Australia's cladding crisis sends insurance premiums soaring
As at 12 March 2018, a total of 412 buildings in NSW have been identified as requiring further assessment as a high priority because they have cladding in a quantity, location and/or arrangement which potentially increases fire risks. While industry stakeholders and government authorities continue to assess the extent of the combustible cladding crisis in NSW and across Australia, insurance companies have been proactive in increasing insurance premiums and inserting exclusions around cladding related claims into their policies in anticipation of the forthcoming wave of professional indemnity claims.
Who is affected?
Accredited certifiers, building surveyors and body corporates are being notably affected by the insurance industry's response to the Australian cladding crisis.
With regard to certifiers, in accordance with section 63 of the Building Professionals Act 2005 (NSW) (Act) and regulation 10 of the Building Professionals Regulation 2007 (NSW) (Regulation), accredited certifiers are required to hold professional indemnity insurance that indemnifies certifiers against their statutory liability (which can arise from, amongst other things, breach of professional duty, or a negligent act, error or omission by the certifier).
As a consequence, professional indemnity insurers are subjecting the renewal of policies to a great deal of scrutiny when it comes to cladding related claims and have been offering policies to certifiers, which exclude coverage for professional services that involve combustible cladding products. Insurers have also substantially increased its premiums. Blackett Maguire + Goldsmith, a building regulation and certifying firm, has confirmed that its professional indemnity insurance policy doubled from $70,000 last year to more than $120,000 this year.
The insurance industry's response to the cladding crisis is making it increasingly difficult for certifiers and building surveyors to obtain professional indemnity insurance or stay afloat in the construction industry. Certifiers and building surveyors are also at risk of obtaining (and practicing with) inadequate insurance coverage with exclusions in the policy, and may consequently be in breach of their accreditation requirements under the Act and Regulation. It is essential that certifiers and building surveyors carefully review their policies (and renewals) to ensure that they are adequately covered for the services they provide.
Similarly, body corporates responsible for strata plans have been inflicted with soaring insurance premiums. As a consequence, body corporates are being faced with the decision of passing on the increased premiums to lot holders, or increasing levies in order to rectify the building by removing any combustible cladding products. Insurance companies have also been warning lot owners (in buildings with combustible cladding products) that it may refuse insurance cover outright or make is too expensive because of the high safety risks.
The ongoing implications
Unless a certifier, building surveyor or body corporate is able to adequately demonstrate to insurers that there are no cladding related issues, it is likely that the certifier, building surveyor or body corporate will be faced with restrictions in coverage, increased premiums, or even total exclusions of cover for claims given the ongoing cladding crisis.
NSW Fair Trading is aware of the insurance industry's response to the cladding crisis and the difficulty certifiers are facing in obtaining professional indemnity insurance without exclusions. NSW Fair Trading are also wary that certifiers may be in breach of their accreditation requirements under the Act and Regulation and encourage certifiers to contact NSW Fair Trading (by telephone on (02) 8522 7800 or by email) to discuss the situation. The regulatory response is otherwise fairly limited at this stage.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.