High Court hearing for strata owners could shake-up construction insurance

High Court hearing for strata owners could shake-up construction insurance | Insurance Business Australia

Construction & Engineering

High Court hearing for strata owners could shake-up construction insurance

Proportionate defence is at stake

Construction & Engineering

By
Daniel Wood

Today, an appeal hearing in the High Court of Australia could determine the future of the proportionate liability regime used by insurers and construction professionals in NSW for the last two decades.

“At stake in this case is whether developers, builders and consultants can continue to rely on proportionate liability as a defence under the Design and Building Practitioners Act 2020 (NSW) (DBPA) when they face claims for building defects,” said James Rigney (pictured above).

Sydney-based Rigney is a partner and construction insurance specialist with global law firm Clyde & Co.

Wednesday’s hearing follows a series of recent NSW legal cases under the Design and Building Practitioners Act 2020 (NSW) (DBPA), that Clyde & Co. says have “disrupted the status quo in relation to claims.”

Until recently, proportionate liability has allowed construction industry stakeholders to shift part of the blame for defects and other issues to subcontractors, or other parties, without needing to issue cross claims. However, if the appeal wins, said Rigney, the proportionate liability option could become unavailable.

“This is likely to add pressure to insurance premiums that are already high for contractors and consultants,” he said. “The Owners Corporation argues that the DBPA imposes a non-delegable duty on developers and builders, meaning they are fully responsible for the negligence of subcontractors.”

He said this argument does make sense from a consumer protection perspective.

“It ensures that those ultimately responsible for the project bear the risk of defects, even if they delegate work to subcontractors,” said Rigney.

The developer and builder, he said, argue that they should be able to rely on proportionate liability, which would allow them to apportion blame to subcontractors or other “concurrent wrongdoers.”

“In other words, [they argue that] much of the construction industry is based on allocating risk to downstream parties such as sub-contractors, and they should be entitled to do that, so as to offset their own risk,” he said.

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Consultants are also impacted

Consultants, including engineers, architects and certifiers are also impacted by the Pafburn case.

“They could face increased exposure if the High Court upholds the view that proportionate liability defences are unavailable under the DBPA, making them fully liable for any defects arising from their work, even if subcontractors or others contributed to the issue,” said Rigney.

He said guidance expected from the judgment will clarify whether consultants can still rely on proportionate liability or whether they too will face a non-delegable duty of care.

“This is crucial for determining the extent of liability consultants may face and how it will affect their professional indemnity insurance,” he said.

How well has proportionate liability worked?

The legal insurance expert said that, in his experience, the old regime of proportionate liability did not result in excessively drawn out or expensive legal battles over building defects. If anything, it sped things up.

“Owners typically have direct statutory warranty claims against builders and developers that are non-apportionable anyway,” said Rigney. “In those matters, the proportionate liability regime does not come into play.”

Stakeholders say the rising number of building insolvencies also plays into construction issues.

“Without the ability to plead proportionate liability defences, other parties in the litigation are more exposed, and are often looked at to make up any shortfall,” said Rigney. “Another issue in residential apartment construction has been the time taken by some Owners Corporations to prepare and prosecute their claims.”

In cladding disputes, this time lag can be a result of involvement from Project Remediate that requires all ACPs to be removed from the building before it can grant its interest free loans.

Is affordable quality possible?

Rigney suggested that the current challenge is finding a balance between improving building quality through new regulations but not placing excessive compliance and financial burdens on developers and builders.

“The market remains challenging for builders and consultants,” he said. “With interest rates high, builder’s margins are lower than ever and this creates pressure on the consultants because the builders will seek to pass on more risk in a project to preserve slim profit margins.”

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