Building Practitioners and the Demise of Insurability
By Lovegrove & Cotton – Construction and Planning Lawyers
Comprehensive building practitioner insurability is a foundational pillar of the existing building industry regulatory matrix in a number of jurisdictions in Australia. This regulatory pillar is slowly eroding with incremental removal of certain insurance products, increased excesses, premiums and exclusions; all of which present the potential for unintended consequences. This article contends that the maintenance of good practice regulation dictates that consideration be had to regulatory reform designed to buffer the impact of diminished access to insurance for building practitioners.
In the early nineties, a number of Australian jurisdictions adopted National Model Building act (NMBA) based reforms; the Northern Territory and Victoria cases on point. In the late nineties, NSW amended its Environmental Planning and Assessment Act wherein it introduced private certification, 10 year liability reforms and proportionate liability which derived from the NMBA.
Some of the most far reaching elements of the NMBA reforms were the introduction of:-
- 10 year liability capping: The 10 year liability cap emanated from the French-based Napoleonic Code whereby a liability guillotine severed the ability to initiate legal proceedings 10 years after the issue of an occupancy permit.
- Proportionate liability: This liability apportionment regime replaced the joint and several liability regime (‘JSL’), whereby solvent parties assumed the liability of impecunious defendants in the event of multi-party liability responsibility. Also known as the ‘deep pocket syndrome’ or the ‘doctrine of the last man standing’, the doctrine ensured that by and large there was someone, some party that could be guaranteed to pay for the acts, errors and omissions of others to ensure that the plaintiff was afforded redress. Prior to the introduction of proportionate liability insured defendants and local government inevitably bore the burden of indemnifying these liabilities, hence the euphemism insurers of last resort was coined for municipal authorities.
- Interestingly, the early ninety NMBA building acts were the first jurisdictions in Australia to introduce proportionate liability but by the end of the second millennium many other non-building related jurisdictions replaced joint and several liability as the predominant liability apportionment doctrine with proportionate liability.
Proportionate Liability and Mandatory Insurance
When proportionate liability replaced JSL the new doctrine meant that no responsible actor could be found liable for more than their, or its, liability apportionment.
From a policy architecture point of view, proportionate liability was recommended in circumstances where insurance was mandated by law for all key actors; the best exponents were the Northern Territory and Victoria where broad church registration regimes were promulgated. Practitioners such as engineers, building surveyors and architects were required to be insured by law as one of the prerequisites for registration.
Long tail run-off cover: another early nineties insurance innovation
To ensure that building practitioners upon retirement or cessation of practice could be indemnified for liabilities generated whilst in practice, long tail run of cover was introduced. Long tail cover was loosely based upon the French system of insurance of the time, although the antipodean cover did differ in material respects to that of the French.
For much of the nineties, long tail run-off cover was available but by the end of the second millennium, the insurers found that the provision of this type of cover was no longer viable in light of unsustainable costs of underwriting, so the legal requirement for practitioners to carry such cover was removed from the insurance gazettes.
It thus followed that building practitioners who were intent on retiring were obliged to purchase runoff cover, on an annual basis, post retirement to provide indemnification of liabilities generated at earlier stages of their career. This was not particularly problematic in the nineties as most building surveyors were new to the profession and had a nigh on two decades working life ahead of them.
Early nineties policy architecture NMBA assumptions
When private certification was introduced in Australia, as long tail cover was readily available, building surveyors could be indemnified for liabilities upon retirement. The rationale for mandating of this type of cover was that, in migrating building approval functions from the local government to the private sector, the ability of local governments to provide indemnification for the duration of the statutory limitation periods, needed to be mirrored in the private certification context. It is rare for a council to go insolvent; so to ensure that consumers were protected, it was considered important that building practitioners, upon their cessation of practice, could by way of insurance provide an equivalent long term safety net to consumers.
This pillar was removed with the run off cover eclipse and the first significant crack in the insurance matrix emerged
The second assumption was that comprehensive professional indemnity cover would be both readily available and affordable, which it was for the better part of two decades, until the risk profile of the building industry deteriorated. The importance of this assumption was that in introducing proportionate liability and expunging JSL, the holistic matrix of the NMBA dictated that policy architects could jettison JSL if there was a compulsory multi-actor insurance regime that would ensure that all key actors had the capacity to provide indemnification for their acts, errors and omissions. This way the plaintiff could obtain redress. In recent times this assumption has been tested because:-
- Professional indemnity cover for many has become prohibitively expensive;
- higher excesses have introduced an element of self-insurance; and
- The proliferation of exclusions now means that many traditional risks are no longer indemnifiable so that many actors are paying significant sums of money to obtain insurance that does not actually insure certain liabilities that were insurable even recently.
This has become the new normal. That which is problematic about this new development is that the assumption of readily available comprehensive and affordable professional indemnity cover is no longer so infallible.
How could insurance limitations translate into the new normal?
Plaintiffs may find that many of the liabilities that were traditionally underwritten are no longer underwritten – indemnification for compromised cladding being one such liability. This could culminate in a surge of men of straw defendants and the “safety net”, “pillar”, call it what you may, of the comprehensive insurability of the profession which was central to the introduction of proportionate liability is being tested like never before.
Unintended consequences will materialise
The insurability conundrum will impact on the building regulatory ecology consumer and industry deliverables.
When building practitioners retire, unless they pay an annual premium to purchase long tail run off cover, there will be no insurance protection for past acts, errors or omissions. Furthermore, retirees will not be indemnified for such acts unless they obtain run off cover and pay annual premiums for a period of 10 years post the issue of their last occupancy permits. With an average age of 55, many building surveyors are now on the verge of retirement so the lack of availability of the nineties version of long tail cover will become problematic for those that have not provisioned for payment of annual run off cover premiums.
As some of the higher risk elements of professional expertise are no longer insurable, there are holes in the insurance safety net. There will thus be a higher risk of insolvency, as some actors will have to personally indemnify acts, errors and omissions that are not insured.
The security blanket of insurance, a key pillar that was fundamental to the introduction of proportional liability is fraying and undermining the holistic foundations that underpinned modern day building control in a number of jurisdictions.
That which may help
One cannot remove a foundational pillar (i.e. conventional insurability), that was central to the holistic workability of post-80s legislation, without ‘renovating’ acts of parliament to introduce best practice reforms that ameliorate the risks that will flow from that buffer.
To put it simply, absent an insurer safety net, there is now an even greater need for buildings to be well built; for if they are, there will be fewer claims and resort to the insurer safety net will diminish.
The implementation of recommendations in the Building Confidence Report to the Building Minister’s Forum is a given, but more needs to be done to improve the risk profile of the building industry and some ideas on point are below:-
- Mandatory inspections should be introduced cross-jurisdictionally.
- The inspections need to be carried out by building officials and in the case of higher risk elements of inspection approvals need to be obtained by way of robust peer review mechanisms.
- Mandatory inspections need to be calibrated with the building classifications. Low risk building classifications will require a lesser number of mandated inspections than higher risk building classifications on account of lower risk profiles.
- The same types of inspection regimes should be rolled out in every jurisdiction in recognition that offshore insurers see Australia as one market, one risk environment so a provincial approach to regulatory ecology could well inhibit a return of insurers to the construction sector.
- The ability of private building surveyors to sanction alternative solutions under the NCC should be annulled as the risk concentration in the exercise of that natural person discretion is too great. Alternative solutions will therefore need to be sanctioned by independent peer review bodies.
- Mandatory auditing of building practitioners on a user pays basis would be established by way of regulatory amendment to ensure that, at first instance, all building surveyors pan-jurisdictionally are audited and then in the fullness of time the same auditing regime would be rolled out to audit other key practitioner actors.
- Qualification entry points for building practitioners should be reviewed to ensure that international best practice qualification criteria’s are adopted.
These ideas are by no means exhaustive and they do not purport to be a panacea, furthermore Kim Lovegrove MSE RML FAIB of this firm has written more expansively in the below pieces:-
If a foundational pillar of a regulatory matrix removed, where that pillar is central to the sustainability of important aspects of a regulatory construct (as is the case with insurance), there exists the potential for profound consequences. In a post comprehensive insurability construct, the imperative to build well and embrace good practice is even more compelling.
In addition, a failure to redesign regulation cross-jurisdictionally could, in the fullness of time, test the viability of liability reforms such a proportionate liability, as its introduction was premised upon the assumption that comprehensive insurance coverage would exist in perpetuity. With the incremental removal of key insurance products such as long term run-off cover, an inability to provide indemnification for traditional risk, and a move towards significantly higher excesses and premiums, there exists the possibility that JSL may by force of law resume currency. This would not bode well for ‘those left standing’ such as municipal authorities, particularly in a corona virus world where the institutions are facing huge fiscal challenges.
Lovegrove & Cotton Lawyers to the building industry
For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Justin Cotton is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his appointment as Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Likewise, Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing email@example.com.