Cladding continues to trouble insurers and the construction industry in Australia

The Melbourne Docklands’ Lacrosse Apartments fire in November 2014 and the London Grenfell Tower fire in June 2017 have highlighted the risks associated with combustible Aluminium Composite Panelling (ACP), more commonly referred to as cladding.

One of the major causes of the Lacrosse fire was the use of ACP, which was used extensively in Australia between 2005 and 2015. This is a real concern for construction professionals and their insurers. The Australian federal and state governments launched various inquiries into fire safety risks posed by external wall cladding and the use of ACP, and the reviews on cladding building exposure by the New South Wales, Victoria and Queensland state governments are almost complete.

State government response

Each state government in Australia has audited large numbers of high rise buildings. The results of these audits enabled the identification of a significant number of buildings that failed to comply with the Building Codes of Australia (BCA) in their use of ACP, including a number of hospitals in Queensland.

There is a consensus in the state governments’ responses to the ACP risk that fire risk needs to be reduced through increased regulation and compliance measures. Legislation has recently been passed aimed at preventing the use of unsafe building products and increasing accountability:

  • In August 2017, the Queensland government introduced the Building and Construction Legislation (Non-conforming Building Products - Chain of Responsibility and Other Matter) Amendment Act 2017 to regulate the use of building products.
  • In December 2017 the Building Products (Safety) Act 2017 NSW was enacted, which enables the Fair Trade Commissioner to ban the use of building products in construction where a safety risk has been identified.

In April 2018, the Building Minister’s Forum (BMF) released the “Building Confidence - Improving the effectiveness of compliance and enforcement systems for the building and construction industry across Australia” report which sets out recommendations for a national best practice model, aiming to strengthen the effective implementation of the National Construction Code (NCC). This proposes a significant package of reforms to strengthen effective implementation of the NCC, and if implemented by the BMF it will lead to a wholesale change in the NCC which will have big implications for the construction industry.

Case law impact

In addition to the ongoing audits and regulation, recent case law has highlighted rectification costs and questions over responsibility. The Victorian Supreme Court decision of LU Simon & Ors v Victorian Building Authority [2017] clarified the limits of the powers of the Victorian Building Regulator (VBA) in relation to issuing a “Directions to Fix” order after an occupancy certificate has been issued.

The VBA ordered the builder to rectify a number of apartments where ACP had been identified. The builder resisted the order as nine years had passed since completion and argued that The Building Act 1983 (Vic) only empowers the VBA to make such orders prior to the issuance of occupation certificates. The court agreed. This decision clearly curbs the VBA’s powers to issue “Directions to Fix” orders following completion of a building.

This restriction on rectification orders will be welcomed by the building industry (and their insurers) as it limits the exposure of builders. Whilst this issue has not come before other states’ Supreme Courts, we anticipate a similar approach will be adopted.

This puts the onus on building owners to explore the complicated legal position of liability for rectification associated with ACP, which may lead to increased litigation against builders and other building professionals alleging breaches of their professional duties.

Residential Hazard Identification Protocol (the Protocol)

Due to the risk of increased litigation, the Insurance Council of Australia and insurers have agreed upon the Protocol. The purpose of the Protocol is to provide a framework in circumstances where ACP is considered to be present in buildings. This will:

  • Allow risk assessments to be undertaken to assess and report residual risk
  • Assist building owners’ and their insurers’ decision making when considering the need for remedial action.

As remedial action is costly and is likely to require building owners to replace cladding in its entirety, it is therefore important that thorough risk assessments are undertaken before remedial action is carried out.

Comment

Whilst the state governments’ response and the Protocol will hopefully help reduce the risk of fire, insurers can expect to see an increase in claims for (i) the investigation and defence costs in respect of further investigations and (ii) disciplinary action as the state governments and authorities continue to take measures against the use of non-conforming building materials. We have already seen an increase in litigation as a result of the use of ACP. There is a possibility we may also see an increase in class actions against engineers, architects, builders, surveyors and certifiers, where minimum BCA standards have not been met.

Read other items in the Construction and Engineering Brief - August 2018