A closer look at SMEs in the Construction PI insurance market: their risk profile, their approach to insurance and the types of claims they are experiencing - Part 3

In this article, the third in the series, we look at ‘Current claim trends in construction PI’. The links to the first and second articles can be found below.

1. The risks currently faced by construction-based SMEs;
2. The approach construction-based SMEs take to insurance; and
3. Current claim trends in construction PI.  

Current claim trends in construction PI

In our first 2 papers of this series we looked at the risk profile of construction-based SMEs and their approach to insurance. In this third and final paper in the series we look at the current claims trends we are seeing in construction PI. 

The delivery by the Victorian Court of Appeal of its decision on the Lacrosse² appeals earlier this year, has brought some guidance to cladding claims particularly in Victoria, but in Australia more generally. The willingness on the part of the Building Appeals Board to accept alternative solutions that allows some combustible cladding to remain on buildings³, as part of a performance solution under the NCC, has also assisted in resolving some of the long tail cladding claims in Victoria. However, cladding claims are still being made and we appear to be a little way off seeing the back of these claims. Contractors and consultants need to be diligent in the products they are using, approving and inspecting in terms of compliance and fire safety, as claims in these areas are now commonly excluded in construction PI policies.

The trend in Owners Corporations undertaking a building defects review of residential developments prior to the expiration of the 10 year limitation period under the Building Act 1993 and commencing proceedings to recover losses incurred (or to be incurred) remediating defects, continues. Contractors and consultants are often named defendants/respondents to these claims. SMEs can mitigate against the risk of these claims by ensuring they have detailed QC and QA policies and processes that are followed, that any inspections are recorded and carefully documented, diligent record keeping generally on projects and additionally, in the case of contractors, ensuring at project completion owners corporations are given thorough maintenance manuals.

Claims against engineers generally seem to be on the rise. We have seen numerous claims resulting from the misinterpretation by structural engineers of soil reports as well as claims arising from shortcomings in the design of various types of slabs, typically designed as part of Performance Solutions. Defects in designs can be costly for both SMEs and insurers, particularly if the consultancy agreement between the SME engineer and the contractor involves a broadly worded indemnity, as described above and the defect in the design is discovered before practical completion of the project.

Changes to the NCC came into effect on 1 July 2021 which changed the way in which performance solutions under NCC are required to be developed. These changes, which are set out in A2.2(4) of the NCC, were introduced as a result of the Building Confidence Report⁴. Regardless of the complexity of a performance solution, A2.2(4) requires (in summary) for all performance solutions:

• The development of a performance-based design brief, in consultation with key stakeholders of the design, to ensure a clear pathway for the design process.
• A robust analysis and evaluation process of the design proposal/method. This forms part of the documented record of activities and outcomes for the final report.
• A final report which demonstrates how the design will be acceptable and confirms the Performance Requirements are met.

SMEs have expressed concern about these requirements. Building surveyor and engineering-based SMEs, who typically have limited staff numbers and are already burdened with significant regulatory requirements, are likely to feel the full impact of these requirements. The preparation of the brief, analysis and evaluation and a final report are likely to be time consuming and onerous to prepare. In what is already a competitive market, SMEs may wear some of the cost burden that will be an inevitable consequence of the changes.  

We have also seen a number of engineering based SMEs face coverage issues under PI policies for failing to disclose circumstances that may give rise to a claim. Renewal time is an opportune time to remind insureds of their disclosure obligations and of the benefit of notification under s40(3) of the Insurance Contracts Act 1984.

Construction based SMEs, particularly in the current hard market, face significant challenges obtaining insurance in terms of costs and cover. The COVID pandemic has added a further layer of risk and exposure for SMEs. Educating SMEs on risk prevention strategies, common types of claims and how to avoid them and their disclosure obligations are all ways in which insurers can assist SMEs mitigate their risks and find favour with insurers come renewal time