I wanted to take a moment to discuss the current state of the construction insurance market, which, as you likely know, includes challenges such as:

  • Lloyd’s markets withdrawing capacity
  • PI markets under pressure
  • Capacity and appetite shrinking across all construction-related insurances
  • Accelerating public liability losses (with workers’ comp insurer recoveries for injuries to workers onsite being a prime contributor – see Finity’s telling collation of data below)
  • Aluminium Composite Panelling issues (and Victorian government chasing ‘dodgy builders’)
  • Heavy media focus on defective buildings.

NSW to introduce Design and Building Practitioners Bill

And while our industry is reeling from the effects of the above, the NSW Government is looking to bring in the Design and Building Practitioners Bill. The proposed legislation will apply to new builds after the commencement of the legislation. Amongst its concepts are:

  • A requirement for design practitioners to become certified and for such practitioners to themselves certify that a building is constructed in accordance with a ‘regulated design’ (which is another concept of hte Bill) and that it complies with the Building Code of Australia.
  • Creation of a statutory duty of care imposed on builders to exercise reasonable care to avoid economic loss caused by defects in or related to their building work. That duty is owed to current and future owners of the land on which the building work is carried out. The owners will be entitled to damages for any breach of the duty.
  • If more than one person/entity is engaged in the build, the entity who is the principal contractor for the work will be made responsible for the acts and omissions of its contractors and subcontractors.

The concepts themselves show that the government is focussed on introducing meaningful and positive change to remedy the many deficiencies in their administration of the construction sector, and are therefore to be applauded.

Potential consequences of the NSW Design and Building Practitioners Bill

But what effect will the costs of economic loss claims, arising out of defects, have on construction-related liability insurances (PI and PL) – which are already severely under pressure from industry claims?

For PL, the effects are perhaps less clear than they are for PI. In most commercial contracts, other than design and construct contracts, there is an ‘excepted risk’, to the effect that the owner/principal, and not the builder, is liable for defects in the design of the works provided to the builder by the principal. (Of course, this does not include design provided by the builder).

A large proportion of defects in buildings results from defects in design provided by architects and others appointed by the principal. However, we have seen a tendency in the courts to ignore this excepted risk and instead sheet the liability away to the builder under the guise of the National Construction Code, Building Code, Consumer Act or whatever.

It is therefore to be anticipated that the proposed legislation is likely to challenge indemnity under PL policies more often, resulting in an upsurge in claim-defence costs – if nothing else.

For PI, which is as equally stressed as PL, but which has received greater media attention than PL due to the certifiers and ACP issues, this proposed legislation will surely add an increased claims burden. It makes the design practitioners responsible for certifying compliance with regulated design, and therefore they will invariably become the first ‘port of call’ in many claims.

The risk of builders being exposed to financial/’consequential’ loss through building defects (normally the subject of contractual exceptions), will increase the exposure of builders to PI risks – where that is not currently the case.

Summary

In a nutshell, this proposed legislation is good news for consumers. It potentially creates some disconnect between some standard forms of construction contract that may need to be addressed. However, to avoid potentially time-consuming and expensive litigation, builders will need to ensure that they employ best construction principles, backed-up by quality insurance covers. Insurers of construction PL and PI risks, are likely to be exposed to a larger number of complex claims.

By Glenn Ross – CEO

More information

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