In May 2016, we reported on further developments on the current issue of combustible cladding, and the implications for building practitioners and their insurers. Read our article 'Non-compliant' cladding issues update.

The tragic Grenfell Tower fire in London has sparked a global concern about the hazard associated with the use of combustible aluminium composite panel products in the construction of high-rise buildings and the potential for vertical fire spread. Namely, it has become apparent that a fire hazard is likely to be present unless the exterior wall assembly of buildings and all associated components are non-combustible, or have passed comprehensive fire safety testing.[1]

In this update, we report on recent developments, in particular Australia’s approach to fire risks and associated insurance implications for building practitioners.

Australia responds to fire risks

From 2017 Australian state and territory governments commenced a review of existing buildings to identify the use of highly flammable, combustible external wall cladding products. Addressing both the Grenfell Tower and Lacrosse building fires, the various taskforce units established by Australian state and territory governments have made a number of uniform recommendations to reduce the risk of fire. The recommendations include the undertaking of further audits of existing buildings and further work in formulating a shared responsibility regime applying to manufacturers, importers, suppliers and installers of building products alike.

State and territory investigations

Whilst the approach taken between the Australian states and territories is not identical, there is an overlapping consensus that fire risks need to be minimised, through increased regulation and compliance measures. The response of certain states and territories are more advanced than others, with legislation recently being passed in NSW and Queensland aimed at preventing the use of unsafe building products and increasing broader accountability.

In July 2017 the Victorian Government established the Victorian Cladding Taskforce (VCT) to investigate the extent of non-compliant external wall cladding on buildings and provide recommendations on how to ensure safety in the homes and offices of Victorians. The VCT issued its interim report[2] and findings on 1 December 2017, confirming the widespread use of combustible cladding products throughout Victoria. It reported that the problem derives from the supply and marketing of unsuitable building materials, a low level of compliance within the construction industry and the need for increased regulation. Audits of Victorian buildings are continuing to take place, and in turn may lead to a number of prosecutions in the event of wrongdoing.[3]

The responses of the Western Australian, South Australian, Tasmanian and Australian Capital Territory governments have mirrored Victoria’s approach, with a focus placed on auditing buildings for the use of combustible cladding materials.

Similarly, the NSW government[4] has responded to the issue by implementing an inter-agency Fire Safety and External Wall Cladding Taskforce to develop a government action plan and introducing new legislation. On 18 December 2017, the Building Products (Safety) Act 2017 came into operation, which now enables the Fair Trading Commissioner (Commissioner) to ban the use of building products in construction when a safety risk has been identified. Relevantly, a safety risk caused by the use of a building product is defined to exist when occupants of the building are or will likely be at risk of death or serious injury. The Act also provides the Commissioner with the power to investigate the safety of building products and the extent to which they have been used in building works. It also provides the Commissioner with the broad power to investigate and examine documents and mandates the requirement of any individual to provide information relating to the investigation. Further, the Act makes it an offence for a builder or owner to engage in the non-compliant use of building products, for the purpose of saving costs or otherwise.

The Queensland government’s Non-Conforming Building Products (NCBP) Audit Taskforce has taken a proactive approach to the issue. Brisbane’s Princess Alexandra Hospital has already been identified as a government-owned building posing a fire risk with various others continuing to be investigated.[5] In order to enact an appropriate response, the taskforce has established a process of investigating and notifying Queensland Fire and Emergency Service of building works identified to comprise combustible materials. On 31 August 2017, the Queensland Parliament introduced new legislation to regulate the use of building products; namely the Building and Construction Legislation (Non-conforming Building Products – Chain of Responsibility and Other Matters) Amendment Act 2017. The Act expands compliance and enforcement powers in Queensland and establishes a more even chain of responsibility amongst designers, manufacturers, importers, suppliers and installers of building materials. It creates new offences and penalties for breaching the obligations placed on participants in the building product supply chain to prevent and address non-conforming building products. Although only applying to the installation of products after 1 November 2017, powers extend to ordering a wrongdoer to undertake remedial works.

Professional indemnity insurance implications

Whilst the above developments might be a step in the right direction, it is clear that building practitioners face a substantial liability exposure arising out of the use unsuitable products, which has made insurers nervous. This exposure is of particular interest to professional indemnity insurers, some of which have either stopped writing risk for building practitioners or limited their scope of cover by excluding cover for building works using non-conforming combustible cladding products, as well as building works involving the intentional non-compliant use of building materials.[6]

The decision to limit the scope of cover may also have some unintended consequences. Specifically, pursuant to the differing state regulations,[7] various classes of building practitioners are required to provide evidence of their professional indemnity insurance at the time of each registration renewal. There are implicit concerns as to whether holding limited professional indemnity insurance, due to insurer exclusions or reduced coverage amounts to a building practitioner inadvertently not complying with their ongoing registration requirements.

Recently, in LU Simon Builders Pty Ltd v Victorian Building Authority[8], LU Simon Builders were successful in action against the Victorian Building Authority (VBA) for exceeding its powers when issuing six notices to rectify buildings around Melbourne’s CBD, including the Lacrosse building, identified to contain combustible cladding. In finding in favour of the builder, the Victorian Supreme Court held that builders are only required to rectify any building defects identified during the construction process, thereby forcing the owners’ hand to recover the cost of rectification on their own accord.

Following this decision, whilst we may start to see insurers softening their approach, in light of the current insurance climate and the possibility for subsequent litigation, this may not be a given. If this trend continues, building practitioners may be unable to maintain registration in their respective states/territories and their exposure to litigation will remain. Accordingly, state and territory governments may need to consider limiting exposure to building practitioners for non-conforming cladding and the non-compliant use of building products. Alternatively, if building owners are left with the responsibility to rectify works following state-wide audits or related investigations, it may be necessary to consider introducing a government or industry funded scheme, as a means of recovery.