How to Fix the New Zealand Building Act
By Conjoint Professor Kim Lovegrove FAIB, BOINZ
No compulsory insurance
Building practitioners in NZ are not required to be insured by law. Compare this with some other antipodean jurisdictions like Victoria where every building practitioner has to be insured. I make this observation because there is a view harboured by some that it would not be possible to make insurance compulsory in NZ because offshore insurers are not attracted to the NZ construction insurance market. This is not correct, the impediment to compulsory insurance is the legislation in that there is no proportionate liability doctrine in operation.
It is of course problematic that there is no mandatory insurance in NZ, reason being a lack of compulsory insurance makes accountability in the construction sector somewhat of a red herring, a furfey if you will. Yes, the recently introduced system of registration is laudable and progressive, but it is, to put it somewhat colourfully, half pregnant because absent compulsory insurance, the holistics of best practice building regulation did not make full term.
Accountability involves being held responsible for one`s actions, but in the building industry where there is economic loss there can only be real accountability if there is a mechanism to pay for reparation. It is only in circumstances where one can pay for one`s neglect that one can have real exoneration, a balancing of the books so to speak. NZ of all countries should know this more than most having been though the carnage of leaky buildings. The irony is that many of the perpetrators of this maelstrom were builders and contractors who erected compromised product but enjoyed the comfort of having companies that could be wound up with immunity and impunity. This enabled entrepreneurs to migrate profits to finance often profligate life styles. Absent a compulsory insurance regime, destitute and troubled home owners were left drowning in their wake.
Admittedly the regulatory framework of the then Building Act was an enabler, in that it allowed a laissez faire approach to building control to gain expression. If, however, there had been a compulsory insurance regime in place, the liabilities and accountabilities would have vested with those primarily responsible, be they the design fraternity, the assessors or the constructors. Instead local government reached into it’s deep pockets as “the insurer of last resort” and assumed the lion’s share of financial accountability even though local government had very little to do with it.
If one uses the case study of Victoria, it is a pretty good benchmark in terms of holistic building control. All of the principal actors in the construction line up are required to be insured. This embraces the engineers, residential builders, building surveyors, building inspectors, draftsperson, quantity surveyors, construction managers and plumbers. This has been the status quo since the 1st of July 1994. The system is established and entrenched and it gives a plaintiff a great deal of comfort when it is about to embark upon a construction litigation. Equally it gives the insured defendant some solace when he, she, or it is sued. Reason being once the defendant claims indemnity assuming indemnity is granted, which in most cases it is, then the insurers will assume conduct of the defence of the claim.
12 months ago a Wellington architect was referred to me who had been caught up in a litigation where he was being sued for about half a million. The architect wasn’t insured and was bereft of funds and couldn’t afford legal representation, so needless to say we did not accept the brief. If the same person were domiciled in Victoria by law he would have been required to be registered and by law he would have been required to be insured. He would have simply claimed indemnity and the insurer`s lawyers would have assumed conduct of the case, period. As it was he was potentially facing bankruptcy.
Compulsory insurance for registrants is a “no brainer” it provides protection for consumers and the capacity and ability to account to defendants. Furthermore it permits risk and accountability to settle where it should. As it stands councils and local government remain the insurers of last resort. In an environment where the flawed doctrine of joint and several liability holds sway, as is the case in our country, it is the last man standing that picks up the liability of the impecunious co-defendants and a multi-million dollar construction failure can bludgeon a council`s bottom line. Further the irony is that absent insurance the consumer is often left bereft of redress unless there is some resort at law to local government but ultimately it is the rate payer who keeps local government accountable, so again the consumer “cops the caining”.
Furthermore the post GFC world has demonstrated that councils are not infallible, some American councils are teetering on bankruptcy. Any forward thinking confederation of municipalities would see the wisdom in compulsory insurance and the introduction of proportionate liability because such doctrine ensures that councils don’t assume the liabilities of strangers if you will. But in recent decades in NZ the Gods of deregulation have enjoyed a very broad Crown fellowship and it’s hard to keep these Gods at bay. The mantra of “let’s cut costs”, “lets deregulate” is resuming currency as evidenced with the deregulation of the consent process by way of the “new beaut” building consent exemptions that are proliferating like “randy rabbits”. If the Crown is determined to cut the costs of building then it may consider creating a culture where construction quality improves, because better quality leads to less defects, less delays, less down time and more importantly a lower incidence of claims.
A more holistic approach would be to mandate insurance, increase the bar with respect to qualifications and introduce proportionate liability. Why would this cut costs? Because it would engineer a cultural shift. Compulsory insurance is always conducive to a higher professionalisation of an industry. Reason being insurers become defacto quality controllers as they won’t insurer high risk practices and contractors. Higher qualifications lead to better product, be it intellectual or as built and removal of joint and several liability ensures that the Crown isn’t bludgeoned by the liabilities that rightly reside with others, but instead fall where they were created i.e with the party that created them.
So what is Joint and Several Liability?
Joint and several liability is a doctrine that provides that in circumstances where there are a number of co-defendants in a legal proceeding, those defendants that are still standing or financially sound at the end of the proceedings will assume the adjudicated liabilities of any insolvent defendants in the same proceedings. This means that the solvent defendants assume the financial liability for other parties that throughout their own negligence occasioned economic harm. Councils are very popular defendants and an astute plaintiff will do his or her level best to find a way to implicate a council in full knowledge of the fact that in a country like NZ where insurance is optional unless you can embroil a deep pocket in the legal action, a litigated victory can be hollow because there will be no money at the end of the day.
Councils thus have come to be known as “insurers of last resort”. In the early nineties, Australia launched an initiative called the National Model Building Act. The initiative was augmented by the nine Australian governments through the auspices of the previous incarnation of the Australian Building Codes Board. The culmination of the project was a Model Building Act for use as a template for jurisdictions intent on reframing their Building Acts, Victoria was one such jurisdiction. During the project there was extensive consultation within local government in Australia and every council in Australia was sent a questionnaire fashioned to ascertain what local government considered to be meritorious reform ideas. Over 90 percent of councils were unanimous in their support for the removal of joint and several liability and the replacement of this doctrine with proportionate liability.
Local government was not enamoured with the vagaries of the “deep pocket syndrome”. Local government showed very little enthusiasm for being deemed the insurer of last resort. Bodies like BOINZ in Australia then lobbied their ministers to back proportionate liability reform and it was successful. In the early millennium, other jurisdictions, that is non-building sector jurisdictions adopted wholesale reforms to remove the application of joint and several liability.
What is proportionate liability?
This doctrine ensures that no defendant is liable for any more than his judicially assessed proportion of liability. Case in point would be a multi party proceeding where there is a designer, a builder and a council. When the judgment is handed down the decision maker will divvy up liability on the basis of the given defendants’ contribution to the problem. Regardless of the pecuniosity of the co-defendants, no defendant assumes the liabilities of another defendant, or to put it another way, the liabilities can’t migrate, they stay within their judicially assessed silos.
Critics of the system “opine” that absent compulsory insurance the plaintiff will be left out of pocket if the defendants can’t pay. Correct, hence the critical importance of compulsory insurance and the only jurisdictions in Australia that have introduced such a scheme are the NT and Victoria.
NZ has proved to be resilient to holistic law reform and to date has not embraced proportionate liability. There have been Law Reform Commission investigations into the value in introducing proportionate liability to NZ but the conclusion has been one of little appetite.
It is my strongest contention that another enquiry into the mileage in introducing proportionate liability into the fabric of tort law in NZ would be timely. In a post GFC world local government funding has been under considerable pressure. This is none more so than the United States where there have been massive cutbacks in municipal services because of the destitution of the rate payers and the rapidly diminishing reserves of the public purse.
The case for tort reform on point is compelling because governmental institutions can ill-afford the burden of carrying the liabilities of other parties that occasioned failures that were not of municipal authorship. Furthermore as the rapidly growing parish of deregulationists expands with its fellowship with the accoutrements of building consent exemptions there could well be an overall compromising of the quality of construction which will in all likelihood create more litigation.
For there is one truth that has merged in recent decades in NZ it is that deregulation and the relaxing of building controls has led to carnage in the as built sector. Leaky building is case in point. This, however, is not unique to NZ, as last year in Latvia you will recall the roof collapse that killed dozens of people. The Prime Minister resigned on account of this calamity because he felt that the post GFC austerity measures had led to an environment where building controls may have been less than optimal. One of the casualties of the austerity program was the dispension of the national building inspectorate shortly after the GFC. Ominously in NZ there is a feeling of here we go again with the proliferation of consent exemptions and does not bode well.
The vagaries of limitations defences under the Building Act
Section 393 of the Building Act provides: