand for projects and the steadily rising costs of materials are all contributing to higher repair and replacement costs. Increases have been exceptionally high for the goods and services that drive personal insurance claims.

Inflation is further driving up costs. McKinsey and Company estimated that inflation alone increased U.S. property and casualty insurance loss costs over historical levels by $30 billion in 2021.

In our increasingly litigious society, according to Sedgwick’s book of business, litigated claims account for as much as 50% or more of the total amount paid on all claims. According to a Carlton Fields survey, class action spending has increased for eight consecutive years due to two major drivers: claims are getting larger, and more companies are facing such lawsuits. 

Preparing for and mitigating claims: best practices

Because litigation is one of the primary cost drivers in liability claims, we recommend that companies always lead with litigation avoidance. But if necessary, having the right partner with a strong management process for legal spend can ensure attorneys are maintaining each individual case and billing according to agreed-upon guidelines. Robust attorney oversight is vital as well.

It’s important to have partnerships, policies and emergency plans in place in advance of a catastrophe to minimize business interruptions and expedite restoration and resolution. These plans should be current, tested regularly, and reflect industry best practices for disasters like hurricanes while aligning with your carrier’s specific terms. Ensure your partners possess both technical expertise and a service-minded, empathetic-led approach.

To counter climate change-related challenges, sustainable construction practices — such as designing for sustainability and energy efficiency and selecting locally sourced, renewable and recyclable materials — have emerged as a proactive way to reduce the building industry’s adverse impact on the environment. By using water-efficient fixtures, rainwater harvesting techniques, and adopting waste reduction and recycling practices, companies can conserve and decrease waste output.

Looking forward

As we continue to face the reality of managing larger and more complex claims, insurers must keep an eye on trends and adapt strategies accordingly. Establishing the right partnerships, preparing in advance, and employing proactive mitigation and litigation practices are all critical to fulfilling our commitment to taking care of the people we serve.

Some of these ideas were featured in issue 22 of Sedgwick’s edge magazine.

Insurance and indemnity: what policyholders need to know about cyber losses

December 6, 2023

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In the insurance space, the concept of an indemnity period specifies the time frame for which the policyholder (insured) can claim compensation for financial losses resulting from an insured event. It serves as a boundary for the coverage provided by the insurance, limiting it for business interruption (BI) losses to the lesser of when the impact to the business ceases, or the maximum time period stipulated by the policy.

Yet surprisingly, this important aspect of a policy is often overlooked when it comes to renewal time. Let’s explore the reason for that, and what policyholders can do to get ahead. 

How is an indemnity period set?

Firstly, let’s consider how indemnity periods are set in a standard Industrial Special Risks (ISR) program. Being a property policy, physical reinstatement is often at the forefront when considering policy terms and how a claim may operate in practice. This can sometimes be counterintuitive, as the indemnity period should be set to ensure that most of the conceivable financial impacts to the business caused by insured damage would occur within the maximum indemnity period (MIP) placed in the policy.

A typical ISR would set a maximum indemnity period of at least 12 months. This period is usually set based on the required time needed to reinstate a hypothetical total loss, considering the likely repair period for the property insured. However, it is often overlooked that business interruption claims do not necessarily cease upon reinstatement of the damage. 

There are several reasons why a business interruption claim could extend beyond the date insured damage has been rectified. Lost market share, timing issues related to recognition of revenue and use of existing stockpiles, and extended ramp up back to normal operational levels to name a few. Short of a total loss, in most instances the maximum indemnity period should be sufficient to cover losses extending beyond the completion of physical repairs. However, for longer and more complex repairs, losses beyond the end of the indemnity period can become an issue in a claim. 

Cyber policy and how it differs from an ISR

The picture becomes more complex, and the indemnity period exponentially more important, if we apply the above concepts to a cyber policy. The business interruption impact of a cyber breach can be far more difficult to anticipate prior to it happening. There are no physical reinstatement timelines for buildings or other property to use as a base for setting an indemnity period. The damage a breach can cause may also be far reaching and challenging to predict in a pre-loss environment given the potential range and scope of impacts to the business, particularly given the more limited history of cyber breaches compared to traditional property damage and repairs. Further consider that a typical cyber breach is short, sharp, and usually over within a matter of days, or weeks. The effects of the breach though, can often last far longer. 

If we transplant the above school of thought from setting ISR policies, it is reasonable to assume that the indemnity period for a cyber policy will usually be set based on the cyber breach itself, rather than the ongoing impact to the business. A website or server with a major impact can often be back online through backups or recreation within a matter of hours, days, or at most weeks. An indemnity period in a cyber policy will often reflect that and is typically set at around 90 days. Given the complexities that can arise within a business interruption claim, is this enough to adequately capture exposure for both the insured and insurers?

Impact on a claim

Let’s now consider a scenario where a business experiences a cyber breach that leads to a significant disruption in its operations.

If the business successfully recovers and resumes normal operations within the indemnity period, any indemnified losses incurred during that period (whether that be loss of profit, or additional costs incurred) are typically covered by the policy.

However, if the recovery process takes longer than anticipated, or more commonly, the actual financial impact to the business does not crystallise until after the indemnity period expires, the coverage provided by the insurance policy no longer applies. There are a number of ways this could materialise in a claim. For example, an insured could lose long-term contracts as a result of not being able to undertake their normal business, or they may bill quarterly/at project completion and although work is lost, there is no financial impact to the business within the indemnity period. Cyber losses are also heavily publicised and the opportunity for ongoing reputational damage is a significant concern.

Limitations to coverage

Once an indemnity period ends, the insurance policy generally does not cover any additional losses incurred beyond that period. This means that any losses experienced after expiry of the indemnity period would not be compensated by the insurer, even if they resulted directly from the original event.

Importantly, and what is sometimes less considered, is that the inverse is also true, and it leaves insurers exposed. If an insured suffers a loss throughout the indemnity period, but then fully recovers this loss after the end of the indemnity period, insurers are bound to reimburse the insured for the losses sustained, even though a partial or full recovery that would normally offset the losses claimed may have been made.

This is especially pertinent when it comes to cyber losses for two main reasons. Firstly, as discussed earlier, cyber policies typically list shorter indemnity periods. Secondly, it can sometimes be hard to understand the full impact of a breach until well after recovery. Therefore, whilst the insured’s network infrastructure may be fully recovered, operational impacts may still not be apparent.

Summary

In summary, if the indemnity period is too short and the insured’s impact extends beyond that period, the business could face un-indemnified financial losses for the period after the coverage ends. Conversely, insurers need to be aware that whilst a short indemnity period may seem beneficial for the purposes of indemnifying a loss, it may work in an insured’s favour if any recovery is made after the indemnity period has ended.

The correct setting of an indemnity period upon policy inception or renewal can make a material difference to the practical implication in a claim. It is important that experts familiar with business interruption losses particular to the policy in question are consulted in order to ensure that the appropriate considerations are made. Hopefully, this results in a smooth and appropriate claims experience for all parties.

Learn more > Contact [email protected].

Tackling transportation thefts in France

December 1, 2023

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After several difficult years, many of the logistical issues that have impacted global supply chains are starting to stabilize. However, cargo theft remains a concern. With persistent inflation and other economic pressures, the phenomenon requires a mobilization of all parties involved in the transportation of goods.

Even if the vast majority of shipments are without challenges, several links in the chain remain exposed to the risk of theft. In fact, a large number of reported crimes take place during pre- or post-carriage. Safety, malice and theft (including theft by deception) become top of mind. Sufficient deterrents are put in place, including stronger warehouse and storage site security through human and technical resources (video protection/remote monitoring), as well as site and warehouse safety certifications.

Transportation theft

Today, two types of theft with very distinct characteristics remain a challenge:

  • Theft by opportunity: Generally unsophisticated crimes and of lesser value, such as goods in vehicles with little or no means of security parking in unsecured parking lots. The increase in online shopping and the consequent transport of goods, as well as the accumulation of goods in rail yards and ports of embarkation as soon as an incident occurs, are two factors that have multiplied this type of theft in recent years.
  • Organised crime: Targeted goods, more sophisticated and planned crimes that often require the cooperation of a person with inside information on the transit route. Perpetrators go to great lengths to identify valuable cargoes, such as electronics and pharmaceuticals, forge licenses and shipping documents, create fake trucking lines and other deceptive schemes in order to steal the goods.

Reality on the ground

Despite the procedures put in place, land transport remains an area that is subject to hazards. For example, congestion at the port may occur in the event of a port strike, or a driver might reach the limit of their authorized driving time. The obligation to park the vehicle on the road is difficult to manage with very few secure car parks in France.

There is a map of which countries are more affected by crime than others, but no one is spared. When altered lead is found on a container transported from France to the United States, many people do not file a complaint because they do not know for certain where it happened. These offences are therefore not reported. To give you a recent example, let’s consider the 300 parcels that disappeared from a container coming from India via Antwerp. Who should file a complaint? The sender considers that it is not within their jurisdiction. Upon arrival in France, it is impossible to know where the flight took place, especially at the time of the stopover.

It is often noted that there is a lack of coordination between the various parties involved. However, only a concerted approach could make it possible to put in place preventive actions and limit the risks.

Cost of incidents 

Safety is always a priority, but it can come at a cost, and not all shippers are ready to accept it. However, the cost of theft is often more expensive than taking preventive action.

Whether the goods are stolen from a ship, train, truck or warehouse, losses of goods that occur in transit are generally covered by marine insurance policies. All of these situations come at a cost. For example, when a container has been opened, its delivery is delayed by several days. The deductibles may be in the range of 15,000 to 20,000 euros per claim, and this can add up to significant sums.

Carriers call on the experts to help them establish liability at the time of the theft (if the investigation determines that the negligence of one of the freight forwarders, carriers or logistics subcontractors led to the theft, then they must take responsibility for the loss), as well as to recover the stolen goods and reduce the risk of future losses.

Safeguarding interests

Among the actions to be considered to combat malicious acts, security professionals should be asked to carry out a risk analysis prior to the transportation of goods. The client can draw up a set of specifications, which is the subject of a study, and not just an offer of prices drawn from the lowest drawn. Establishing this recommendation is particularly relevant when the value of the goods, or the distance/destination, are sensitive. By starting a conversation about how transport can be organised, customer and carrier share a common vision of risks. Problematic issues need to be discussed and validated jointly. For the client, it then becomes more acceptable to pay for the service, which also corresponds to a consultancy service. 

As we have already seen, it is essential to report all facts/obervations, even if they are not reported to the insurers, as well as to transmit those findings to the authorities (relationships between certain facts) to give them more means to act.

With insurers, thinking about the level of deductibles that do not currently encourage people to file a complaint would be a first point of reflection, as would collectively act on prevention. Securing goods can generate costs that the client is not always willing to accept. The carrier can’t take care of everything. An incentive in the form of a bonus could encourage the necessary investment in vehicles, for example. Safety is everyone’s business and awareness is essential. It starts with developing simple best practices and a culture of safety. 

The industry must deal with new risks, such as cyber, that can have a real impact on the transportation business, but we can’t dismiss the fundamental risks. In the event of an incident, everyone’s reputation can be at stake, and in the event of a court case, the judge can be less lenient with a company that has all the capacity to act. We need to put in place joint initiatives to reduce these risks and limit the cost to business.

Insuring the green transition

October 16, 2023

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It is a time of rapid change in the energy sector. After years of steady transition to renewables, progress has accelerated recently, with policies such as the U.S. Inflation Reduction Act deploying significant amounts of capital to fund both the developments of new technologies, and their adoption. 

This progress is vital to hitting global net zero goals and transitioning to a low-carbon economy, but when quantifying their risk, it creates new challenges for insurers. Calculating the likelihood of something going wrong, and how much it will cost, is always an imperfect science when dealing with novel technologies. No matter how talented the engineer or actuary, they can’t predict the future. 

A reluctance to cover a project under these conditions is understandable, but it must, and can, be overcome. Without insurance, these projects cannot be built at scale, so waiting for abundant historic data to emerge is not an option. However, there are steps we can take to mitigate these risks, and allow insurers to be at the forefront of the transition to net zero. 

Specialist and technical expertise 

Although we cannot quantify the risks facing emerging renewable technologies with certainty, a team comprising deep expertise across a spectrum of specialisms is invaluable. Modern renewable energy solutions represent the cutting edge of engineering, so understanding how they work, what could go wrong, and how risk can be mitigated requires the expertise of elite specialist engineers. 

This is especially true for loss adjusters. Take the example of an offshore wind farm. These have existed for decades, but technological improvements have continued at pace, with the largest turbines now supporting rotors with diameters of over 200 meters, weighing hundreds of tonnes. When dealing with entirely new technologies, there is no handbook to consult, and no substitute for those with the skills to apply their knowledge directly to each situation. 

There is a need for multidisciplinary expertise, understanding that the risk profiles of new power technologies can go beyond engineering, and requires the input of meteorologists, oceanographers and environmental experts. This need is core to our focus on diverse specialisms, allowing us to draw on the expertise of colleagues from Sedgwick and EFI Global worldwide. 

Global collaboration

Different countries are at different stages of technological maturity, and this is especially true for renewable power generation. To solve the knowledge gaps that disincentivise insurers from covering these projects, it is vital to think globally, and draw on the learnings of engineers and insurers who have experienced the same challenges, wherever they are located. 

For example, a UK insurer appraising the risks of a large offshore wind farm may benefit from the learnings of a colleague in China, where these projects are more mature. Similarly, Icelandic insurers and engineers may have solutions to challenges relating to geothermal power. 

Global challenges require global responses, and international firms can benefit from implementing channels and structures that encourage worldwide collaboration and the exchange of ideas. More broadly, international events and forums can place these debates high on the agenda to establish best practices and learnings to be shared on an industry-wide level. 

Making the first move

Access to expert insight and global learnings can mitigate many of the uncertainties surrounding renewable power projects but cannot remove them entirely. If we are to facilitate the green transition, it will require bravery and insurers who take the first step and offer solutions for projects that may have no precedent. 

Although risk cannot be eliminated, the potential rewards of going net zero are significant. Reducing the weighting of fossil fuels on their books can help insurers hit their environmental, social and governance (ESG) targets, as well as benefitting the brands of insurers who take the lead. And beyond ESG, tackling these challenges is also a business imperative. 2023 saw an estimated $1.7 trillion of global investment in clean energy projects, and is set to continue to rise. All of this presents a significant opportunity for insurers who draw on global insights and specialist expertise to develop new solutions, and establish themselves as leaders in the space.

Property disrepair claims – An awakening

March 7, 2023

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The UK media have extensively reported on the issue of mould caused by property disrepair following the death of Awaab Ishak. The Coroner issued a Regulation 28: report to prevent further deaths to The Department for Levelling Up, Housing and Communities who have published their response.

Rising awareness

The Housing Ombudsman sent an open letter to social landlords in November 2022 about complaints relating to damp and mould. The letter requested that they adopt a proactive zero-tolerance approach as recommended in the Spotlight Report from October 2021. Landlords were asked to assess themselves against 26 recommendations, engage with residents during the process and publish the results. The letter also warned against the use of inappropriate language, such as blaming the resident’s lifestyle.

In July 2020, the Draft Building Safety Bill was presented to Parliament. The bill included provision for the removal of the ‘democratic filter’ before they could access redress via the Housing Ombudsman. During 2019-20 only 6.9% of cases entering the Ombudsman’s formal remit had been referred by a designated person. On 1 October 2022, changes to The Housing Ombudsman Scheme took effect and the ‘democratic filter’ was removed. This ensured that social housing residents had unrestricted access to an Ombudsman.

Following the change, the Housing Ombudsmen using their powers under Section 49 are investigating to establish if there’s evidence of systemic failings. The Housing Ombudsman Special Report on Birmingham City Council published in January 2023 found a maladministration rate of 96%. Further investigations with other social landlords are ongoing with others expected.

With the focus of claimant solicitors now turning to other revenue streams following the 2021 whiplash reforms and COVID-19 business interruption claims, housing disrepair claims are now in the crosshairs of many of these firms as an alternative.

My colleague, Richard Lumby, technical and audit manager commented on this matter, explaining that “The appetite of any claimant law firm to enter the market or remain there will largely be driven by the desire to maximise costs. With the proposed shift to fixed recoverable costs in the next two years, one must assume this will dampen interest amongst proposed entrants and lead to a more streamlined approach amongst existing firms as we saw when the principle was applied to personal injury claims back in 2013.”

Another colleague, Victoria Full, technical and audit manager shared that “Up until these changes are implemented, we expect that track allocation and costs will remain a contentious issue as highlighted by the issues in the County Court decision in Jalili v Bury Council (17 June 2021). Jalili-v-Bury-Council-Manchester-CC-Judgment-20210617-V-Final.pdf (civillitigationbrief.com)

According to The English Housing Survey (2021 to 2022) published, 19% are within the private sector with a further 17% in the social rented sector. The Headline Report noted various interesting points including that in the private sector 23% of homes were deemed “non-decent” compared with 10% in the social sector and problems with damp were most prevalent in the private rented sector with 11% of dwellings having reported a problem in 2021. It’s considered that the private rented sector will be the main source for these types of claims.

The housing quality and condition report provides a range of useful data, including the types of property where disrepair is more likely to be a problem and also provides a breakdown by region.

Dan Peck, Sedgwick’s regional director for complex liability commented: “It’s not just damp and mould that can cause an issue. Floors, stairways and banisters that are poorly maintained can cause falls which could lead to far more than a housing repair claim as significant injury could occur. With the ongoing cost of living crisis, landlords could be left with a double-edged sword. There will be less money to fund the cost of the necessary repairs to keep the property fit for habitation and the tenants unable to fund the costs of the required rental increase to meet the costs of repair.”

In an effort to improve the UK’s housing stock, the Government passed The Homes (Fitness for Human Habitation) Act 2018 that came into force on the 20th of March 2019. The act amends the Landlord and Tenant Act 1985 sections 8 to 10 and inserts a new s.9A, s.9B and s.9C.

The act applies to all new tenancies of a term less than seven years (including new periodic tenancies) granted on or after the commencement date as well as to all tenancies that began as a fixed term before the commencement date but become a periodic tenancy after the commencement date.

The Forum of Insurance Lawyers’ disease sector focus team says that liability claims for injury generally involve sums of less than £5,000, although there are occasionally larger amounts. What often happens is that a claim is made for financial recompense off the back of housing disrepair claims, then if the surveyor appointed finds mould, it could also give rise to financial compensation for associated respiratory injury also.

We’ve already seen a handful of cases and it’s considered that this may become a prevalent issue for liability insurers, particularly because of social conditions. However, the low compensation levels involved make the cases less attractive to claimant firms.

Regulatory framework

Prior to the 2018 Act landlords were required to keep properties “in repair”, as opposed to being “fit for habitation”. If a property has a defect that isn’t classed as ‘disrepair’ because the property has never been in a better condition (such as inadequate ventilation that leads to excessive condensation), the landlord was not obliged to improve its condition. The 2018 Act sought to close this loophole.

As set out in s9A(4), this can’t be avoided or contracted out of by the landlord, nor can any contractual penalty be levied on the tenant for relying on the covenant.

The act supplements s.11 LTA 1985 and requires that the property let remains fit for human habitation. The amended s.10 provides a definition of fitness of ‘for human habitation.’

We anticipate that this will — in the event of a claim — take some interpretation on the facts of the case but will be compared to the current list of 29 HHSRS hazards. Regard will need to be given as to whether a property is unfit, and also whether there’s a risk of harm to the health or safety of the occupiers.

We are reasonably confident that the doctrine relating to liability for unfitness as set out in O’Brien v Robinson [1973] will still apply; being as there are no express provisions in the Act on notice to the landlord, which is the case in S11 of the Landlord and Tenant Act.

In saying the above, for any unfitness arising from the landlord’s retained parts (common parts or exterior of a building of which the dwelling is part), the landlord will be deemed to be on notice as soon as the unfitness arises, and liable after a reasonable time to remedy the defects – Edwards v Kumarasamy [2016] refers.

Additionally, there are exceptions to the landlord’s duties under the act, including:

  • The landlord is not responsible for unfitness caused by the tenant’s failure to behave in a tenant-like manner, or that results from the tenant’s breach of covenant
  • The landlord isn’t obligated to rebuild or reinstate the dwelling in the case of destruction or damage by fire, storm, flood or other inevitable accident
  • The landlord isn’t obligated to maintain or repair anything the tenant is entitled to remove from the dwelling
  • The landlord is not obligated to carry out works or repairs which, if carried out, would put the landlord in breach of any obligation imposed by any enactment (whenever passed or made) – this would include things like breaching planning permission, or listed building consent, or conservation area requirements
  •  Where the needed works require the consent of a third party (e.g., a superior landlord or freeholder, a neighbouring leaseholder or owner, or a council) and the landlord has made reasonable endeavours to get that consent, but it has not been given

The Pre-Action Protocol for Housing Disrepair Cases will apply for cases of disrepair including personal injury to the occupants.

Conclusions

It’s considered the spotlight on these cases due to the recent media interest will have a far-reaching impact on the conditions of housing stocks especially in light of the recent open letters to all social housing landlords and can only be good for a tenant in dealing with bad landlords. Time will tell as to how this impacts claims for injury caused by disrepair, in particular with the removal of the reliance that the property was in poor condition at the start of the tenancy. It’s reassuring that the notice doctrine remains and that other defences are still available.

The main reason for optimism for liability insurers is the realisation that if such appalling cases such as Awaab Ishak’s start happening more often, then the subject will quickly rise to the top of the social agenda and landlords will receive much greater scrutiny.

Special thanks to Victoria Full, technical and audit manager; Dan Peck, regional director for complex liability; and Richard Lumby, technical and audit manager for their valuable contributions to this blog.

The impact of inflation on claims: what lies ahead in 2023

February 15, 2023

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By Andrew Cavan, director, head of major and complex loss (North)

As reported in the Financial Times, on 31 August 2022, the head of one of the world’s largest building materials companies confirmed that he’s seeing a ‘second wave of cost increases’ following the surge in gas prices.

Spiralling energy prices are just the latest addition to the cocktail of global events that have driven high inflation and a recession in the UK – and currently, there’s little indication that this market uncertainty will improve in the immediate future.

So how will this impact insurers’ costs for property reinstatement and business interruption (BI) claims in 2023?

Materials and labour

It’s universally well-known that the global shortage of many basic building materials is driving prices up, and the ongoing war in Ukraine has exacerbated this issue. Europe has a high level of dependency on Russia for gas, and they supply 20% of the world’s softwood. Ukraine is a global producer of metals – nickel, copper and iron – and any shortage significantly impacts the production and supply of steel, which is crucial to several industries, especially construction.

However, there’s evidence that the scale of these price increases is slowing, and we’ve even seen some price decreases in timber commodities. But the most important factor now is rising energy costs, particularly in the production of energy-intensive products, such as bricks and steel.

Higher prices aren’t the only issue to consider. Long replacement times for many materials are also causing major problems, with lead times more than doubled on products such as steel joists, roofing membranes and insulation.

Labour costs are also increasing in the UK due to Brexit, the post-COVID Great Resignation and a general shortage of skilled workers, from plumbers and electricians to lorry drivers. Employers are offering higher salaries to attract and retain staff, which results in increased costs. And so, we go on.

When will it end?

Every indication is that building costs will continue to rise in 2023, with an obvious impact on material damage and BI settlements. The Building Cost Information Service, the leading provider of cost and price data for the UK construction industry, is currently seeing an 8.5% increase in year-on-year returns, and they forecast this figure to be 7.5% in quarter one, 2023.

Sedgwick’s repair solutions quantity surveying team’s current inflation forecast for the insurance building repairs market in 2023 is 6%. This assumes some market stability, and as a result, material costs begin to fall off.

However, in practice, there continues to be a lot of building work available, and contractors can afford to be choosy in what they take on. Recently, we’ve seen a higher incidence of contractors declining to tender and not accepting projects because costs have shifted since they submitted their quotes. The support of a reliable and robust contractor network will be essential as we work through various challenges in the coming months.

Mitigation measures

Adjusters and insurers can’t control market forces, but we can react to them with pragmatic and nimble solutions. Planning is crucial, and we need to be aware of potential delays and bottlenecks in the supply chain and be ready to work around them.

In building reinstatement, orders for critical materials should be placed as quickly as possible, and early payments to contractors can assist with this. We could also consider different reinstatement methods or materials where economic and appropriate, and a single contractor approach if it saves time and reduces BI costs. Where plant and machinery are being assessed, we could look at suitable second-hand equipment. Early cash settlements might also assist the customer in terms of cash flow and help manage uncertainty for both policyholders and insurers.

Essentially, everyone in the insurance industry wants to avoid any reduction in settlements due to under-insurance or shortfalls if the sums insured are exhausted.

Adequacy of cover

Given the current economic climate, it really is essential that businesses regularly review the value of their assets. If the sums insured aren’t up to date, the impact of the continued and projected levels of inflation could be dramatic.

Long lead times on materials can affect the speed of building repairs, which means business interruptionperiods will be extended. Replacement machinery and stock are also likely to take longer to source, which will again impact the early recovery of the business.

The time to review sums insured and business recovery plans – across both material damage and business interruption maximum indemnity periods – is now. This will help customers steer through any period of disruption and emerge stronger. While worldwide economic uncertainty continues, it’s more important than ever to ensure that we are ready and fully equipped to manage the challenges ahead.