WHO SHOULD READ THIS
- Building industry professionals including builders, contractors, certifiers and developers
THINGS YOU NEED TO KNOW
- In response to insurers ceasing to offer insurance coverage to building certifiers for cladding-related claims, the Queensland Government and NSW Government will be temporarily allowing building certifiers to practice with professional indemnity insurance that excludes cladding-related claims.
WHAT YOU NEED TO DO
- The solution offered by the Queensland Government and NSW Government is only a time-limited solution, and building industry professionals will need to remain informed as to developments in relation to this insurance crisis.
On 3 July 2019, the Queensland Government announced that it will be introducing regulations providing time-limited cladding-related exclusions for private building certifiers.
The response to the combustible cladding crisis has continued to develop over two years following the Grenfell Tower fire that captured the world's attention and highlighted the concerning practice in the building industry of using cladding material on buildings that is susceptible to catching alight.
An interim report handed down by PwC to the Department of Public Works of the Queensland Government on 24 June 2019 identified a significant tightening in the professional indemnity (PI) insurance market and increasing difficulty in obtaining exclusion-free insurance for building professionals, particularly, building certifiers. State-licensing bodies require PI policies to be free of exclusions.
This comes following legal developments including the Victorian Civil and Administrative Tribunal decision handed down on 28 February 2019, which apportioned the majority of liability for the Lacrosse Tower fire in Melbourne, 2014, to the building certifier who was engaged in respect of that building.
Other legal proceedings on foot relating to cladding include a claim against a building certifier firm in respect of cladding that was used on Melbourne's Royal Women's Hospital, and a class action in the Federal Court of Australia against the manufacturers of Alucobond PE, a type of cladding with a 100% polyethylene core.
Laws relating to insurance
The Building Regulation 2006 (Qld), section 52, requires that building certifiers hold PI insurance for a claim that may arise from the performance of private certifying functions.
The Building Professionals Regulation 2007 (NSW), section 10, requires that an accredited certifier holds professional indemnity insurance.
PWC presented to the Ministerial Construction Council on 18 June 2019 and released its report on 24 June 2019.
In addition to the legal developments introduced by the Lacrosse decision, the report identified that the building audits being carried out by private building owners as part of the Safer Buildings regulations by the Queensland Government will only be completed in 2021. Until more information is available, insurers will not have a full understanding of the potential costs and liabilities that they would face.
The report identified that in response to the crisis, insurers were either declining to provide PI insurance cover, placing exclusions for combustible cladding on policies, with these applied retrospectively or prospectively, increasing premiums, and introducing changes in requirements to notify of potential claims.
With relation to the availability of the insurance, the report identified that only two insurers had continued to offer exclusion-free policies for building certifiers, but had stopped providing new policies within the last month of the report being prepared and finalised (June 2019).
On 3 July 2019, the Queensland Government announced that following a meeting of the Ministerial Construction Council, it was determined that new regulations would be introduced which would allow building certifiers to remain licensed while holding PI insurance featuring cladding-related exclusions.
These regulations were explained to be a time-related solution to allow the industry to continue operating.
This announcement was accompanied by a statement that the Queensland Government would be introducing a ban going forward on the use of aluminium composite panels with a polyethylene core of greater than 30 percent on buildings in Queensland.
This development followed the NSW Government's announcement on 26 June 2019 that it had amended its Building Professionals Regulation to remove its requirement for PI insurance held by building certifiers to have no exclusions. The NSW Government advised that the amendment would be removed in no later than 12 months, with the expectation that other reforms will have improved the insurance market before then.
Response to the announcements
The announcements have been cautiously welcomed by the industry, however, it effectively only amounts to a stop-gap solution to allow building certifiers to continue operating with cladding-related exclusions in their PI insurance.
The effect of cladding-related exclusions is that building certifiers will face exposure if proceedings are commenced against them in relation to cladding-related matters.
The cladding ban will, moving forward, provide certainty in ensuring that combustible cladding will not be used on buildings in future.
However, these reforms will not reduce the exposure of building certifiers for cladding in respect of buildings that are already constructed. If PI insurance does not provide coverage in respect of cladding, this will mean that building certifiers will have to meet any claim themselves, and if they do not have the means, then it is possible that they may be forced out of business, depending on their individual financial circumstances and the amount of any claim they are presented with.
Claimants, such as building owners, who proceed against building certifiers will also be reliant on building certifiers having sufficient funds to pay any claim in the absence of cladding-related insurance cover, and if there are insufficient funds available for recovery, claimants may also be out of pocket.
McCullough Robertson will continue to monitor this and will provide updates as they develop. For further information on this alert, or to discuss, please contact our team below.
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