What happened to our insurance?! How PAS 9980 Assessments and external wall remediation might impact, and possibly jeopardise, your building insurance

Amongst our Housing Association and public sector clients, we are noticing a developing trend in buildings insurance that raises important considerations around remedial works, and how and when to engage with insurers. In advance of a webinar to discuss these issues (details below), the nub of the problem is that increasing numbers of our clients are encountering adverse terms, or in some cases refusal of cover, for buildings that have been assessed and remediated in accordance with PAS 9980 assessments, or otherwise retain combustible materials in the external wall systems.

Why?

It appears that the changes are being driven by a rationalisation in the insurance market. Historically, buildings insurance premiums for Housing Association/public sector stock were considerably lower than private market comparables. The reason being, beyond economies of scale, was that those organisations had significant maintenance and repair resources to deal with defects and issues “in-house”, rather than giving rise to claims. As a consequence, this area of business offered lower yields (premium), and became dominated by a small number of insurers. 

Following the Grenfell tragedy, there was a fundamental shift in risk identification, and a somewhat confused response to addressing the problem. An initial focus on remediating to the objectively strict functional requirements of the Building Regulations has, faced with a dawning realisation of the works and costs that this would entail, been increasingly displaced by the subjective risk-based approach established by PAS 9980 guidance, developed as a methodology for undertaking FRAEWs (Fire Risk Appraisals of External Walls) required by the Fire Safety Act 2021 (“FSA”).  It has become increasingly clear, however, that this approach is having an unintended, but significant, impact on both the insurance and lending position in respect of affected buildings. 

The impact on premiums, and other terms, is a reflection of the simple fact that the fire risk issue that has been brought into focus is a “large loss” issue, rather than anything that could be dealt with by an internal maintenance and repairs team. As such, it is an issue that hits the Housing Association/public sector in the same way as the private market, leading to steep rise in premiums.

PAS 9980 and Insurance

The use of PAS 9980 assessments is, unsurprisingly, increasing – it often offers a quicker and less expensive road to remediation where the safety of residents is the key focus. Its use goes beyond just the FSA. The PAS 9980 methodology is now used in preparing EWS1 Forms and the criteria for making new Building Safety Fund and Cladding Safety Scheme applications for funding. It also forms the basis of obligations under DLUHC’s Developer pledge and contract. Increasingly, it is the basis for the settlement of claims between building owners and contractors/developers. 

For the uninitiated, a PAS 9980 assessment seeks to categorise buildings into one of four categories of risk - Low, Medium tolerable, Medium intolerable, or High – the latter two categories requiring mitigation or remedial works in order to render the buildings safe for occupation. Those recommended works almost invariably result in remedial solutions being undertaken to the building that are significantly different to the works that would have otherwise been required to be carried out to meet strict compliance with the relevant functional requirements of the Building Regulations. 

By way of example, to achieve compliance with Building Regulations, a building over 18 metres would likely require the removal and replacement of combustible insulation and rectification of missing and/or defective cavity barriers. For the purposes of an FRAEW conducted in accordance with PAS 9980 however, the assessor may well form the view that the combustible insulation presents a tolerable level of risk (and can therefore remain in situ), provided that the defects to the cavity barriers are addressed, or other mitigation measures introduced. 

This dichotomy in remedial standards poses a significant challenge in the building insurance market. A PAS 9980 solution will predominantly focus on the safety of occupants in the event of a fire or other hazardous incident (such as the ability to safely evacuate) However, the main concern of a building insurer, when deciding whether to accept a risk and setting any premium or other conditions, will be the building’s ability to withstand or minimise damage, with the ultimate aim of reducing the amount payable under the policy, in particular if the building is damaged or destroyed by fire. Given that the risk associated with a building that adheres to the black letter of the Building Regulations will (almost certainly) be of a lower risk than one subject to a PAS 9980 assessment, these two competing interests have resulted in a very cautious approach being taken by insurers, seeking to minimise their risk when underwriting policies in this sector. Our clients are increasingly reporting that insurers are raising premiums, introducing exclusions or limits on liability, and in some cases refusing cover entirely when a building is remediated to the PAS 9980 standard. 

Given the potential issues that arise in obtaining insurance at a reasonable price on a building remediated to a PAS 9980 standard, it is important that building owners take steps to engage with insurers at the earliest opportunity and before a risk-based remedial solution is undertaken. This will give building owners some comfort that, in electing to remediate a building in line with a PAS assessment (as opposed to remediating to the objective standard of the Building Regulations), this will not adversely impact the ability to insure the building. 

Building Regulations and Insurance

An even more concerning and growing trend is where building owners are intending to remediate to Building Regulations standard as is the established practice, but insurers are nevertheless refusing to insure those buildings (or do so with significant limits on liability or high premiums) where there is an element of combustible material being retained within the external wall. This has included buildings under 18 metres, which would usually be able retain combustible materials within the external wall and still comply with the Building Regulations, but have now been highlighted as “problem buildings” for insurers. Therefore, it is strongly advised that discussions are had with insurers prior to commencement of works, even where the aim is to bring the building in full compliance with Building Regulations. 

That position is not without logic from a property reinstatement perspective. As noted above, building insurers are concerned not only with risk to occupants’ health and safety, but also with the protection of the building. In the event of a fire, the building may perform in accordance with the functional requirements of the Building Regulations, resulting in the safe evacuation of all residents, but may still suffer significant fire damage requiring partial or complete reinstatement. Where combustible materials are included within the external wall system of the building, the fire spread will be clearly more rapid and destructive than if materials of limited combustibility were present, resulting in a higher risk of significant property damage. 

The issue is not confined to buildings under 18m. Even where it can be demonstrated that the functional requirements of the Building Regulations have been met through, for example, a large-scale test undertaken in accordance with BS8414, the lawful retention of combustible material may still cause concern for building insurers. 

How to mitigate the consequences

Ultimately, the market dictates the terms, so building owners need to respond by accommodating insurer requirements. In order to avoid the risk of cover not being available, or minimise the impact on premium and terms, the best course is to ensure that the insurer is as comfortable as possible about the risk, and what is proposed. This involves: (1) similar to new-builds, keeping insurers appraised of the risk and the remedial works that are proposed, and seeking confirmation that cover will be available; (2) considering doing more than the “bare minimum” to achieve compliance or building safety – the greater the reduction in the risk, the more likely a building will be covered on more advantageous terms. That said, there will be tipping point where increased remedial costs will not be offset by premium savings. 

Conclusion

Should the worst case scenario happen, the cost consequences of owning a building without insurance are extremely significant. In addition, uninsured buildings will not support lending, either to the freeholder or their individual leaseholders – the consequences of the position taken by the insurance industry is therefore critical.  

As with previous issues around fire safety defects, and the demand of EWS1 forms by lenders, it may well be that the Government might need to try and intervene, to try and avoid the insurance market from excluding cover for buildings that are remediated to the PAS 9980 standard or retain otherwise compliant combustible elements. This is particularly important given the Government’s current drive towards buildings being assessed and remediated in accordance with this new PAS 9980 risk-based approach. If the market cannot resolve this, the Government may need to become the insurer of last resort.

How the interplay between remediation and the insurance market plays out over the immediate months and then beyond will be interesting to watch; however, it is clear that building owners should engage with insurers, via their brokers if retained, at as early stage of the remediation process as possible, to ensure they are able to comment on proposed remedial solutions and to avert any unforeseen consequences later down the line.

We will be hosting a webinar to explore these issues, on Wednesday 21 February, from 11:00 – 12:30, which you can sign-up to here: The impact of PAS 9980 assessments on UK buildings insurance.