By Conor Gillam and Tristan Higham
In the wake of a string of building fires, most notably at Lacrosse Tower in 2014, Grenfell Tower in 2017 and the Neo 200 tower earlier this year, professional indemnity (PI) insurance premiums have risen. This follows concerns about the risks associated with the use of combustible cladding in many buildings around the world.
Many certifiers are now facing the prospect of being uninsured due to the significant price rise of their insurance premiums. This has a flow-on effect in the building and construction industry as many projects have been delayed or not completed as insurers and certifiers face great uncertainty in relation to potential exposure to claims relating to non-compliant cladding.
Significant industry reform is already in the pipeline following the introduction of legislative stop-gap measures in Queensland and New South Wales earlier this year- but what does this mean for you?
Building certifiers in New South Wales and Queensland are required to have professional indemnity insurance in order to obtain a license to operate. The purpose of this insurance is to cover liability for claims made against a person arising from a breach of their professional duty, including coverage for negligence, misrepresentation, inaccurate advice or errors.
Fires such as the one at Grenfell Tower in 2017 highlighted the risks of the use of combustible cladding, prompting insurers to drastically raise premiums for PI policies which cover non-compliant cladding. This development has contributed to increased uncertainty in the industry, with the sector considered by many to be practically uninsurable. A report by the Department of Housing and Public Works (PwC Report) in June this year drew attention to the uncertain state of the PI insurance environment at present, noting the following:
- The significant risks associated with the use of non-compliant cladding have prompted insurers to increase PI insurance premiums covering claims relating to cladding from $20k to $100k on average
- There has been a 24% reduction in the number of license finalisations for certifiers in FY 2019 compared to FY 2018 despite forecasted industry wide growth of around 8.5%.
- 452 buildings in NSW and QLD have been identified as ‘potentially high risk’ or ‘requiring possible further action.’
- Insurers are exposed to both the potential historical liabilities of certifiers along with liabilities emerging from building remediation works and new projects.
Stop Gap Measures Currently in Place
In response to the crisis at hand, stop gap measures have been introduced in order to ensure that certifiers can continue to operate in the interim in order to mitigate disruption to the industry while a permanent long-term solution is deliberated.
In Queensland, amendments to section 52 of the Building Regulation 2006 commenced as of August 9 this year to the following effect:
- A private certifier may operate with PI insurance that excludes cover for non-compliant external cladding.
- This exemption period ends on June 30, 2021.
In New South Wales, amendments to section 14 of the Building Professionals Regulation 2007 commenced as of June 28, 2019 to the following effect:
- As in Queensland, a private certifier may operate with PI insurance which excludes cover for any claim made against the certifier in relation to non-compliant cladding.
- This exemption only applies to a PI contract providing indemnity for a period of no more than one year which commences on or before June 30, 2020.
Implications for You
The recent Victorian Civil and Administrative Tribunal (VCAT) Judgement on the Lacrosse Building fire established there is liability facing industry professionals who have provided advice regarding the use of non-compliant combustible cladding. His Honour Judge Woodward handed down the decision that apportioned 97% of liability to the building surveyor, fire engineer and architect cumulatively – just 3% of liability was apportioned to the resident of the building who accidentally started the fire by leaving a cigarette in a plastic food container on his balcony.
The reforms implemented are a step in the right direction and will allow certifiers who do not work with buildings that require external cladding to negotiate reasonable insurance premiums with policy exemptions excluding cover for non-compliant cladding. This will have no impact on their work if they continue to work with buildings that do not require external cladding which is non-compliant.
However, this will not help certifiers who continue to work with buildings with combustible external cladding and could see them either forced to pay hefty insurance premiums or forced out of the business.
Where to from here?
Several recommendations have been tabled to rectify the rise in professional indemnity insurance premiums, with the Shergold-Weir Report making a number of suggestions centred around increased and revised regulatory framework regarding the role of certifiers and surveyors.
At this time, it is difficult to speculate how the issue will be resolved.