by Allan Ramsay
Whenever I meet other architects nowadays the topic of conversation very often turns to the subject of professional indemnity insurance. I suppose that this is not surprising because, after staff and premises costs, PI insurance cover very often forms the largest part of any firm’s budget.
Much of the conversation relates to the difficulty that architects have experienced in obtaining PI cover at a reasonable cost and in reasonable time. Lack of capacity in the traditional market has resulted in many instances where renewal quotations have been produced at not the 11th but the 12th hour (without opportunity for the insured to discuss terms) and it has been known for brokers to offer policies with part of the risk still uninsured.
It is not surprising then that, some four years ago, several of the UK’s largest architectural practices, to whom the problem of PI insurance was particularly acute, decided to investigate the possibility of an alternative method of insuring themselves which would allow escape from the vagaries of the traditional market. Their objective was to achieve a long-term stability, not only for themselves, but, equally important, for their clients to whom the problem of PI insurance was becoming ever more important in an increasingly litigious world. The result of this move was the creation of the Wren Insurance Association, a mutual company administered day to day by Tindall Riley & Co, who have more than 100 years of experience in managing such organisations.
To those practices involved in the search for alternative insurance, the establishment of a mutual offered many benefits. First, it would not be in business to make a profit for outside investors, nor would it charge any commission. The potential substantial savings would be reflected in lower premiums or, alternatively, would make more cash available for the settlement of claims. Second, the insured firms would elect the directors of the mutual, who would fulfil a supervisory role with powers to influence the policies of the Wren — something unheard of in the traditional market. The ability to deal directly with the mutual, without the need for intervening brokers, was also seen as a definite advantage. Third, and to many the most important factor, the mutual would be established on a long-term basis with members committing themselves in return for a known premium rate, subject to gradual adjustment, over a period of years. These advantages as well as others convinced those searching that a mutual would offer the stability that they were seeking.
Now that the Wren has been in operation for two years, I am often asked whether we are happy with the situation, and whether in practice it offers the benefits that we expected. The answer, so far as our practice is concerned, is an unqualified “yes”, although it has not all been plain sailing.
Obviously the establishment of a new insurance source upset the traditional market-place. It was, at first, difficult to negotiate adequate reinsurance and vested interests placed doubts in the minds of our clients about the viability of a mutual. The Wren, I am happy to say, weathered this storm, obtained re-insurance to satisfy the Department of Trade and Industry, and is now backed by the world’s three largest re-insurers. I do not believe that any other PI cover in this country has such strong support.
Undoubtedly, most aggravation has stemmed from the Wren’s stance in attempting to impose some sort of discipline over the matter of collateral warranties. This has created considerable difficulties for ourselves and our developer clients in a market-place where funds and tenants have had a free rein for far too long in imposing ever more burdensome liabilities on architects. It was time that some sort of order was brought to the situation and those who had benefited from the former chaos were bound to object. The Wren’s action has not only established principles which are now followed generally in the insurance market, but has produced documents which are specifically related to insurance risks, something never contemplated by solicitors when collateral warranties were originally conceived. The traditional market position has been not to cover collateral warranties, though some underwriters will now extend cover on a restricted basis and the situation remains very uncertain and unsatisfactory.
Unfortunately it is taking some while for those who demand warranties to appreciate the benefits of receiving agreements approved by the Wren. Unlike the traditional market where policies are renewed annually, the long-term commitment of Wren members means that warranty liabilities are insured on a continuing basis. Traditional underwriters are entitled to vary policy conditions at renewal (just like your household cover) and, as they exist to make a profit, they would be neglectful if they did not do so. At a stroke, therefore, liabilities assumed under a warranty could be excluded from cover at some future date under the terms of a traditional “claims made” policy. In a mutual, which is non-profit-making, this is considerably less likely to happen.
There are other benefits arising from membership of the Wren which are fast becoming apparent and which are not available in the traditional insurance market. When setting up the mutual, all prospective members submitted details of their claims history over a 10-year period which led to the first real analysis of claims within the profession on such a scale. This information is now available to members, as is the technical experience of participating practices, both factors undoubtedly able to influence the quality of product produced by member firms. We, ourselves, have benefited from this pool of common knowledge and so have our clients on more than one occasion.
In a further effort to improve product quality the Wren has established a risk management programme under which all members will be audited by external risk management consultants. The exercise is not intended to lay down hard-and-fast rules to bind every member, for this is not the purpose of an insurer. Rather, it will check that good housekeeping standards are generally being followed by all and are being applied to the management of projects. I am sure that many, like ourselves, have looked at their management procedures with special care over the past few months in readiness for the auditor’s visit.
There is one further benefit of the mutual which will become increasingly apparent as the number of claims increase, as they most undoubtedly will. History shows that after a period of frenzied activity this inevitably happens, and recently the situation has been aggravated by new fast-track techniques, shortages of skilled labour and projects of unprecedented size. The undoubted benefit will be the handling of these claims by qualified in-house legal staff which will speed matters and, at the same time, considerably reduce the level of legal fees. This, again, will leave more cash available for investment and, therefore, for settling claims.
I said earlier that all had not been plain sailing since the establishment of the mutual, and I think that some of the problems have arisen from a lack of PR by Wren members. Traditionally, architects still think as professionals and many feel that insurance is a matter between them and their insurers and not for public discussion. This is understandable, but nowadays, whether they like it or not, PI insurance is considered to be fair game for clients, funds, tenants and anyone else who happens to be interested.
I would therefore be self-critical and say that we have not explained to our clients clearly the undoubted benefits that they obtain from our membership of the Wren. Mutuals historically form when traditional market conditions become untenable and this instance was no exception. The members were worried by the complete absence of any stability and they felt that action was required to protect them and their clients. Matters must have been in a very sorry state of affairs to have precipitated such action: I, for one, did not spend seven years training as an architect in order to end up as an insurance broker.
