Liam Greene, technical underwriting manager – Financial Lines at Markel UK, explains why the ongoing economic and cost of living crises are putting new pressure on businesses and raising professional liability risks.
The Government recently reported that the number of company insolvencies in Q2 2022 was 13% higher than in Q1 2022 and 81% higher than in Q2 2021. This important data paints a picture of an economy experiencing significant challenges. The professional liability sector will not be immune to the impact of these trends and headwinds are expected throughout 2023.
The rise in insolvencies alone is a factor that can increase project risk. Where recessionary fears lead to under-priced projects being subjected to the pressure of rising costs, financial issues or even collapse may occur. And where a contractor or sub-contractor goes out of business part way through a project, for this or other reasons, it can lead to a nightmare scenario. Clients or main contractors needing to find a sub-contractor willing to pick up what might be a semi-complete IT system build, for example, can find themselves beset with challenges.
The availability and cost of materials, supply chain issues and labour shortages are further factors that are already causing problems for contractors of all types and this is only likely to worsen into 2023.
Material costs and availability may start to tempt some contractors into using sub-standard materials or swapping the supplies they need with substitutes not designed specifically for the job being undertaken. Labour shortages may tempt those in the tech industry to source untested IT resource raising risks associated with their projects. Checking that sub-contractor partners are undertaking work using skills, processes and/or materials are to the standard expected will be especially important.
The situation can manifest in negligence claims, or other regulatory and financial risks for contractors and their clients. Should a claim fall on the shoulders of the main contractor, they may seek corresponding compensation further down the chain which can be complicated especially if, for example, an untested overseas sub contactor has been used.
Linked to this will be fears that an increasing number of small businesses will find it challenging to find adequate, suitable or affordable insurance cover. This can be a significant challenge when the costs of claims are increasing. Any issue only becomes apparent when a claim in made and the claimant finds themselves having to supplement the amount paid by the insurer. This is a difficult situation for all parties so ensuring cover is adequate – often through being advised by a broker – is preferable at all times.
Fraud is another factor associated with recessionary times. Whilst the number of fraudulent liability insurance claims reported by the ABI in 2022 dropped by 10% compared to 2021, we expect this number to have begun to change direction in 2022 and be heading north in 2023.
It’s now ever more important that SMEs work with their broker to ensure they have adequate cover that is suitable to the needs of their business. Checking in halfway through the policy period is also recommended given the rapidly changing environment.
Contract reviews could also make a significant difference, especially with main contractors becoming ever more wary of the need to oversee sub-contractors’ working practices and insurance covers.