Articles

By Kim Lovegrove RML FAIB, Senior Construction Lawyer, Lovegrove & Cotton – Construction and Planning Lawyers.

The Problem

Insurers are leaving certain sectors of the marketplace because of an unsustainable level underwriting risk in the Australian built environment.

Many building surveyors may not be able to obtain professional indemnity cover by the end of July 2019. That means it will be illegal for them to carry out their statutory functions which consist of:-

• Issuing building permits/construction certificates
• Inspections
• Issuing occupancy permits

The net effect of a prohibition of building surveyors exercising their functions will be that some building projects will grind to a halt.

The combustible cladding crisis has generated a litany of high profile expensive cases and the payouts will be massive. The magnitude of the collateral means that the insurance premium receivables are infinitesimal when compared with the claims on the book and the contingent liabilities.

Consequence, the insurers will find the market very challenging if they stay, hence the exodus.

How did it come to this?

First the problem is worldwide. Free trade agreements have allowed for a flood of unregulated product to flow into jurisdictions that did not have strong product quality controls with regards to the importing of construction product and materials.

There was no federal body charged with the responsibility of accrediting complying product, hence the proliferation of non-complying cladding imports. Although the administration of building control in Australia is the exclusive remit of the State and Territories, the control of that which is imported into antipodean shores is not, that comes under federal jurisdiction. There are strong customs controls  over the importing of pernicious plants, vermin and  health or environmental hazards and there is a compelling argument to suggest that similar controls should apply to materials that pose a threat to the built environment.

Dated Fire Engineering Dexterity

Fire engineering practice has not kept up with the science of fire engineering. The sophistication that has been applied to the practice of fire engineering, mindful of the multifaceted complexities of this discipline is  nowhere near where it should be, particularly when viewed on an industry wide basis.

No Peer Reviewing of Alternative Solutions

There is no peer review system for the use and application of alternative solutions. The Building Code of Australia the NCC allows an applicant to obtain a building permit by either submitting design proposals that comply with the deemed to satisfy provisions of the BCA or the alternative solutions route.

DTS provisions are prescriptive provisions, and are predominantly black and white. Alternative solutions are fashioned to cater for innovation and flexibility, in that even though a design proposal may not comply with the prescriptive criteria of the NCC, as long as the alternative design proposal complies with the objectives and functional requirements of the code an AS design proposal can be approved by a certifier.

The alternative solution approach was introduced in BCA 1996, a performance building code which was modelled along the lines of the then NZ building Code. As a result building surveyors were given the power to sanction alternative solutions; which gave them the power to exercise subjective discretion. However the overarching administrative regulations that provided the legislative framework for the operation of performance codes did not evolve sufficient checks and balances to prevent less than optimum sanctioning of approvals of performance based design scenarios.

This was a huge game changer and its impact has proved to be profound, yet has to date been largely underestimated.

A deemed to satisfy provision is forged through vigorous consultation and debate in the BCC (the building codes committee of the ABCB). Representatives from every jurisdiction meet regularly to work through provisions that ultimately become DTS provisions. It is a peer review process that is used to shape the design of codified prescriptive regulations.

But in circumstances where private building surveyors are afforded the ability to sanction alternative solution design proposals, in lieu of embracing the DTS route, then they can do so absent any peer review rigor.

When the 1996 performance based BCA was called up by the states and territories, each jurisdiction would have been well advised to have promulgated uniform building regulations that dictated that alternative solutions needed to be independently peer reviewed. That used to occur in Victoria under the Victorian Building Control Act. The previous codes were prescriptive and stymied innovative design. But the then Referees Board, the predecessor of the Building Appeals Board afforded applicants the ability to submit design proposals that did not comply with the prescriptive provisions, whereupon an independent panel of peer reviewers vetted the proposals and either approved or rejected same.

That system was not reintroduced with BCA 1996, the effect of which being an astonishing amount of power was invested in natural person building surveyors absent any peer review mechanism.  This was to reiterate a game changer, in that it paved the way for economically motivated design proposals  that did not necessarily have public safety as the overriding and paramount objective. This impacted upon the risk landscape and it was always going to be a matter of time before the prevalence of non-peer reviewed alternative sanctioned design proposals generated deleterious legacies.

Fee Cannibalization – the Writing was on the Wall as far Back as the 1990s

In one of the first cases concerning the liabilites of private building surveyors and inspectors Toomey v Scolaro [2001] VSC 279, a Victorian Supreme Court case, the problem with of the free market in terms of downward pressure on fees first became evident. The Judge found that the remuneration of the building inspector who was appointed to carry out, amongst other things the balustrade inspections was not, when viewed objectively, sufficient to ensure that the required level of vigilance could be deployed to do the job effectively.

“The situation was that Smith [the inspector] had completed a Form 14 (after seeking advice as to how he should do so) in terms which were so sparse as to provide no information at all. He was unknown to Young [the building surveyor] personally. If Smith held the absurd belief that the inspector did not need to measure a balustrade, Young did not ask a single question to establish that fact. The surveyors knew that Smith was being paid an absurdly low monthly fee, from which he had to pay all expenses. A reading of the list of site inspections would have demonstrated that he could not have been earning more than about $10 per visit, in some months when he made multiple site visits. There was every reason to fear that he might cut corners in those circumstances.” – at [282]

In this case, in 1996 a person became severely injured when he fell over the balustrade that was not the required height under the BCA at a buck’s party.  The Judge was forthright about  his concerns regarding low fees for service, yet little heed was subsequently paid by the industry to his findings. The telling yet not surprising observation was that  a ‘ low monthly fee’ could give rise to ‘fear that he might cut corners’. So yes the writing was on the wall way, way back, courtesy of a Supreme Court decision.

The writer for many years has published pieces that allude to the fee cannibalisation that occurs in the competitive free market with respect to the remuneration of building surveyors and building inspectors. The amount of times the writer has heard the ode of “my quote was competitive but another guy won it, because I was undercut by a factor of 30 per cent’…. I don’t know how he can do the job for that price.”

Well it appears that ‘the other guy’ couldn’t – something had to give and something has given. If the regulatory policeman i.e. the building surveyors had not been remunerated in an amount that is commensurate with a viable fee, then it is not difficult to form a view that an optimum level of technical dexterity will be compromised. It tends to follow.

Australia has Fallen Behind in R and D

Australia does not benchmark itself against international best practice building control regimes. It is rather antipodean centric. As a result the science and technological progression has overtaken the competencies. The proliferation of SHR super high rises has profoundly changed the construction ecology and the risk landscape. A one size fits all approach to building inspection has become enshrined in various acts of parliament rather than risk based inspections and this approach has tended to underestimate the complexities implicit in high rise design and construction.

No Mandatory Auditing of Building Surveyors

Mindful of the fact that building surveyors play such an important role in the construction probity dynamic, the complaints based auditing regime, which is characteristic of Australian jurisdictions, has had its limitations. Japan, when it introduced private certification in the late nineties, introduced mandatory annual auditing of their equivalent of building surveyors. Japan has not experienced any controversy in respect of private certification.

The lack of multi practitioner registration regimes in a number of jurisdictions

Certain jurisdictions NSW being one of them did not require multi actor registration in contra distinction to the likes of Victoria and the ACT. Multi registration regimes should have been established uniformly in the early nineties to facilitate cross jurisdictional consistency in respect of licensing and probity regimes. It has come to light recently that some of the deficiencies of modern day Australian building control are multi – disciplinary in their nature rather than that which can be attributed to a single discipline or profession.

So what is to be done to get the insurers back?

No more approvals of alternative solutions by private certifiers

Reduce the risk by improving the risk landscape by introducing mandatory peer review of alternative solutions. The state will accredit peer reviewers that will comprise a panel of experts who will be called upon to sanction an alternative solution based design applications.

Impose a minimum fee floor for building surveyors to remove fee.

Ministerial gazettes will publish the minimum level of fees that will be charged for building approval functions. The charges will be ‘CPId’. Only this will allow building surveyors to receive special case treatment. And why special case treatment for building surveyors? Because the regulatory gatekeeper must be paid an amount that ensures that the  task is done properly. It cannot be susceptible to race to the bottom fees. The free market ideology must not apply to the most critical actor in the construction probity chain, this can only be cured by regulatory intervention.

Educational upskilling revolution, right across the Spectrum

Australian educational qualification criteria’s for registration have fallen way of the pace in terms of international benchmarking. In China for instance a country that is taking SHR design and construction to new levels, the equivalent of sorts of a private certifier is a Quality Assurance Engineer.

A QAE is required to have an engineering degree and 5 years’ experience to become a medium level engineer. To qualify as the QAE, a further 4 years of training is required and upon completion of the experience criteria. A further round of intensive examinations needs to be passed to qualify.

The higher the qualification and experience benchmark the writer suggests the lower the risk of compromised as building product.

Mandatory CPD

The pressures of business are such that unless practitioners are forced to undertake annual CPD they will not choose to do it. As a lawyer if I want to maintain a practicing certificate I have to accumulate a regulated number of points a year. Had the system not been made mandatory, I doubt that I would subject myself to this compulsory annual education regime. I’m probably not Robinson Crusoe in this regard.

Mandatory Auditing

For the better part of 20 years the writer has been extolling the importance of mandatory annual auditing of building surveyors. A pan – jurisdictional phenomena has emerged where by and large auditing of same, is reactive and in response to complaint.  Once a complaint has been lodged the damage of course has been done.

The more enlightened macro risk minimisation approach is to make auditing of private certifiers an annual event. Again for those that have read some of my other pieces on point the writer repeats, look to the legal fraternity probity controls for guidance. Lawyers that operate trust accounts are required by law to be audited twice annually. Further Treasury does not fund this probity control, it is user pays, and the lawyers pay for independent auditors to carry out the task.

Compulsory auditing ensures that problems can be detected early rather than late, or more to the point too late. Further the spectre of “big brother” being in the background changes the optics and the culture. If there is one thing that has become crystal clear over the last 20 years, leaving the industry to self-monitor and self-regulate in terms of probity compliance is risky as there some that will not deliver optimum outcome unless they are forced to. One further article extolling the virtues of mandatory auditing can be found here.

The promulgation of risk based inspection regimes

In some Australian jurisdictions there are a number of mandatory inspections, in others not. Inspections must be made mandatory but the number and stages of the inspections must marry up with the building classifications under the BCA.

Non-controversial warehouses will not require the number of inspections that are needed for high rises. There cannot be a ‘one size fits all’ approach. Further, if insurers are reluctant to insure high-rises, all the more reason to have exceptionally robust inspection and probity controls to allay their fears. Only legislative amendment will achieve this.

Some would suggest that the quality of certain high rises is subordinate to that which it should be. The converse should be the case – SHRs should be the exemplars in terms of design and construction quality. Why? – because they pose the most risk in light of the large number of people that reside in these ‘vertical suburbs’. To achieve this outcome, construction product control, workmanship and certification regimes must evolve to a much higher standard.

Mandatory registration of all key building practitioners

It is a given that all building practitioners have to be insured and this has been the case in Victoria and the NT since 1993. It is perplexing that jurisdictions like NSW only chose to register accredited certifiers. One is ill-advised to legislate proportionate liability unless there is multi-actor registration complemented by compulsory insurance. The advantages of multi practitioner registration are axiomatic and do not need to be further ventilated here.

The establishment of a Federal Government imported product accreditation authority

One of the down sides of free trade agreements is that a flood of less than optimum quality construction product has its found its way on to local shores. This has to stop. A facility has to be established that has the power to accredit imported product by way of vigorous testing.

The Federal government body would identify reputable testing authorities that would be approved to carry out the tests and any manufacturer intent on supplying product to the Australian market would have to pay for the tests and the accreditation. The state and territory governments would then uniformly amend their Building Acts to dictate that building surveyors cannot by law allow the use of product to be incorporated unless it has the accreditation logo.

The ABCB would determine what type of product would require accreditation and regard would be had to whether the product is the type of material that can endanger life or limb or contribute to the compromising of the integrity of the as built product.

The establishment of an international best practice building control research Centre will complement the task.

This is critical and will probably best be located at a venerated university and will be funded in part by altruistic industry bodies. The Centre will have a remit and a continued mandate to research and collate international best practice material in fire engineering, holistic building control, best practice dispute resolution systems and best practice building control design.

The governments can then access the findings if they are motivated by ensuring that their legislation evolves with regulatory advances, advances that are indexed with emerging technologies and best practice probity controls.

A state remediation fund

In terms of the cladding crises, well then, industry and government now know that insurers are not going to retro – underwrite. Regard could be had to the leaky building syndrome in NZ. Such was the devastating effect of LBS the government ‘bit the bullet’, established the Weathertight Homes tribunal and also contributed funding towards the remediation of repairs on a national scale.

The Australian jurisdictions should establish a fund that ensures that  the costs of cladding remediation will be borne by the state. If this does not occur there will be a system failure of immense proportions.

It follows that the risk landscape in Australia has to be redesigned. Insurers will not indemnify on an annual claims basis cladding retro fit, that is clear, they are pulling out. They will, the writer predicts, come back into the market and underwrite in the future. But there is a caveat, the risk landscape will have to change so that Australia embraces international best practice in the redesign of the building regulatory ecology.

More robust holistic and carefully thought through regulation has to be implemented to engineer a paradigm shift. This of course should be done on a national scale as the London underwriters assess Australia as one market. Most of them will have never heard of Victoria, the ACT or the NT. They only recognise Australia. It is thus important that no given jurisdiction lets the team down by not adopting sound uniformly enlightening legislative amendments.

Temporary solutions will not solve long term problems.

Quick fixes may generate even more problems down the track, one of the solutions percolating round the rumour mill is that Ministerial orders may be amended to allow exclusions to the insurance policies. If the exclusions allow policies to exclude indemnification for cladding; yes that will enable certifiers to continue to practice legally which has a compelling pragmatism to it, but unless remediation funds are allocated by government then of course consumers will be left exposed. The two reforms would have to be promulgated simultaneously.

The quick fixes however will not solve the greater problem ie the riddle of how do policy makers redesign building regulation to improve the risk profile of the Australian building industry; for it will only be a redesign of regulation that will create an as-built environment that will incentivise insurers to return.

The long term solution is to take a blank canvass approach to the redesign of building control. The objective being, by way of reiteration because this point is so very important, to adopt the best from international best practice regimes. This would involve adopting Japanese law reform philosophy whereby international comparative analyses is carried out with a key emphasis on identifying regimes that have experienced systemic failure or major regulatory failure. Diagnostic analyses will ensue to determine that which caused failure in order to develop immunisation strategies that inoculate Australia against ill – considered regulation. It involves international expert think tanking and it can’t be done quickly.

In conclusion I will quote form a paper that I prepared for a national conference held by the Society of Fire Protection Engineers USA in the late nineties in Washington DC. The Paper was titled Holistic Considerations for Performance Based Building Codes. The paper is hyperlinked and the reader may find in interesting to peruse.

The comments I suggest are equally relevant nearly 30 years later for jurisdictions that operate with performance based building codes such as Australia and New Zealand.

“There is a developing awareness that the performance approach is not just about the development of technical codes which contain objectives, functional statements, deemed to satisfy provisions and acceptable solutions. Rather it is about a holistic system, a legislative, regulatory package that is complemented by expertise, accountability and responsible allocation of risk. Yet some jurisdictions have approached performance solely on a technical basis. Unless these complements exist, a performance system may not reap the imagined benefits.”

If legislation is re-engineered to reduce the risk landscape of the building industry then those whom underwrite risk, the insurance fraternity, will in all likelihood return.

If the reader is interested in best practice holistic reform concepts for building regulations, click here to read a piece penned by the author on point.

About the Author

Kim Lovegrove RML FAIB is a Senior Lawyer at Lovegrove and Cotton lawyers. He is a law reform adviser having been deployed in an advisory capacity in Japan, Australia, India and China. He is a past conjoint professor in building regulation and certification. He is the Ethiopian Honorary Consul to the Australian State of Victoria