Combustible cladding: Building a solution 01

Various measures have been put in place to avoid the future use of combustible building products.  However, the challenge for building industry professionals and owners of affected buildings lies in the considerable combustible cladding legacy issues. 

Identifying the challenges ahead for the construction sector

Over the past two decades, innovation in building design and materials led to combustible cladding being used on the external walls of many Australian medium and high-rise buildings.  However, the catastrophic nature of London's Grenfell Tower fire and Melbourne's Lacrosse and Neo200 fires exposed the latent fire risks associated with combustible cladding.

The scale of the combustible cladding problem across Australia is gradually becoming clearer as the States and Territories make progress at different speeds to identify affected-buildings through cladding audits.  In the past 18 months, the States and Territories have passed a raft of legislative and regulatory reforms dealing with combustible cladding.  Now, the key challenge facing regulators, owners of affected builders and building industry participants is the remediation of affected buildings and removal of non-compliant cladding that poses a risk to public safety.  The obvious question arises – who will fund the removal of cladding identified as a fire risk on hundreds of buildings?

The Victorian Government is leading the charge when it comes to identifying buildings requiring rectification and funding cladding rectification works for privately owned buildings.  Following the example of the UK's decision to fund the replacement of combustible cladding on privately owned buildings, Victorian premier Daniel Andrews announced on 16 July 2019 a $600 million package to fund building rectification works, together with the establishment of a dedicated cladding agency, Cladding Safety Victoria.  

Building industry professionals, including design consultants, engineers and building certifiers, will be mindful of their potential liabilities for the selection, approval and installation of non-compliant cladding on previous projects, especially in light of the Lacrosse VCAT decision. The apportionment of liability in Lacrosse turned upon the particular factual matrix.  In other jurisdictions, variances in proportionate liability regimes and the ability of owners to rely upon statutory warranties may produce a different outcome.  Of course, liability will also hinge upon the factual circumstances surrounding the selection, approval and installation of cladding, including whether cladding was compliant with the National Construction Code (NCC) at the relevant time.  In going forward, construction professionals involved in cladding rectification work will be alert to the significant changes to the NCC imposing strict regulations on the use of bonded laminated materials (such as cladding), which came into effect on 1 May 2019.

In the aftermath of the Lacrosse decision, construction professionals are seeing their PI insurers imposing exclusions in respect of any liability in relation to combustible cladding and seeking to increase premiums to a point where the cost of insurance is prohibitive.  This may cause professionals to breach statutory licensing requirements or contractual provisions requiring insurances to be held.  Recently, both Queensland and Victoria have announced that they will relax statutory requirements to allow certifiers to remain licensed, despite PI cladding-related exclusions.  Similarly, NSW has amended the Building Professionals Regulation 2017 (NSW) to allow for exclusions to PI insurance.  While these steps avoid the construction industry grinding to a halt, professionals potentially remain exposed to legal liabilities that may arise in connection with past projects.

The Shergold-Weir Report called for a more robust regulatory framework for building and construction.  To date, the response to the cladding crisis has been conducted in a fragmented way.  As seen in our infographic below, there have been variances in how the States and Territories have sought to tackle the cladding issues.  This is an area that is evolving.  Given the disparate State and Territory approaches to addressing the combustible cladding crisis, the Building Ministers' recent announcement about national oversight on uniform building and safety standards is a welcome step.  We will keep you posted as further developments occur.

New risks for building owners and purchasers

The cladding crisis is set to have a direct impact on building owners and purchasers over the next twelve months, with insurance risks, compliance obligations and financing difficulties all coming to a head.

Existing owners

Building owners in NSW and Queensland are beginning to hit the compliance deadlines contained in the cladding related disclosure requirements legislated in August and October last year. Where NSW building owners were required to register their buildings by 22 February this year, Queensland building owners have been given an extension to 31 July 2019.

Purchasers

Those looking to purchase or refinance buildings in Australia will be affected by the increasing reluctance of lenders to be involved with properties that are suspected of containing combustible cladding. These fears are evident in the decision of listed non-bank lender Resimac to completely halt all new lending to cladding affected apartments.

Purchasers of potentially affected buildings (and of companies which own such buildings) should be incorporating cladding audits into their due diligence processes, and should be reviewing warranties given by vendors to ensure that they address combustible cladding risks and that any warranty claim period in a sale and purchase agreement is adequate. Prudent purchasers should also be negotiating retention arrangements to cover the rectification of any cladding.

In NSW, the legacy issues are intensified due to the retrospective nature of the aluminium composite panel ban that came into effect on 15 August 2018.  

Liability and insurance implications

Property owners

In buildings found to be affected by non-compliant cladding, property owners may well be claimants, seeking to recover their losses from third party professional service providers, or defendants, exposed to claims by lessees or visitors to their property.

In addition to undertaking the steps required under legislation, depending upon the risk of harm and the cost of taking remedial action, property owners may owe a duty of care to occupiers and entrants to take reasonable precautions to eliminate or mitigate the risks of identified non-conforming cladding products.  Property owners will be required to undertake a risk assessment of their buildings to determine the level of rectification or precautionary steps required to discharge their duty of care.   

In order to comply with their obligations of disclosure imposed by the Insurance Contracts Act 1984 (Cth), property owners may be required to disclose to their insurers any non-compliant cladding, and if so, what steps they have taken to protect against such risk.  If property owners cannot satisfy their insurer that the risks of any existing non-compliant cladding is being adequately managed, they will face increasing premiums or policy exclusions. 

The costs of rectifying any defective cladding, at least in the first instance, is likely to fall to property owners.  The typical insurance held by property owners, covering them for damage to their property, or liability to third parties, will likely not respond, in the absence of a fire or any actual damage, to cover the costs of rectification.  In these circumstances, property owners will need to consider whether those rectification costs can be claimed from professional service providers or others in the cladding supply chain.  

Professional service providers 

In cases of pure economic loss or diminution in value, it may be difficult for property owners to establish that the building professional owed a duty of care and particular consideration will need to be given to the relative vulnerability of the property owner and its ability to protect itself by contract in order to assess whether any such duty was owed by the building professional to the property owner. 

Where there is an incident or fire causing property damage or personal injury, claims are likely to involve multiple parties across the supply chain.  As demonstrated by the Lacrosse decision, how liability is apportioned across the supply chain will depend upon the facts of each case having regard to the conduct of each wrongdoer, any contractual arrangements between the parties and other issues of causation.

Maximising insurance recovery

Building owners who want to maximise the prospect that the builders and building professionals, including certifiers, have insurance cover for recovery claims, should immediately put on notice all potential defendants so that those parties can notify their insurers before their insurers apply exclusions for cladding claims.  

At the same time, and regardless of whether they are aware of a claim, builders and building professionals should develop a very carefully crafted and comprehensive notification to their current insurer to seek to trigger their insurance before their insurer applies a cladding exclusion.  If the notification is carefully drafted, it should operate to trigger current insurance, even if the cladding related claim is made after the insurance expires and after a cladding exclusion has been imposed.