Insurance broking clients in the building and construction industry may have new obligations under the Design and Building Practitioners Act 2020
Insurance broking clients in the building and construction industry may have new obligations under the Design and Building Practitioners Act 2020, which commences on 1 July 2021.
Whilst the DBA Act became effective on 11 June 2020, much of the detail for the new regime was left to the accompanying Design and Building Practitioners Regulations (DBA Regulations), which were recently released and commence on 1 July 2021.
What are the main features of the reforms?
Whilst it was initially believed the DBA Act would apply to a range of building classes, it only applies to Class 2 buildings and buildings that include Class 2 components. Class 2 buildings are those which contain two or more sole-occupancy units, each being a separate dwelling. So, predominantly apartments, but they could also include townhouses, duplexes and the like. Class 2 buildings do not include single residency dwellings.
At a high level, here’s a summary of the main features proposed under the DBA Act
Most notable changes
“The most significant change is certainly to introduce the statutory duty of care. It’s very unusual legislation, due to the retrospective element that means you could face claims or litigation that relates to work done years ago, at a time when you didn’t legally owe that duty of care,” noted Lander & Rogers’ Partner, Charles Thornley.
“Class 2 buildings (particularly high-rise apartments) have been the bane of the industry because they’ve attracted some ‘shoddy’ or ‘fly by night’ developers which has resulted in building stock rife with defects. The aim of these regulations is to take away that problem, to remove from the landscape the ‘bad’ or underqualified builders and consultants and improve the quality and trustworthiness of the industry.
“The type of ‘blowtorch’ pressure that NSW Building Commissioner David Chandler is putting on developers and builders will have a big impact as well. To date, Mr Chandler has issued orders on nearly 1000 apartments in 10 developments to either fix them up or stop work and deny them occupation certificates.”
About the statutory duty of care
Part 4 of the DBP Act provides that ‘a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects’ which are either in or related to a building for which the work is done or arise as a result of the construction work.
The DBP Act defines ‘construction work’ quite broadly, including building work and designs for building work, manufacture or supply of a building product used for building work and supervising/coordinating/project managing or otherwise having substantive control over the carrying out of any of the before mentioned.
This means that if a building is defective, owners can make claims not only against the builder or developer, but also against the architect, engineer, individual subcontractors, building product manufacturers and suppliers, and project manager.
Importantly, the DBP Act’s extension of the duty of care now includes ‘each owner of the land in relation to which the construction work is carried out and to each subsequent owner of the land’.
This is a significant departure from the precedent established in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288, where, in 2014, the High Court of Australia confirmed that a builder does not owe a common law duty of care to a subsequent purchaser. By inference, such a duty was also not owed by the consultants involved with the project.
The new duty of care imposed by the DBA Act overrides the decision in Brookfield, meaning that future sales and new ownership do not extinguish potential liability for breaches of the statutory duty of care.
A contract is not required to establish duty of care and parties cannot contract out of it.
The duty of care provisions apply retrospectively, provided the loss first became apparent no earlier than 11 June 2010 (10 years before the new Act was passed). This effectively increases the exposure of design and building practitioners for jobs done years previously, when no such duty was owed to subsequent owners.
The short-term impact of the DBA Act from an insurance adviser perspective
Managing expectations around price increases and insurance availability has been one of the most noticeable short-term impacts of the legislation.
“Premiums in the building industry have been increasing steadily over the last few years, partly because of the dramas surrounding flammable cladding and structural defects of high-rise buildings. There’s no doubt the introduction of the DBA Act and Regulations will put further pressure on pricing (if cover can be obtained at all) in the short to medium term because of the increased exposure created by both, particularly through the expanded duty of care. Hopefully, in the longer term, the more stringent regulation of the industry will lead to benefits for everyone,” said Acacia Insurance (Corporate Authorised Representative of Insurance Advisernet), Director, Mark Williams.
The added exposure caused by the new statutory duty of care and the need for adequate cover is already causing reactions in the insurance arena.
“There are already moves in the market to exclude cover or liability for statutory duty of care. This creates issues for everyone because, on one view, the insurance will not cover ‘all liability’ if it does not cover the newly created statutory duty of care” added Williams.
“The requirement that the cover obtained provides an adequate level of indemnity is also likely to cause confusion, even though the regulations list a number of guidelines to be considered. Building contracts will often specify minimum levels of cover required but whether they are adequate will need to be assessed on a case-by-case basis and practitioners probably now need to come to a more informed view about the level of cover required. Maybe the old adage that design and building practitioners should effect as much cover as they can afford is now even more apt.”
Williams suggested a proactive approach with clients regarding their risk profile and insurance solution.
“We’ve started working with our clients to understand what their exposures might be under the DBA Act and Regulations and how that might impact on renewal negotiations. Even more than ever, it will be essential that we start the renewal process as early as possible and be armed with detailed information in order to achieve the best outcomes possible. The process might not always lead to good news for clients but we think it’s better to understand the position at an early stage rather than later.”
Observations on the longer-term impact from an underwriting perspective
A strong industry advocate, MECON Insurance CEO Glenn Ross has been observing the changes from both the industry and an underwriting perspective.
“Cost increases on this scale have driven consolidation in the consultant industries. It’s more feasible for the bigger consultants to wear the increases and fund the premiums. Some tier one consultants at the bigger end of town have even closed down their Class 2 consulting engineering divisions, or are actively resisting doing Class 2 building or design work,” says Ross. “We’ll likely see a change in the makeup of the consultant and building industry, at least until the conditions have improved.”
“With time, the DBA Act should lead to far better building stock, and far fewer claims as a result. It will benefit insurers because we’ll have much stronger confidence in the quality and capability of builders and consultants when it comes to our appetite to insure them. It will benefit builders and consultants because this level of risk management should work to drive the price of their cover down.”
“And, most importantly, it will give the owners and occupiers of these buildings the peace of mind they deserve, both from a safety and a financial perspective.”
Kindly note that this article does not encompass all facets of the Act, it merely draws attention to some of the more salient features of the Act that could apply to our clients. It must not be relied on as general advice. Please obtain a copy of the Act for specific information.
You can access our previous articles on this topic here.