The Building Practitioners Act – Implications for Construction Professionals and their insurers in an already hardening insurance market

On 10 June 2020 the Design and Building Practitioners Act 2020 (NSW) came into effect in part. The balance of the provisions will take effect on 1 July 2021. The Act has implications for construction professionals, their insurance requirements and for insurers.

In an already “hardening market” (see our article here) for construction professionals these new provisions have had further impact on already increasing premiums, rising excesses and narrowing cover for this class of insurance. In all insurer appetite for construction professionals continues to diminish, thus less insurers and reduced competition. The changes could not have come at a worse time for construction professionals, considering the current market conditions.

In NSW, the prevalence of building defects in new multi-owned properties (i.e. strata buildings) have been recorded as high as 97%. The most common forms include design defects; water ingress; internal and external wall cracking; cladding defects; fire protection issues; roofing and guttering problems and tiling faults.[1]

In 2014 the High Court of Australia significantly curtailed building practitioners’ liability exposure to subsequent lot owners for economic loss caused by latent defects.[2] In short, the High Court held that the builder in that case did not owe either the developer or the Owners Corporation a duty of care in negligence for such defects. By extension of reasoning, the implication was that not only was a builder not liable in negligence to subsequent owners but other professionals involved in the design and construction process (such as engineers and architects) were similarly not liable to subsequent owners.[3]

The effect of the Brookfield decision was that building professionals’ (and more so their insurers) could take comfort that their professional indemnity policies need not respond in the event that building defects were identified, and wherein such defects were as a result of, or in connection to the provision of “professional services” performed by consultant.

However, a consequence those who owned property when the latent defect was discovered – who had no relationship with the builder or developer – were required to meet cost of rectifying design and construction defects. This was particularly so if strict time limitations imposed under the Home Building Act 1989 (NSW) were not complied with.[4]

The prevalence of building defects and the shifting of responsibility for loss to subsequent (unwitting and innocent) owners required Government to review regulation in the building industry. The result is more onerous obligations on building practitioners (and by extension their insurers) to exposure for potential liability to subsequent owners for latent defects.[5]

Retrospective Extension of Duty of Care

A key provision in the Act, which should be of most concern to building practitioners and their insurers, is the imposition of a duty of care on persons who carry out construction work to avoid economic loss caused by defects.[6]  The duty of care is additional to any other duties at law, cannot be contracted out of and, expansively, is owed to each owner of the land in relation to which the construction work was carried out and to each subsequent owner of the land.[7] The duty applies regardless of whether there was any contract between an owner and the person carrying out construction work.

Unusually, the extended duty of care is imposed retrospectively. It applies to any construction work if the defect became apparent after to 10 June 2010, whether or not proceedings were issued in relation to that defect, and to any defect that becomes apparent after commencement of the Act.[8] Contractual provisions in an agreement that were in place prior to the commencement of the Act that limit potential liability for negligence are of no effect.[9]

However, statutory limitations periods will continue to apply from the date that the work was done or loss became apparent or reasonably ought to have become apparent.[10]

Registration and compulsory insurance requirements

In addition, the Design and Building Practitioners Act 2020 introduces a registration regime and requirements for designers, engineers and building practitioners. The statutory regime, once fully in force:

• Stipulates that a registered designer or building practitioner must provide a design compliance or building compliance declaration for their work before an application is made for an occupation certificate for the building.[11]
• Requires registered design, engineering and building practitioners to have “adequate insurance” before doing building work or providing a compliance declaration.[12]
• Provides that a building practitioner is “adequately insured” if is indemnified by insurance that complies with the regulations against any liability to which the practitioner may become subject.[13]

Further, the Act introduces a disciplinary and penalty regime for non-compliance with Act and gives the regulatory body significant and strong investigatory powers. This will make coverage for investigation costs in any insurance policy all the more important.

There is no doubt that liability for defects has been firmly shifted onto the building industry and consequently onto the insurers of building professionals and practitioners.

The retrospective expansion of potential liability to a much wider class of persons has caused the insurance market to tread cautiously across the class. There is little doubt that the introduction of the legislation has caused some insurers to exit the market, and more so has caused insurers increase premiums. We fear that the cost of professional indemnity will simply force many practitioners out of business.

Notwithstanding the requirement for “adequate” cover requires that insureds, their brokers, and insurers carefully consider policy wordings. This may prove challenging unless and until insurers update their policy wordings to account for the requirements of the Act.

For example: the Act applies to not only design professionals and engineers but also to “building practitioners” who are engaged to carry out the work. Engineers and designers usually have professional indemnity insurance that, on prevalent wordings in the market, advance cover for only “professional services” provided by that professional. Builders who carry out the works do not usually have insurance that covers them for “defective workmanship” and may not be considered to be providing “professional services” within the meaning of a professional indemnity policy. Accordingly, cover is unlikely to be available under such a policy if a building practitioner has not complied with their duty of care, which will be imposed by the Act. Section 5O of the Civil Liability Act 2002 (NSW) is unlikely to offer a defence to builders.

Again, in a hardening market where insurers are seeking to narrow the scope of cover they provide (please see Bellrock’s article here “The impact of narrowing cover in the hardening insurance market: construction professionals & claims made policies”) the legislative reforms seek for cover to be widened. The consequence again is increased premiums for the class.

It will be imperative for insureds to comply with their duty of disclosure (see Bellrock’s article here) and to ensure that any circumstances that might give rise to a claim are notified to their current insurers as soon as possible. If this is not done there is a risk that insurers will decline to provide cover or decline to issue cover for future policy periods and the benefit of policies that are currently on foot may be lost.

[1]Johnston & Reid (Deakin & Griffiths Universities): An Examination of Building Defects in Residential Multi-Owned Properties, June 2019 https://www.griffith.edu.au/__data/assets/pdf_file/0030/831279/Examining-Building-Defects-Research-Report.pdf

[2] Brookfield Multiplex Ltd v Owners Corporation

Strata Plan 61288 [2014] HCA 36

[3] See Robertson M.A (with whom this has article has been drafted): Pure economic loss claims: Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 and its lessons for owners, builders, developers, vendors, purchasers, professional advisors and their respective insurers (2016) 28 ILJ 71, ISSN 0817-623X.

[4] Home Warranty policies are often written on a “last resort” basis, meaning the policy will not respond until the builder is insolvent so an actual claim cannot be made on the policy until that event occurs.

[5] Robertson (supra) noted that the Brookfield decision “Squarely put the focus on the legislature to determine the extent of which statutory warranties and rights of redress are available to subsequent purchasers of dwellings”. That prediction has now come to fruition.

[6] S 37(1) Design and Building Practitioners Act 2020 (NSW)

[7] S 37(2)

[8] Schedule 1, Part 2(5)

[9] s 40 & Schedule 1, Part 2(4)

[10] This is ordinarily 10 years from the date of completion of the work. See Schedule 1 of the Act and Limitation Act 1969, and section 6.20 of the Environmental Planning and Assessment Act 1979 (NSW)

[11] s 17

[12] s 24

[13] S 24 (2)