Top 5 claims risks affecting architects and engineers in 2024

1.

Economic instability

Whilst the rate of inflation in the UK has decreased since the record high figures in 2022, inflation and interest rates remain high and the construction sector is struggling to overcome the recent and ongoing financial pressures since the aftermath of the pandemic and the war in Ukraine.

Last year, we reported that the predicted increase in contractor liquidations could lead to claims against architects and engineers if claimants look to them and their insurers to recover losses. This is a prevailing concern as a recent report stated that construction firms make up 16.2% of insolvencies in England and Wales, a staggering 34.2% increase since 2019^[1].

The increase in the cost of labour and materials has also notably led to delays in major public developments such as the new high speed line (HS2). In the private sector, large housing developers are reporting a decrease in profit and revenue and are cutting down on the number of new houses being built due to funding challenges and high mortgage rates putting off potential purchasers.

Architects and engineers should where possible review the financial stability of firms they work with as insolvencies mean they could become the main or only target for a claim. They should also ensure that their contracts allow them a right to terminate in particular in the event of client insolvency and/or failure to pay fees. 

2.

Sustainability and environment, social and corporate governance (ESG)

Sustainability is still at the forefront of discussions surrounding risk management in construction, as recent changes to the Environment Act will require certain developments to have a minimum of 10% net gain of biodiversity. The new rules are now coming into force in 2024, after being postponed by the government. 

In conjunction with this, there is an industry wide push to reduce carbon footprint and make buildings more sustainable and firms’ ESG policies are being scrutinised more closely by developers and insurers alike.

There could be pressure for architects and engineers to win tenders by being ‘ahead of the game’ and proposing innovative new technologies, practices and materials. Whilst it is important to take ESG action and to achieve the project’s required biodiversity levels, such materials and practices should be sufficiently reviewed and tested before they are specified or used on a project.

Firms should also be wary of express guarantees within their contracts to deliver biodiversity net gain of 10% and meet other sustainability criteria as developers could seek to transfer liability on to the project team. Claims flowing from breach of such express guarantees may not be fully supported by a professional indemnity insurance policy. 

3.

Building Safety Act 2022 - limitation and the new role of the Principal Designer

Recent changes to the Building Safety Act (“BSA) has created some uncertainty amongst construction professionals as to the impact from an insurance perspective.

From 1st October 2023, the Act has introduced a new Principal Designer role whose main role is to ensure compliance with Building Regulations. It is important to distinguish this from the established Principal Designer role under the CDM Regulations as different knowledge, expertise and competence will be required for both roles.

Insurers often take a reactive approach to risk, looking at previous claims and losses when reviewing their risk appetite. Until claims materialise it can be challenging to predict how undertaking this new role will influence an underwriter’s risk assessment so firms should seek guidance from their broker.

Firms should be wary of contractual obligations relating to the new Principal Designer role without seeking appropriate guidance and should provide staff with relevant and ongoing training to ensure continued compliance with the new statutory obligations.

The extended limitation periods under the BSA also continue to give professionals and their insurers a sense of uneasiness. Notably the first case where the courts have considered this (URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ 189) has now given more clarity on the application of the BSA and it is likely that more cases will follow. 

It was found that URS as an engineer owed a duty of care to BDW under the Defective Premises Act as the duties therein apply to developers and that the extended limitation periods apply retrospectively to any parties already in litigation unless it has already been finally determined.

It is important now more than ever to ensure that documents are retained for at least 15 years in the event there is a claim under the BSA, to ensure any contracts with sub-contracts are back-to-back in particular with regards to limitation periods and also to improve contract management practices to ensure that obligations signed up to are reasonable and insurance supported.

4.

Shortage in skilled workforce

Many firms report difficulties in attracting new talent within the construction sector and this looks to remain as the skills shortage is set to continue in 2024.

It is important for firms to be more pro-active and plan ahead, as inflation remains high and wages rise and therefore staff retention becomes a more widespread problem. For any employer, it is setting yourself apart from competitors and diversifying recruitment practices that will minimise the impact of the labour shortage.

However it has been challenging to recruit young staff with few looking to qualify due to lack of interest and a general negative perception of the architectural and engineering professions.

Whilst the government recently relaxed visa requirements for overseas workers to try to address the labour shortage, the government has now done a U-turn following an increase in net migration and there will be new and stricter immigration rules by spring in 2024. It is doubtful whether the previous relaxed rules were enough in any event and particularly whether there should instead be more investment in attracting young people to the sector, for example through more apprenticeships.

High staff turnover can lead to mistakes and issues being missed due to lack of continuity. Senior managers should therefore get ahead of the curve and reconsider their current recruitment practices and prioritise engagement with the younger generation to improve perception of the industry as a whole.

5.

Cyber Risk

Cyber threat has been on the rise across all sectors, including construction. 

The Cyber Security Breaches Survey was a government research study published in April 2023 which reported that construction firms are “among the most likely to fall victim to cyber-facilitated fraud” and are one of the top three sectors that fell short on having technical cyber security controls.^[2]

The increased digitisation of construction methods and practices, such as the use of Building Information Modelling (BIM), has been immensely beneficial however this coupled with inadequate cyber security protection makes construction firms particularly susceptible to cyber threats.

Remote access, use of personal devices and cloud servers as a result of working both on and off site as well as home/hybrid working models following the pandemic, exposes architects and engineers to cyber vulnerabilities. Those involved in cyber-crime can exploit the complexities of cyber security measures that are required to be put in place across diverse settings. 

It is therefore important that all firms adopt sufficient cyber protocols including delivering adequate cyber risk training to staff and implementing internal policies such as multi-factor authentication, strengthening passwords, data back-up and encryption and updating software regularly.

Failure to do so not only poses a risk of financial exposure but also damage to reputation, in particular if an attack leads to project delays or even derailment of a project. The ICO are also entitled to impose fines if personal data is compromised, as occurred in 2022 following a phishing attack against Interserve.

An incident response plan is crucial and this should involve having a robust cyber insurance policy in place that will respond quickly to such threats. It is worth noting that policies such as professional indemnity and directors & officers insurance now look to fully exclude any cover for cyber liabilities.