“I’m shell-shocked – like being in an explosion”.
That is how Phil Connors, owner of Protek Building Surveying Services in Launceston, described his situation in an article in The Advocate on July 15.
Connors was forced to shut his 19-year-old business employing seven staff after his premium for professional indemnity insurance jumped from $25,000 to $80,000 and his excess jumped from $5,000 to $50,000.
Clients from around 600 unfinished jobs were left with uncertainty about their permits.
This is not an isolated case. Around Australia, building surveyors – known as building certifiers in New South Wales – are being hit with massive increases in fees and excess with their professional indemnity (PI) insurance. In Queensland, New South Wales and Victoria, surveyors are required to hold PI insurance without exclusions as a condition of their registration (elsewhere, surveyors are required to hold insurance which is appropriate to the work they perform). In early July, the last underwriter to offer insurance which did not contain exclusions for cladding ceased to do so. As this happened, panic set in amid fears that an inability of surveyors to maintain their registration and continue to issue permits would see the building industry grind to a halt.
As a temporary measure, governments in New South Wales, Victoria and Queensland have amended their laws to enable surveyors to continue to hold registration even where their insurance contains exclusions relating to non-conforming cladding in building work. All states insist that these are interim measures only. In NSW, the measure has been achieved via an amendment to the Building Professionals Insurance Regulation, which Minister for Better Regulation and Innovation Kevin Anderson says will be removed in no more than twelve months.
On July 18, progress toward longer-term solutions was made in two areas at the meeting of the Building Ministers Forum (BMF). First, the BMF agreed to adopt a national approach toward implementation of the Building Confidence Report delivered to the BMF last year by Professor Peter Shergold and lawyer Bronwyn Weir. Second, the BMF agreed for Queensland and New South Wales work with insurers and the building industry to develop an options paper which will set out a pathway for professional standards schemes and alternative insurance options for building surveyors. As outlined below, these are considered important steps to address the issue over the longer term.
Welcome though this is, however, the crisis remains far from over.
All this raises questions about what caused the current crisis, what its ultimate effects will be, how surveyors themselves can best manage the impact upon their own firms and what needs to be done to resolve the situation. To explore these issues, Sourceable spoke with Bronwyn Weir, lawyer and co-author of the Building Confidence report (also known as the Shergold Weir report); Brett Mace, chief executive officer of the Australian Institute of Building Surveyors; and Adam Mainey, Director of Sydney based building certification, building code consulting and town planning firm Concise Certification.
At an immediate level, the crisis is being driven by insurer fears over the cost of cladding rectification, which has been laid bare by various inquiries and state based audits following the Grenfell and Lacrosse fires. In NSW, recent media reports suggest that 629 buildings may have flammable cladding. In Victoria, the final report of the Cladding Taskforce set up by the Government in the wake of Grenfell was released on July 16. It revealed that of 1,369 privately owned buildings which were identified as potentially having flammable cladding, 72 have been assessed as being of extreme risk whilst a further 409 had been assessed to be ‘highest risk’.
Estimates of remedial costs vary. In Victoria alone, RMIT researchers Simon Lockrey and Trivess Moore put the overall cost of rectification at between $250 million and $1.6 billion.
For insurers, this means exposure as affected owners and seek compensation – building surveyors and anyone else with compulsory insurance being first in their sights. As a result, they have largely concluded that returns associated with underwriting insurance to surveyors (and some other groups of building professionals) are no longer worth the risk involved.
Beyond the immediate cladding exposure, Weir says the current insurance situation also reflects broader concerns about building quality. These, she said, have grown as structural and other issues have become increasingly apparent and numerous inquiries have uncovered poor building practices and deficiencies in building regulation. As well as her own inquiry run in conjunction with Professor Shergold, these include the Senate Inquiry into Non-Conforming Products and the Victorian Cladding Taskforce report as well as a review of building regulation and fire safety conducted by Dame Judith Hackett following the Grenfell fire tragedy in the United Kingdom.
“But they are a symptom of a bigger problem. That’s what’s been found in reports like ours and the Dame Judith Hackett report (into the Grenfell tragedy in London) … “
“… There has been a lot of information in the sector and in the public about the fact that building quality is very poor at the moment.”
For certifiers, immediate consequences involve skyrocketing premiums and excesses for their PI insurance.
On premiums, Mace says cases of members who have contacted the AIBS having had their premiums rise from somewhere in the vicinity of $35k to $135k or more are not uncommon. At Concise Certification, Mainey says his firm’s premiums have gone up more than fivefold. Without revealing the actual amount, he says that if his firm’s annual PI insurance bill was an employee, it would be in the top three percent of all wage earners in Australia. (In sharing this, Mainey stresses that his firm has not had any claims in its three years of operation and that none of the accredited certifiers on its staff – who have a combined 60 years of experience between them with previous firms – has every faced disciplinary action.)
With regard to excess, Mace has seen examples of these shooting up from $20k to $200k or to $300k in the case of combustible cladding (prior to the last insurer to cover cladding now not doing so).
On top of this, surveyors are dealing with long term concerns about their ability to maintain their registration in absence of insurance being offered without exclusions along with the uncertainty of their practices not having coverage in the event of a successful cladding related claim against them.
In light of this, many surveyors are questioning the long term viability of their business. Mainey talks of a ‘mass exodus’ of certifiers if the current situation is not resolved soon. In his own case, Mainey says his firm ‘may need to join the rank of certifiers that are currently considering their options to leave the industry’ if solutions are not found in the next twelve months.
Mace agrees, adding that a growing number of AIBS members feel that staying in business offers too little reward relative to the risk involved.
Should a private surveyor exodus eventuate, the building industry would become more reliant upon certification from local governments.
This presents several challenges.
First, it may lead to delays in building approvals as local authorities may be unable to cope with the volume of applications coming in – especially as many councils have scaled down their certification resources over the past two decades in response to the growth in private certification. This could have broader economic and social consequences through slowing down building activity and delaying the delivery of new housing supply.
On a related note, there are concerns about the ability and capacity of local governments to grapple with larger and more complex projects. Whilst many local governments could come up to speed to manage Class 1 and 10 buildings (detached homes, detached units, townhouses and non-habitable structures such as carports and sheds), Mace says a significant number would be challenged by large commercial or multi-storey residential buildings.
In addition, some private certification firms focus on particular building types such as hospitals or aged care and develop expertise which is specific to that type of development. Were such firms to withdraw, knowledge in these specific areas would be lost.
As well, any withdrawal of private certification from the market would diminish opportunities for building surveyors to work in private practice and would reduce the attractiveness of certification as an occupation. This make it harder for the profession to attract and retain talent and could lead to a hollowing out of the skill base within the certification industry. That, in turn, would have flow on effects upon the quality of checks being performed in building.
More immediately, any shutdown of private certification firms impact clients. In his own firm’s case, Mainey said Concise Certification has around one thousand projects at different stages of construction. Were a firm such as his to close down, each project owner would have to transfer their development to another A1 Accredited certifier – either a private certifier or a government certifier.
This would be costly and difficult. The next certifier would inherent the liability over the entire project yet would have little visibility regarding the history and backstory of the development in question. Thus they would have to carefully investigate the risks involved before agreeing to take on a project – an investigation for which they would charge an added fee. This would cause delays and add to cost. That’s if the certifier even agrees to take on the project.
Beyond that, Mace, Mainey and Weir all warn that any transfer of work to municipalities may be a false economy as local governments would in turn contract out much of the work to private firms who would act as consultants. This, Weir says, creates an additional headache which relates back to the original problem of insurance as councils will require contractors to have their own insurance. Should surveyors not be able to obtain insurance at reasonable rates and excesses, using them could be difficult for councils.
Beyond private certification shutting down, Weir says another possible scenario is that governments wind up allowing surveyors to operate with non-exclusion insurance on a longer term basis. This has implications for the ability of consumers to recover money from these firms in the event of successful claims in which the surveyor is a defendant.
What can certification firms do?
According to Mace options depend on the type of insurance the firm is able to obtain. This in turn is influenced by the type of work they do. For those who concentrate mainly on Class 1 and Class 10 buildings, the situation may not be that bad. For larger firms who deal with more complex projects, things may be more complicated.
Before entering into contracts, he says surveyors should look carefully at the level of PI insurance which is required for those contracts and make certain that they have the capacity to meet these requirements. Certification firms also need to consider the risk profile of their project portfolio and think about the types of work they are going to undertake. Clients should be selected carefully: those likely to pursue frivolous claims should be avoided. Finally, given the likelihood that certifiers will now be left to defend many of the cladding-related claims which are made against them on their own, they should look to minimise the risk of claims going against them on existing projects as much as possible.
Mace also cautions that the scope of many of the exclusions extends beyond flammable cladding and instead covers all types of external cladding and non-conforming products. This, he says, could have broader implications should insurers try to reject claims for issues such as waterproofing on the basis that they relate to external cladding.
Weir, meanwhile, advises a number of actions. Certifiers with exclusion-free policies should notify their insurers about buildings which they have approved which have combustible cladding before their annual policy expires. Where this happens, Weir says there is a good change that insurers who have been notified will have to accept any claims which are later made. Those firms who enjoy a positive track record in doing lower risk work should communicate this to prospective insurers.
Surveyors who do have exclusions in their policies need to understand the scope of these and be careful about any decisions which could fall within that exclusion if made in error. For cladding related exclusions, diligence should be observed in respect of all types of buildings – high rise or otherwise. This means insisting on appropriate evidence of suitability, checking DTS provisions carefully and interpreting them conservatively and requiring third-party review of all cladding related performance solutions.
Above all, Weir says surveyors need to be more careful and do more checking.
“My message is don’t just do what you have always done,” Weir said.
“Second guess everything!”
At a policy level, there is broad agreement about what needs to be done.
First, Mace says governments and the insurance industry need to work together on a solution for the likely rectification of combustible cladding.
In addition, Mace says a mandatory professional standards scheme is needed to improve standards and practices within the certification profession. This, Mace said, should limit liability whilst still offering consumer protection and should raise the standards of building surveyors.
Third, all agree that recommendations of the Building Confidence report need to be implemented as a priority.
On these issues, progress has been made in recent weeks. As mentioned above, the Building Ministers Forum agreed on July 18 to adopt a national approach toward implementation of the Building Confidence Report and for Queensland and New South Wales to work with insurers and the building industry to develop an options paper to set out a pathway for professional standards schemes and alternative insurance options. In Victoria, the Government has announced a $600 million fund to help to fund rectification works buildings with flammable cladding in that state.
Beyond this, Weir sys industry itself needs to lift its game. Toward this end, industry associations need to work with their members to raise the bar in terms of knowledge, competence, professionalism and expected behaviours. This is true not just of the larger groups such as the PCA or MBA but also trade and industry associations whose members focus on specific industry segments such as fire protection, plumbing, electrical trades, structural engineering and other areas.
Finally, Mainey talks of the need for accountability to be spread throughout the supply chain. Every construction industry participant, he said, should be required to be educated, to be accredited and to hold PI insurance. This includes suppliers, designers, installers and others.
He talks of the need for shared responsibility and accountability. Should a certifier miss defects during a waterproofing inspection, that certifier must share in responsibility for that, he says. So too, however, should the waterproofing contractor.
As well, Mainey expresses frustration about a tendency to point fingers at certifiers. With cracking at the Opal and Mascot Towers, for example, he says problems related to structural components of the building which are designed and certified by engineers and are not required by law to be inspected by certifiers – private or municipal. Yet people are going ‘hell for leather after the certifier’ in these cases. On the issue of private certification, he points out that the occupation certificate at Mascot Towers was issued not by a private certifier but by Botany Bay Council – a municipality.
Australia faces a crisis in PI insurance for private certifiers.
Unless this is resolved, ramifications will be significant.