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Australian Construction Industry Insurance Update - June 2020

  • Market Insight 30 June 2020 30 June 2020
  • Asia Pacific

  • Insurance & Reinsurance

Australian Construction Industry Insurance Update - June 2020

Design and Building Practitioners Act 2020 (NSW)

The Design and Building Practitioners Act 2020 (NSW) (Act) has recently commenced.  The Act places new obligations on design and building practitioners to ensure that each step of construction is well documented and compliant. It forms part of the NSW Government's response to the Shergold and Weir "Building Confidence" report that was published in February 2018 on the effectiveness of national compliance and enforcement systems. The Building Confidence report found, among other things, that the accountabilities of different parties were unclear and there were insufficient controls on the accuracy of documentation.

The Act:

  • places builders, designers and others under a statutory duty of care to owners to avoid economic loss caused by defects;

  • requires designers and builders to provide compliance declarations for certain "regulated designs";

  • introduces new insurance requirements for registered practitioners;

  • creates a new registration regime for design and building practitioners; and

  • enhances enforcement powers.

The statutory duty of care

A person who carries out "construction work" is placed under a new statutory duty to exercise reasonable care to avoid economic loss caused by defects: (1) in or related to a building for which the work is done; and (2) arising from the construction work.

"Construction work" includes design services, building work, manufacturing of building products, and project management.  Thus the statutory duty of care applies to product manufacturers, designers and project managers.

The duty of care is owed to each owner of the land, as well as to each subsequent owner of the land. The owner of the land is entitled to damages for breach of the duty as if the duty were a duty established by the common law. An owners' corporation is deemed to have suffered economic loss if it bears the cost of rectifying defects.  The duty cannot be delegated to third parties, and contracting out of the duty is not permitted. The statutory duty of care is in addition to all other common law and statutory duties.

The statutory duty of care is intended to address the uncertainty created by the High Court's 2014 decision in the "Brookfield Multiplex" case as to whether, in the case of developments with sophisticated contractual arrangements, builders and designers owe a common law duty to owners' corporations and subsequent apartment owners to take reasonable care to protect them from economic loss.

The statutory duty of care commenced on 11 June 2020 and applies retrospectively. The ordinary statutory limitation periods apply to the statutory duty of care, which for building actions is 10 years from the date construction is completed. Consequently, building practitioners (and their insurers) in NSW are now exposed to liability for breach of the statutory duty in respect of projects that have been completed within the past 10 years. 

Compliance declarations

The Act introduces the concept of "regulated designs" for building elements including fire safety systems, waterproofing, structural stability, facades, and mechanical/hydraulic/electrical services.   These building elements have been targeted by the Act because they are associated with a high incidence of non-compliance.

Designers must provide a written design compliance declaration, in the prescribed form, that their regulated design complies with the Building Code of Australia (BCA) and any requirements to be set by the Regulations. 

Building practitioners must provide a building compliance declaration, in the prescribed form, that their building work complies with the BCA, any regulated design, and any other requirements to be set by the Regulations.

Principal certifiers must obtain and consider all compliance declarations before granting an occupancy permit.

Designers and building practitioners must hold insurance that indemnifies them for liability resulting from their compliance declarations and that complies with the minimum requirements set in the Regulations (not yet made).

The commencement of the compliance declaration scheme has been deferred until 1 July 2021.  The scheme should benefit building industry participants and their insurers by requiring a higher standard of design documentation and by more clearly assigning and delimiting responsibility (and therefore liability) to each party involved in the design and construction of a development.  The insurance industry awaits the minimum insurance requirements that are to be set by Regulations.

Class actions against manufacturers of combustible ACP cladding

There are two class action proceedings progressing through the Federal Court of Australia against the manufacturers and Australian distributors of the two major brands of combustible Aluminium Composite Panels (ACP) that contain a polyethylene core (Alucobond and Vitrabond).  The lead plaintiffs in each proceeding are the owners' corporations and apartment owners of residential apartment blocks in NSW. The litigation is funded by Omni Bridgeway (formerly IMF Bentham). The claims were originally brought under the Australian Consumer Law for breach of the consumer guarantees that the ACP products would be of acceptable and merchantable quality.  The claim in the Alucobond class action was amended in February 2020 to add claims for misleading and deceptive conduct in relation to the advertising and promotion of the ACP products.

The class actions are open to property owners, owners' corporations and long-term lease-holders who have suffered, or will suffer financial loss due to the need to remove and replace the ACPs. The class actions seek compensation for owners of residential, commercial, mixed-use, and other non-residential buildings throughout Australia on which those ACP products have been used.  Orders have been made permitting class members to opt out.

A key issue in the class action proceedings is how the manufacturers can prosecute contribution claims against the builders, designers and certifiers involved in the development of each building. A novel feature of these class action proceedings is the very large number of potential contribution claims  that could be made by the manufacturers and the complexity of those claims.  There are thousands of buildings across all Australian States that fall within the classes, each developed with its own unique design and construction teams under unique contractual arrangements.  The identity of the contribution targets are not within the knowledge of the manufacturers and cannot realistically be obtained without the assistance of the building owners that are within the classes.  Thus, the manufacturers in the Alucobond proceeding recently applied for orders requiring class members to register their claims and provide information that will assist in identifying contribution targets.

The manufacturers also face the problem that limitation periods have likely started to run on some of their contribution claims.  It is not possible for the manufacturers to ascertain at this time when their contribution claims will become statute barred because the causes of action cannot be determined and there is variance in the state-based limitation regimes.  The manufacturers' recent application in the Alucobond proceeding therefore sought orders that had the effect of "closing the class" by preventing group members who do not register their claims by a specified date from receiving any distribution from a settlement or judgment in the proceeding.  Alternatively, a "de-classing" order was sought, being that the representative proceedings should be stopped in favour of individual proceedings.

Justice Wigney recently issued a written judgment on the manufacturers' application declining to make a class closure order or a de-classing order.  Instead, orders were made requesting that the class members register their claims and provide specified information about the design and construction of their buildings that would assist the manufacturers to identify contribution targets.

Class closure order

The manufacturer sought a set of "class closure" orders whereby group members who do not register would remain members of the class but would no longer be entitled to receive any dividend from any settlement of, or judgment in, the proceeding.  The non-registering group members were to be bound by the terms of the settlement agreement or the judgment, and would be barred from making any claim against the manufacturer relating to the subject matter of the proceeding.

The "class closure" order was sought under section 33ZF of the Federal Court Act 1974 (Cth) (FCA Act), which is a general provision which empowers the Court to “make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding”.  Section 33ZF has been interpreted to confer a "very wide power" on the Court and the section has been relied on to make "common fund orders".

Justice Wigney considered that the proposed class closure orders were "draconian" and "fundamentally at odds with the opt out nature of representative proceedings under Pt IVA of the FCA Act".  His Honour therefore decided that s.33ZF did not permit the making of the proposed orders.  It was further decided that, even if there was power under s.33ZF, then the court would refuse to make the order because the manufacturer had only identified a theoretical and unquantified prejudice (the potential loss of contribution rights) that should not prevail over the actual prejudice of non-registering class members (loss of recovery rights).

De-classing order

The manufacturer sough an order under section 33N(1)(d) of the FCA Act that the proceeding no longer continue as a representative proceeding. The manufacturer argued that it was not in the interests of justice for the proceeding to continue as a class action because of the prejudice to contribution rights.  It was submitted that if a "de-classing order" was made, each individual group member would have to plead and particularise their claim and the manufacturers could use the usual procedural steps in each proceeding to investigate and prosecute contribution claims.

His Honour decided that the efficiencies achieved by the representative proceeding prevail over the theoretical and unquantified prejudice that the manufacturers could suffer through the loss of their contribution rights.

Implications

The manufacturers will face an uphill battle pursuing contribution in respect of any liability they may have under a judgment or settlement in the class action proceedings.  There is unlikely to be any significant commonality in the parties or issues in any contribution claims, in which case contribution will have to sought in thousands of separate proceedings rather than in class action proceedings.  There is also a likelihood that the limitation periods on some of the manufacturers' contribution claims will expire before proceedings can be issued.  The Federal Court's recent judgment does not materially assist the manufacturers in this regard.

However, the enactment of the statutory duty of care in NSW (discussed above) provides the manufacturers with a basis to claim contribution against NSW building practitioners in class action proceedings.

Due to the abovementioned impediments to any contribution claims by the manufacturers, the risk to designers, builders and certifiers (and their insurers) of class action or individual contribution proceedings by the manufacturers relating to the use of Alucobond and Vitrabond ACP seems relatively low. Building practitioners who have been involved in the development of multiple buildings in NSW are most at risk of a class action contribution proceeding by the manufacturers in the current Federal Court ACP class actions.

Building practitioners who are defendants to building defect proceedings where Alucobond and Vitrabond ACPs are involved will need to consider the overlap between the class action proceeding and any building defect proceeding.

Firstly, owners who are pursuing building defect proceedings in respect of Alucobond and Vitrabond ACPs are most likely class members in the Federal Court proceedings.  Defendants to those building defect proceedings should require the owners to file "opt out" notices in the class actions.  If the owners do not do so, there may be grounds to stay the cladding claim in the building defect proceeding to avoid a multiplicity of proceedings.  In Victoria, these principles will apply to any future subrogated recovery claims brought by Cladding Safety Victoria following government funded rectifications.

Secondly, defendants to building defect proceedings involving the use of Alucobond and Vitrabond should be considering whether to attempt to apportion liability to or claim contribution from the manufacturers.  An apportionment defence that adopts the misleading and deceptive conduct allegations from the Alucobond class action would appear to be a good strategy.

NSW Inquiry into building standards issues Final Report

In April 2020, the NSW Parliament released the final report of the Public Accountability Committee, entitled 'Regulation of building standards, building quality and building disputes' (the report).  The inquiry was commenced in July 2019.  The Committee received 202 written submissions and held six public hearings.  The final report makes 22 recommendations for improving the safety and integrity of the NSW building industry.  The Government response to the final report is due in October.

The key takeaways from the report are:

  • Flammable cladding – Flammable cladding was identified as a major issue for the industry.The NSW Government's response was considered to be inadequate.Compulsory disclosure of affected buildings was recommended.It is also recommended that NSW follow the Victorian approach of establishing a rectification authority that remediates high risk private buildings and then seeks recovery of the costs from the liable parties.

  • Professional indemnity insurance – It was noted that the contraction of the professional indemnity insurance market for building industry professional was impairing remediation because of uninsured liabilities and a reduction in the number of professionals willing to perform remediation work. No recommendations are made in relation to insurance.The recommendations focus on improving the response to the cladding crisis so insurers can consider the future removal of cladding exclusions.

  • Private certification – It was concluded that the 20-year "experiment" with private certification has not worked primarily because of a perceived conflicts of interest. The committee rejected calls to revert back to local council certification, recommending instead the strengthening of public control over private certification. It was also recommended that the burden on certifiers should be relieved through the tougher regulation of designers and builders.

  • Role of strata communities in remediating defects – It was recommended that strata communities be provided with financial and regulatory assistance to remediate their buildings and pursue recovery of remediation costs.

The current Project Specific Professional Indemnity (PSPI) Market

The performance of the PI insurance market has continued to deteriorate, which represents a significant concern for the building and construction industry.

The significance of the issue is reflected through various calls for the government to assist with the PI insurance market failure, including the NSW Parliament Final Report on the regulation of building standards, building quality and building disputes. The report provided recommendations that the NSW Government should address the insurance failure, since a  contraction in the professional indemnity market is restricting the number of professionals willing to conduct rectification work on serious safety issues.

Further, as discussed by AON in their Professional Indemnity Insurance Market Insights Q3 2019, project policies providing cover for the contractor and consultant with cross liability provisions are no longer available in the PI market. The long policy periods involved in project PI are difficult to insure due to the high level of stamp capacity required. The limited availability of PSPI insurance has resulted in a heavy reliance on annual PI policies. This is another factor for consideration for underwriters in an already hardening PI market where capacity has reduced and policy terms have become less favourable for insureds. The inability of consultants to rely upon PSPI insurance will likely exacerbate current conditions and lead to difficult negotiations for consultants when seeking to renew their annual PI policies.

With thanks to Reebal Hoteit (Law Graduate) for her assistance in preparing this update.

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