Update on building certification and PI insurance crisis

26 June 2019

We continue to hear reports from industry that insurers are pulling out of the market for professional indemnity (PI) insurance for certifiers, engineers, builders and architects.

The problem is most pressing for certifiers and we understand that as early as the 2 July, there may be no PI insurance available for certifiers without exclusions. In some cases certifiers could be forced to close up shop, creating a significant roadblock for construction activity if a solution is not found urgently.

In order to avert a crisis, Master Builders is recommending nationally that the governments coordinate to:

Allow certifiers to have an exclusion on their PI insurance for combustible cladding, specific to aluminium composite panels (ACPs) and expanded polystyrene (EPS) materials.

The majority of certifiers are solely involved in certifying detached houses. Allowing an exclusion for these certifiers could mean that they continue largely unaffected by the current crisis.

For those certifiers working on Type A and Type B buildings it will be impossible to not work with ‘combustible’ cladding. For these building types there have already been significant improvements to the NCC directing the safe use of combustible cladding. Further controls on the certification of combustible cladding (see point 2 below) would cover the exposure left by an exclusion.

Our recommendation is that all certifiers are allowed a narrow exclusion on their PI insurance relating to the use of ACPs and EPS as external cladding.

Establish a pool of qualified fire engineers and use only government contracted engineers to sign off on high risk components such as combustible cladding.

With the insurance industry unwilling to cover the high risk components of building work, such as combustible cladding, we need to find a new way to indemnify this work.

Victoria provides a peer review system where the certification is checked by an independent panel which includes certifiers and then the state government indemnifies this aspect.

The government could consider a similar system for Queensland where fire engineers working for the Queensland Government, sign off any performance solution where combustible materials are used in external cladding.

This would mean a two-pronged certification process where the certifier provides the final approval but is indemnified for the components completed by the government’s fire engineer.

Establish a dedicated working group to develop options for funding cladding rectification.

Allowing exclusions will extinguish runoff insurance cover for the certifier for any work that falls under the exclusion. This leaves the certifier uninsured for previous work (despite them holding insurance at the time the work was done) and potentially means the owners of existing buildings and the builders have one less avenue for financial recourse. This is a complex problem that needs further consideration.

Possible options include a taxpayer funded response (rejected by governments to date), concessional loans that are provided in Victoria to owners but with little to no take up to date and an industry levy (possibly added to the QLeave levy).

Other options

In seeking to address the problem, the government is exploring the following ideas:

Restrictions on the use of performance solutions (which we strongly oppose)

Performance solutions allow designers, engineers and builders to respond to the specifics of an individual project and often result in better outcomes for the end user. They will be essential to making existing buildings safe where aluminium composite panels (ACPs) and expanded polystyrene (EPS) have already been used.

National body to improve professional standards of certifiers

While we can see the attraction of a national body it would need to deal with the differences in regulation across the states and territories.There may be a benefit in having a national body acting as an ‘umbrella’ for individual certifiers to access affordable PI insurance, along similar lines to the real estate industry.

Local government as the certifier of last resort

There needs to be a lot more work to understand how this can be a viable option. Will every local government have enough capacity? How will local governments deal with the risk? How long will it take to set up? Once established, what will the cost of certification be and how long will it take?

Home Warranty Scheme for multi-storey developments

We support a separate Home Warranty Insurance scheme for high-rise unit developments. It would need to be ring fenced from the existing scheme given the very different risk profile.

What you should do

You need to check-in with your certifier now to see where they are tracking for their PI insurance renewal: especially for any projects that are currently underway.

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