Combustible cladding has been a developing issue in the construction industry in recent years, attracting scrutiny from media and the insurance sector in Australia as well as overseas. The prevalence of the historic usage of the highly flammable material in buildings and construction as well as resulting tragedies, combined with the associated future risks and potential fire damage continue to have a significant impact on the insurance industry.
The publicly-appointed statutory authority Cladding Safety Victoria (CSV) carried out a research analysis around non-compliant use of cladding and published a report of its findings in July 2024. Let’s take a closer look at insights from the report, Compliance in building design, and the potential implications of the combustible cladding situation for professional indemnity insurance and claims.
Who is CSV?
Cladding Safety Victoria was established by the Victorian government in 2020 to address the challenges posed by the widespread use of combustible cladding on buildings. CSV worked with building owners and relevant industry stakeholders to identify, assess and remediate buildings with non-compliant combustible cladding.
Key takeaways
CSV's research report analyses the original plans and permits of 1,000 privately-owned apartment buildings. It reveals widespread misapplication of the regulatory requirements by architects, draftspersons, fire safety engineers (FSEs), and building surveyors. It found:
- Widespread non-compliance with combustible cladding: 72% of buildings reviewed used combustible cladding in a non-compliant manner. Architects and draftspersons specified such cladding in 75% of cases, FSEs assessed it for suitability in only 15% of cases, and building surveyors issued permits without adequate performance solutions.
- Lack of regulatory oversight: The Victorian Building Authority (VBA) and other regulatory bodies failed to ensure compliance, allowing unsafe building practices to proliferate.
Limitations of the research
Various industry experts have highlighted that the narrow focus limits the conclusions that can be drawn from the research. For example:
- The Australian Institute of Building Surveyors (AIBS) has highlighted concerns around current design and construct procurement methods directly contributing to adverse delivery outcomes. It also flags that there is ambiguity in the Building Code of Australia prior to the out-of-cycle amendment in March 2018.
- The Association of Consulting Architects Australia (ACA) has highlighted the multiple class actions taken against cladding suppliers as an indication there are potential widespread issues relating to misleading product information, reliance on other professionals and misinterpretation of complex codes. The ACA has also inferred the report places unrealistic responsibilities onto those with professional indemnity insurance, including architects, yet downplays broader systemic failures across the building industry in product certification, regulatory oversight and industry practices.
Implications for professional indemnity insurance
Cost of recovery claims
The CSV report raised concerns about the claims exposure faced by construction professionals. It remains to be seen what specific approach the Victorian Government will take to recover the $600 million spent on remediating high-risk buildings as identified in the report. However, these potential recovery actions could have significant implications for the insurance market. Insurers continue to navigate the evolving situation to attempt to understand their true exposure to these recovery claims.
Bulk cladding claim notifications
The CSV report references the Lacrosse decision (Owners Corporation of PS613436T v LU Simon Builders P/L VCAT 286) which found consultants primarily liable. In the wake of this landmark case, insurers swiftly responded. A number of major insurers exited the market entirely, while those that remained began to implement broad cladding exclusions in their policies from 2019 onward. As a result, and in an effort to mitigate uninsured exposure for future cladding claims, many construction consultants proactively made bulk claim notifications to their insurers before their policies expired between 2019 and 2020. The rationale for these insureds making bulk notifications was to capture the cladding exposure within a policy period that was not subject to any exclusions.
This has potential complex implications. Among them, these bulk notifications will likely be subject to aggregate limits of insurance. For insureds who have notified numerous projects, this means that there is the potential for their policy limits to be exhausted, leaving them with some remaining claims uninsured.
Consequently, consultants in the construction industry may not have sufficient limits in place under their insurance policies to effectively respond to potential recovery actions. This raises concerns about their ability to meet the financial demands of such claims, if/when they arise. As a result, affected insureds may need to pursue claims against their current insurance policies to respond to potential recovery actions. This approach may result in some uninsured exposures, depending on the level of cladding coverage in place. The potential for uninsured claims further complicates an already challenging landscape for insurers and policyholders alike.
Market response and impact
Following the 2019 Lacrosse decision, the professional indemnity insurance market also responded swiftly and adversely (ie. higher pricing, less availability and stricter conditions of cover) in response to the potential for systemic claims across construction professionals. As and when cladding related claims eventuate into paid losses, the market will again need to critically review and respond.
Insurers will be likely to consider:
- quantum of losses,
- apportionment between parties,
- whether previous insurers, current insurers or the insureds ultimately bear the costs of the losses,
- demonstratable and proactive risk management practices from the construction industry and specific professions. These will help to mitigate insurers’ concerns on future issues related to combustible cladding.
The impact on the insurance industry of potential recovery actions remains to be seen. If the outcomes from recovery actions are less favourable than insurers have forecasted and allowed for, the recent softening of the professional indemnity insurance market may see a shift, with impacts on pricing, availability and breadth of cover.
Learn more
If you have questions about the CSV report or would like to know more about the implications of combustible cladding on your insurance coverage, please contact your Marsh representative.
