Non-compliant building materials have emerged as a significant issue for strata schemes and owners corporations to manage after the Lacrosse Apartment fire in Melbourne’s Docklands district.
Owners corporations now need to address whether their building materials are compliant as a matter of urgency, as failure to do so could impact on their insurance cover.
Building cladding in particular is in the spotlight after the recent audit by the Victorian Building Authority found half of Melbourne's high-rise apartments contain non-compliant external cladding despite the stringent and detailed National Construction Code.
Evidence shows that the market penetration of non-conforming products in key construction product sectors may be up to 50 per cent. A recent survey by the Australian Industry Group found that 92 per cent of builders surveyed had been offered faulty materials or products to buy.
Non-compliant cladding first came to public attention in 2013 after the blaze on a balcony on the eighth floor in the Lacrosse Apartments spread quickly to the top floor, and a subsequent review by the Metropolitan Fire Brigade found that external cladding used in the construction had fuelled the fire. The cladding had not been tested to comply with Australian standards.
Apartment owners were hit with a multi-million-dollar bill and ordered to replace the highly flammable and non-compliant aluminium cladding encasing their homes. Under the Building Act 1993 (Vic), owners are responsible for correcting defects to their property.
The “faulty” cladding used on the Lacrosse Apartments was argued to be compliant. However, there are different levels of standards depending on the material’s intended use. For example, a particular type of cladding may comply with Australian standards for indoor use but not for outdoor use.
Another growing practice is overseas suppliers claiming their products are asbestos-free when they are not. While there are potential fines of up to $170,000 for individuals, $850,000 for companies, or three times the value of goods imported – whichever is greater for the importation of products containing asbestos, this hasn’t deterred overseas suppliers from importing these products, as fines are rarely being issued to offenders.
With these examples of faulty building materials making their way to Australian shores and into the buildings where we work, visit or live, owners corporations now need to address the issue as to whether their building materials are compliant, particularly if the building was recently constructed.
Given the amount of media attention on the cladding material and the potential for fire, it would be very difficult for an owners corporation, or their agent, to say they did not know of the issue.
As a first step, the best course is to make enquiries with local authorities to ensure any cladding used in your building is compliant, and report the result to your insurer.
Paul Keating, managing director of Strata Community Insurance, says the first consideration with building insurance is complying with the “Duty of Disclosure”. This is a statutory obligation (Insurance Contracts Act 1984 (Cth)) that requires, before you enter a contract of general insurance with an insurer, to disclose to the insurer every matter that you know or could reasonably be expected to know which is relevant to the insurers' decision whether to accept the risk of insurance (and on what terms).
If an owners corporation or their agent discovers there is a building product that may be non-compliant, they must immediately notify their insurer. Failure to do so may see the insurer reduce their liability in respect of any subsequent claim (potentially to nil), cancel the insurance contract or avoid the contract as from its beginning.
Keating says in many cases the disclosure may not impact the terms or conditions of the contract and, once disclosed, the onus shifts away from the owners corporation to the insurer. He advises that if your building should be found to have non-compliant materials or service, then you must disclose this to your insurer every year until the non-compliance is rectified.
The existence of the non-compliant materials (like cladding) or services (like sprinkler systems) in itself does not impact the insurance cover in place unless the owners corporation or its agent knew of the existence of the defect or fault and failed to disclose it to the insurer.
Some insurers include exclusions in their policies around defective or faulty products or workmanship, irrespective of whether the owners corporation or its representatives knew of such a problem. It is important to understand these policy differences, and many owners fail to appreciate this at the time they choose an insurer. Sometimes, certain insurance options are cheaper because the policy cover is narrower.
Generally, insurance cover will only come into effect if there is physical loss arising from accidental damage, or third party personal injury or property damage. However, there is also potential for owners to be covered if they suffer any financial loss as a result of an act, error or omission by members of the executive committee.
The way the executive committee and the strata manager decide to address the rectification of non-compliant materials or services is critical to reduce the financial exposure to owners. It will also be relevant to the insurer covering the office bearers of the executive committee.
Should there be a fire affecting only part of the cladding and building, and the local council makes an order for replacement to or upgrade of the undamaged non-compliant cladding, some policies would respond to the replacement of the fire-damaged property only. Not all insurance policies would cover the undamaged property, while others may impose high thresholds, and the cost of compliance with the new order can often exceed the cost of the original fire claim.
When non-compliant materials have been used, there are legal avenues to seek redress. The main statutory protection for home owners with respect to non-compliant materials used in the construction of their buildings are Home Owners Warranties. Every contract to perform residential building work in NSW has an implied warranty that:
“… all materials supplied by the holder or person will be good and suitable for the purpose for which they are used …” (Section 18b, Home Building Act 1989)
But for owners corporations, the use of non-compliant building materials may not impose a duty to rectify. The question is whether rectification is necessary to properly maintain and keep the common property in a state of good and serviceable repair. This is particularly so where the non-compliance will affect the safety of any building, structure or common property in the strata scheme or detract from the appearance of any property in the strata scheme.
The cladding on the Lacrosse Apartment building in Melbourne provides a good illustration.
While the Victorian Building Authority conducted a city-wide audit of external cladding to high rise buildings and found that 51 per cent did not comply with the National Construction Code, it appears that in the majority of cases of non-compliance, local municipal building surveyors have determined that the buildings are safe for occupation and no remedial action is required.
In those cases where non-compliance is found to require expensive remedial action, owners are sure to be looking at legal options for the recovery of those costs. Those options will vary depending upon when those buildings were constructed, the reasons for non-compliance, and the potential defendants.
From a regulatory standpoint, there have been promises of action, but nothing of substance.
The Australian Building Codes Board (ABCB) has initiated a series of measures to deal with non-compliant cladding, following the Building Ministers’ Forum (BMF) in March. The BMF is a body of Commonwealth, State and Territory Ministers responsible for building and plumbing regulation.
The ABCB is considering mandatory third-party accredited certification of cladding materials, a much more stringent option than the mandatory certification it considered last year, which could have allowed self-certification by product manufacturers. It will also look into developing a new verification method referencing a new Australian Standard for determining the fire combustibility of wall claddings and wall assemblies.
Work will be done over a six-month period to investigate options.
Changes to the way building work is certified are long overdue. The New South Wales building industry may be subject to regulatory change. It is a substantial part of the economy, contributing about $25 billion per annum to the state economy and employing about 250,000 employees, or nearly 10 per cent of the labour force. An independent review of the Building Professionals Act 2005 (NSW) is currently underway.
The responsibility for ensuring compliance needs to placed upon developers to ensure construction work is inspected to confirm it is compliant during the course of construction. There also needs to be improved scope and detail of mandatory building inspections of critical building elements.
Best practice would involve design and construction certification compliance undertaken by accredited professionals, and ideally by the person responsible for the design of the building element or system.