‘The Composite Cladding Crisis’: Will the Building Surveying Industry ‘self-combust’?17 December 2018 | Property Claims
Victorian building professionals will by now have heard of the ‘combustible cladding crisis’ affecting Victoria’s domestic and commercial buildings.
In fact, for many in the construction industry, the term ‘aluminium composite cladding’ has become synonymous with the threat of costly and hard fought litigation. However, for building surveyors in particular, the ‘crisis’ is posing a real and genuine thread to the industry’s long-term viability.
In this article, we explore the potential insurance implications of the ‘combustible cladding crisis’ on the building surveying industry.
In November 2014, the now infamous ‘Lacrosse’ building located in Melbourne’s Docklands caught fire. The fire could by now have been long forgotten, but for the cause of the dramatic spread of flames on the exterior, its aluminium composite panel cladding (ACP).
The Lacrosse fire served to ignite serious concerns about the widespread use of ACP products in the Victorian market and resulted in the establishment of the Victorian Cladding Taskforce. The taskforce’s initial report highlighted the prevalence of ACP materials in commercial and domestic buildings across Victoria and has resulted in a State-wide audit by the Victorian Building Authority of buildings constructed after March 1997. The current audit extends to the certain apartment buildings, hotels, motels, student accommodation, hospitals, schools and aged care facilities.
Local councils have also been playing a role in the review process. If a building is suspected as containing ACP products, Municipal Building Surveyors are issuing letters, emergency orders, building orders (minor works), building notice (precedes a Building Order), and/or building Orders to the owners of the buildings regarding their cladding.
Litigation involving building surveyors
Concurrent with the audit is the ongoing threat of litigation to construction professionals, including building surveyors.
Naturally, the flow-on effect of a building owner receiving a notice from the VBA is for notification of the relevant building surveyor involved in the approval of the works – the first hint of the substantial liability exposure to building surveyors sparked by the use of unsuitable cladding products.
Further down the track, and four years after the fire, the Victorian Civil and Administrative Tribunal recently heard the Lacrosse trial over a six week period. Media has since reported that while Judge Woodward is yet to make a judgment in relation to liability for the use of non-compliant cladding, the builder has agreed to pay $5.6 million to replace the combustible cladding on the 21 storey residential building.
Worryingly for those in the profession, there has also recently been considerable discussion about a possible class action in relation to combustible cladding. Indeed, IMF Bentham and William Roberts Lawyers have sought to ‘investigate and bring viable claims for compensation, on behalf of persons and entities with proprietary interests in residential or commercial buildings, on which there is installed [ACP] cladding with a core comprised substantially of polyethylene.’ If the class action proceeds, it will be Australia’s third relating to flammable cladding. Two other groups, Adley Burstyner and Roscon Property Services, and Slater and Gordon, are also considering action.
In response to the perceived threat of claims, many building surveyors have conducted their own internal audit of services provided in the previous 10 years, to determine their own risk of liability and for the purpose of notifying their insurers of potential claims.
Insurers’ response to the ‘cladding crisis’
The real and ongoing threat of litigation has made insurers nervous, with many previously providing professional indemnity insurance to building surveyors either:
- withdrawing entirely from the market (and not writing risk for building surveyors);
- limiting their scope of cover offered to building surveyors by excluding cover for building works using non-conforming combustible cladding products, as well as building works involving the intentional non-compliant use of cladding materials;
- inserting caps on indemnity for claims relating to the use of non-compliant cladding materials; and/or
- significantly increasing the premiums payable by building surveyors for professional indemnity insurance policies.
In fact, most insurers have introduced restrictions on professional indemnity policies for building surveyors.
In Victoria, all registered building surveyors are required to hold professional indemnity insurance. However, because of the limited number of building surveyors practising in Victoria, the pool of premiums may not be large enough to cover the risk of one substantial cladding class action.
If insurers elect to exclude or reduce coverage amounts to building surveyors, this will have the flow-on effect of the building surveyors not complying with their ongoing registration requirements for professional indemnity insurance. That is, the requirements set out in the relevant ministerial order, which include that the building surveyor’s policy of professional indemnity insurance must (amongst other things):
- indemnify the building surveyor against ‘any civil liability in respect of any claim first made against the building practitioner during the period of insurance and notified to the insurer during such period’; and
- must ‘not exclude liability for loss or damage arising out of or concerning building work as defined in the Building Act 1993 in the State of Victoria’.
The requirements of the ministerial order essentially mean that if building surveyors fall foul of the insurance requirements, they may be unable to maintain their registration to practice in Victoria. Worryingly, if building surveyors are no longer able to practice, the end result will be the Victorian building industry rapidly grinding to a halt. The impact of this would no doubt affect the Victorian economy as a whole, and should clearly be avoided.
So, what are the options?
A clear way to avoid the impending insurance crisis for building surveyors would be for insurers to avoid excluding liability for combustible cladding from their policies (and/or, imposing caps for this type of liability). However, bearing in mind the mass exodus of insurers from the market and the limited potential premiums payable, this is unlikely to occur in the short-term.
Therefore, given that the mandatory professional indemnity requirements for building surveyors arise because of the ministerial order, the Victorian Government holds the ultimate power to keep the industry going.
As a reflection of the Government’s powers to regulate the building industry, a second option would be for it to create a statutory insurance scheme providing coverage for claims arising out of building surveyor’s conduct.
We know from experience in the domestic building space, that a limited liability scheme is likely to draw heavy criticism if framed too narrowly. However, this type of scheme is clearly preferential to the Victorian building industry effectively grinding to a halt due to the uninsurability of building surveyors.
It would also be open to the Government to amend or vary the ministerial order to permit exclusions or caps on claims relating to combustible cladding for policies going forward. This may be the best option, particularly in light of the VBA’s new guidelines on the use of combustible cladding – which, will no doubt mean that claims relating to cladding for new buildings are less likely.
Finally, 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. We know the VBA audit is reviewing buildings constructed after 1997; however, bearing in mind the 10 year limitation period for Building Actions, it is likely that there will be a considerable number of building owners who are unable to bring a proceeding against the people involved in the construction of their buildings, and accordingly, be left without redress.
The limited fund could be in addition to the Government’s new loan scheme relating to ‘Cladding Rectification Agreements’ for the repair of building’s with combustible cladding, where owners are not eligible for loans through the scheme.
The hotly anticipated Lacrosse decision should shed further light on the types of proceedings and extent of liability to building surveyors, likely to arise from the use of non-compliant ACP cladding.
If, as a result of that decision, the remaining insurers providing unrestricted coverage to building surveyors elect to withdraw from the market (or insert their own exclusions relating to the use of ACP), the Government will clearly need to step in to ensure the building industry in Victoria remains viable. The degree of the Government’s required intervention is as yet, to be determined.
 In its interim report the taskforce identified 1,400 Victorian buildings as ‘most likely’ having ACP with a polyethylene core or expanded polystyrene – see Victorian Cladding Taskforce, Interim Report, November 2017, available at: https://www.planning.vic.gov.au/__data/assets/pdf_file/0012/110316/Victorian-Cladding-Taskforce-Interim-Report-November-2017.pdf
 Pursuant to its broad powers afforded by section 198 of the Building Act 1993 (Vic).