The liability landscape for the residential construction industry changed on 10 June 2020 with the commencement of the Design and Building Practitioners Act 2020 (NSW). Here’s what you need to know about the landmark changes and the implications for insurance.
The evacuation of residents from the brand new Opal Tower at Sydney Olympic Park on Christmas Eve 2018 made national headlines. Loud noises and significant cracks appearing on internal support walls saw residents flee in what is perhaps the most dramatic example of Australia’s building compliance crisis.
Unfortunately, building defects like this aren’t unusual. While developers argue that the structural failures that triggered the Opal Tower cracks are an isolated occurrence, building defects are all too common in Australian construction.
In the wake of the Opal Tower failure, pressure to clean up the construction industry increased and the NSW Government has now introduced sweeping legislative changes intended to regain consumer confidence in the construction industry.
The reforms in the new Design and Building Practitioners Act are based on the recommendations set out in the Building Confidence Report, which assessed the effectiveness of compliance and enforcement systems in the building industry.
Key reforms in New South Wales
The Design and Building Practitioners Act is intended to strengthen the regulation of designers and builders, and ensure their compliance with the Building Code of Australia. Commencing on 10 June 2020 the Act has a range of key implications for insurance, including:
- Mandatory declarations by construction professionals that their work complies with the Building Code of Australia.
- Mandatory insurance requirements for “any liability” to which a construction professional may become subject.
- A new statutory duty of care that operates retrospectively.
Let’s break down each of these reforms.
Compliance declarations
A new strict regime is intended to ensure that each step of the design and construction process is documented, and that construction professionals declare that their work complies with the Building Code of Australia. Building and design declarations are also required for any variation of the building work.
The upshot is that any declaration that’s non-compliant with the Building Code of Australia and causes damage to the building owner can form the basis of a viable claim. This new declaration system will mean that responsibility for non-compliance with the Building Code of Australia can be precisely identified and bring more certainty to liability issues.
Mandatory insurance
The new Design and Building Practitioners Act makes it clear that anyone who makes a mandatory declaration must be “adequately insured”. But what does this mean?
Precisely what “adequately insured” means is not defined, however the Act does set out that the person must be indemnified by insurance against “any liability to which the practitioner may become subject” as a result of making a declaration or carrying out the work.
At this stage, it’s unclear how construction professionals will comply with this requirement. Construction professional indemnity insurance policies contain exclusions for exposures such as non-compliant building products, reflecting the high risk status of the construction industry. They don’t cover “any liability”, as is required by the new Design and Building Practitioners Act.
At this stage, it’s a case of ‘watch this space’, as the details of the required insurances will be set out in the Regulations (which are yet to be made).
New duty of care
Under the new Design and Building Practitioners Act, construction professionals in New South Wales who carry out “construction work” have a duty to exercise reasonable care to avoid economic loss to owners caused by building defects.
The definition of “construction work” is broad and includes residential building work under the Home Building Act 1989 (NSW), as well as the design, manufacture, supply, and supervision or management of building work.
The new duty of care is owed by professionals undertaking building and design work, as well as those who supervise others who perform building work. The duty also extends to professionals who supply or manufacture building products.
Both current and subsequent owners of land, whether or not they were a party to the construction contract, are owed the new duty of care and are entitled to claim damages for breach of the duty directly from the construction professionals who did the work.
The new duty of care, which cannot be delegated or contracted out of, is in addition to existing common law and statutory obligations on construction professionals.
Importantly, the new duty applies to all new buildings and buildings less than 10 years old. It extends to construction work carried out before the commencement of the Design and Building Practitioners Act. This means that claims can be made for breach of the new duty for defective buildings up to 10 years old. Further, claims currently being litigated can be amended to include a new claim for breach of the new duty of care.
This is a significant change in the legal landscape that has immediate effect and it’s likely that insurers will see a raft of claims for breach of the new duty in the coming weeks and months.
Insurance impact
The reforms set out in the Design and Building Practitioners Act mean that design professionals, including architects and engineers, insured under professional indemnity insurance policies will be subject to direct claims from subsequent owners. This is not an insignificant risk.
The inclusion of manufacturers or suppliers of building products in the definition of “construction work” will also likely see an increase in claims under general liability policies.
The risk profile for construction professionals has increased with the commencement of the Design and Building Practitioners Act and this will, no doubt, prompt insurers to reassess their underwriting policies. How this will play out over time in the insurance market is yet to be seen, but one thing is sure – any increased risk will need to be factored into policy pricing.
As a construction professional, it’s essential to seek expert advice to ensure you comply with these new legislative requirements. You need to understand the breadth of risk you’re facing and know what your options are when it comes to insuring against them.
At Emjay Insurance Brokers, we’re experts when it comes to insurance for construction industry professionals and can provide you with the right advice. We understand the new requirements and can monitor your coverage on an ongoing basis to ensure your professional exposures are managed. With access to a wide range of policies, we can tailor a solution to suit your unique circumstances.
Call us today to discuss your needs on (02) 9796 0400.
