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The drum is again beating, as there is talk about decennial liability cover or a form of insurance that is akin to it, being introduced again in Australia.

It is important for law reformers to know that this pathway has been traversed before.

Within the construction context decennial liability is an insurance indemnification regime for construction liabilities that are occasioned by acts of negligence. The indemnity is operational for a period of ten years after the liability trigger event.

The French introduced a decennial liability cover regime in the late 70s under the Spinetta code.  It has proved resilient as the insurance cover is still a key feature of the French system. But a cautionary note, the French building regulatory ecology is very, very different to that of any Australian jurisdiction.

90s Runoff Cover

One would hope that those charged with the law reform agenda know that a form of decennial liability cover, i.e. existed in many Australian jurisdictions in the 90’s. It was first introduced in the Northern Territory and Victorian Building Acts.

The Ministerial orders that mandated the cover dictated that a compliant insurance policy had to provide a period of indemnity for 10 years post issue of an occupancy permit. 

The triggering event that gave life to the indemnity was the disappearance or cessation to practice of the registered building practitioner.

Why was runoff cover introduced in the early nineties? 

When building approval private certification was introduced in the early nineties, it provided prospective homeowners and developers with the ability to engage a private building surveyor instead of a local council building surveyor to issue the building permits.

The new mandated run-off cover regime was designed to ensure that private certifiers could emulate the accountability capability that exists with local government. 

It was recognised that if a local government building controller committed an act of negligence in the journey of building permit delivery, the deep pocket of local government could underwrite the liability, hence the coining of the euphemism insurer of last resort.

Annual claims made cover couldn’t emulate this capability, for when a certifier retired or became insolvent unless they had taken out run-off cover there would be no consumer protection for past acts, errors or omissions. This reality would present itself if the certifier defendant was a man of straw.

The accountability level playing field.

The promulgation of mandatory runoff cover mirrored the ability of local government to provide long tail cover down the line, from 10 years from the date of issue of the occupancy permit that is, to the expiration of the liability tenure.

1993 introduced an unparalleled and holistic consumer protection system.

Mandatory registration and mandatory long tail cover for key practitioners was established. Those impacted were:-

• Engineers
• Building surveyors
• Building inspectors
• Draftspersons 
• Quantity surveyors
• Architects 
• There was also structural defects cover for commercial builder

Residential builders were required to carry a more comprehensive form of warranty cover.

In the early nineties there was no 3-story exemption for the requirement for builder’s warranty cover, so the form of insurance coverage was significantly more comprehensive at that time.

The trifecta

The key benefit of the holistic system was that coinciding with the introduction of proportionate liability was the mandatory registration and long tail cover regime.

The trifecta ensured that consumers would not be lumbered with an unfunded liability if a given responsibly actor became insolvent.

It was as good as it gets

The combination of mandatory professional indemnity, long tail cover and the ‘north of 3 story’ exemption heralded the beginning of the mandated runoff cover chapter but alas within a historical context like any Camelot, it’s lifespan was ever so brief.

In an article “Run off cover has resulted in peace of mind for building practitioners” by this writer for the Age newspaper dated the 9 November 1996, the benefits of the newly promulgated long tail cover were extolled.

“Since the Building Act was proclaimed in 1993 there has been an about change, courtesy of automatic run -off cover. All building practitioners are now required to carry automatic run – off cover in order to practices. Run off cover continuous to provide professional indemnity cover to practitioners for liabilities incurred after their registration ceases. While a practitioner is registered, he is required to pay an annual premium. If the practitioner retires or can no longer afford to practice, provided he was registered and insured while practices, he is indemnified by the insurer for the duration of the liability period. That period is 10 years under the Building Act.

This is an added benefit for practitioners. Prior to proclamation of the act the only way a retired practitioner could avoid the spectre of personal liability for past omissions was to purchase an annual runoff cover policy. This was expensive because peace of mind had to be maintained for a persons’ natural life. I know of one case where an engineer was sued in his 80’s many years after leaving the industry. He was uninsured and personally liable for the full brunt of the judgement)

Ten-year runoff cover is rare internationally. The only other jurisdictions in the world that have this cover are South Australia and France. It requires a massive premium pool”. [1]

Similar insurance cover was issued in NSW in the late nineties, but it only captured accredited certifiers, as apart from residential builders only certifiers had to be registered in NSW.

“Part 7D of the Regulations comprises extensive insurance requirements for accredited certifiers. The main innovation is the introduction of runoff cover. Run off cover is an insurance cover which meets claims arising after a practitioner has ceased to practice. Runoff cover indemnifies the individual, partnership or company against and accredited certifier`s statutory liability. This would essentially entail any negligence associated with inspections and/or certification responsibilities”.

And then

By the end of the ninety’s storm-clouds were brewing as the challenges of maintaining the mandated runoff cover regime started to gather. The cost of underwriting long tail run cover was proving too onerous for the insurers to bear.

So, at about the turn of the century because of insurance industry submissions to government, the import of which was that the insurance regime was unsustainable, the mandated run off coverage was peeled back. 

This writer can’t recall the exact dates but the winding back events weren’t far apart, for within a proximate period: 

• Run-off cover
• A height restriction for warranty cover
• And structural defects cover for commercial builders

were legislatively annulled by way of amendments to the ministerial orders.

It was the long-term cost of underwriting the cover that was the challenge

The cost of underwriting the product had proved too great. Typically claims take 2 or 3 years to materialise, so at about year five post introduction of the mandated run off cover regime the number of insolvency events were mounting and in some cases there were very large pay outs.

A major insurer insolvency event also occurred with the then insurer HIH in 2001. This company underwrote a lot of construction risk in the building industry.

How is the past instructive?

Firstly, regard must be had to the fact that an insurance product very much akin to a decennial cover did exist for the greater part of the nineties.

When we worked on the facilitation of its promulgation in the early nineties in Victoria and the late nineties in NSW, we worked in lock step with the insurers, so that there was a market capacity to underwrite when the novel cover was first introduced.

The problem was one of sustainability

Sustainability might be a well-worn cliché and an overused term but before the term had the cache that it has now, the continued underwriting of this insurance product within the Australian context proved to be unsustainable. That is just a statement of historical fact.

There were several significant insolvency events at the beginning of the century particularly in the multi – unit high rise sector. This put phenomenal pressure on the underwriting capacity of the market. A major insurer in the construction sector HIH collapsed leaving an unfunded liability crisis.

So, if policymakers are intent on revisiting the viability of the promulgation of decennial liability cover, regard would usefully be had to the past and then most importantly a look to the future the posing of the question will it be sustainable.

This writer is not aware of any evidence to suggest that the risk profile of the building industry has improved. One thing’s clear there are weekly reports of major contractor insolvencies.  

It is one thing to establish a new insurance regime, it is another thing for it to be sustainable. The French have succeeded but Australia has not, and one will only know if any new regime will prove to be resilient at least five years down the track.

The other challenge confronting Australia is the phenomena of the “8 Countries” of Australia. Each sovereign State and Territory has it’s own building regulatory dominion and there exist profound differences in regulatory ecology and consequently profoundly different risk settings. So, if one risk overweight jurisdiction generates a high claims profile, offshore insurers may well treat that as an indictment on the whole Australian market.

It is axiomatic that this doesn’t help but this writer is very confident that this reality will never change despite the decades old well-ventilated clamour for cross jurisdictional regulatory harmonisation, the pleas have not heralded any ‘pan-state and territory’ uniformity. In fact, if anything the states and territories are embracing increasingly divergent pathways.

This article was prepared by the team at Lovegrove & Cotton, Construction and Planning Lawyers.

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Kim Lovegrove as an adviser was heavily involved in the development of the Victorian Building Act 1993 and the Part 4 Reforms to the NSW Environmental Planning and Assessment Act of 1997. In this capacity he worked on the development of the liability and insurance reforms in both jurisdictions. 

Tsigereda Lovegrove is a construction and planning lawyer at Lovegrove and Cotton, is the secretary of the IBQC dispute resolution coalition and is a committee member of the Victorian Building Disputes Practitioners Society.

Disclaimer

This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact construction law firm. Lovegrove & Cotton Lawyers and our experienced team will assist you based on the facts and circumstances of your case.

References

[1] Kim Lovegrove, “Run off cover has resulted in peace of mind for building practitioners”, The Age, 9 November 1996.

[2] Kim Lovegrove and Polly Hatzellis, “Liability and Insurance Reforms of the Environmental Planning and Assessment Act 1979 (NSW) insurance” Austlii, <Rwww.austlii.edu.au/au/journals/AUConstrLawNlr/2000/35.pdf>.