What are the legal and insurance implications of the recent furore regarding cladding in Australia?

This was considered at a Norton Rose Fulbright panel discussion, “What does the future hold for cladding in Australia?”, by partners John Moran, Emmanuel Confos and Katherine Morris, and Christina Knorr, Chief Fire Engineer at Stephen Grubits & Associates.

The issue of cladding used on buildings has been brought into the global spotlight following the Grenfell fire in June 2017. If used in a certain way, cladding can speed up the spread of fire, causing a risk to occupants and the building structure. Cladding is commonly used to improve the appearance of buildings.

Legislation and proposed product recall powers

Katherine Morris outlined amendments to the Queensland Building and Construction Commission Act 1991 (QBCC Act) made by the Building and Construction Legislation (Nonconforming Building Products – Chain of Responsibility and Other Matters) Amendment Bill 2017 which was assented to on 31 August 2017.

The new measures, which are expected to be adopted as a model law by the other states and territories, include:

  1. Chain of responsibility, which will impose obligations on all participants in the supply chain that led to the cladding being installed in an unsafe manner;
  2. A positive obligation to ensure products safe and fit for purpose; and
  3. An accountability mechanism where the QBCC can impose remediation orders. Liability may arise from failure to rectify or address issues.

Insurance implications

During the panel discussion, insurance partner John Moran provided an overview of the professionals and companies who may potentially be liable under both legislation and common law, and the policies which may respond.

Professionals vulnerable to exposure include building certifiers, builders, developers, architects, surveyors and valuers. Executive officers of these companies could also be potentially exposed.

The Victorian Building Authority conducted an audit of 170 high rise residential and public buildings in the wake of the Lacrosse fire of 2014. It found that not any one professional was consistently responsible for the use of non-compliant cladding, but that all potentially played a role.

In terms of insurance policies that may respond, John mentioned that the following could be exposed to cladding risk:

  1. Property insurance policies that may cover damage and loss of life;
  2. Professional indemnity policies that cover professionals;
  3. Product liability and recall policies; and
  4. D&O policies, depending on the level of knowledge possessed by executives.

Damage and loss caused by cladding also raises several issues that may arise during the assessment of a claim, and should be considered by Underwriters, such as:

  1. Operation of aggregation clauses – what constitutes a single claim?
  2. Limits – are insurers going to be willing to extend limits in light of the expensive nature of such claims?
  3. Non-disclosure – was the risk of cladding known and disclosed prior to the inception of the policy? The insurer may look to apply the duty of disclosure in section 21 of the Insurance Contracts Act 1984, noting that s 54 of the Act enables the insurer to reduce the payout on a claim to the extent of prejudice it has faced due to the non-disclosure.
  4. International scope – litigation could occur anywhere in the world, for example, the manufacturer may be based overseas and claims may be brought against it there.

John emphasised that this is not a new risk to insurers – it has been well known for some time. However, it has certainly been made more prominent due to media coverage. Some insurers are taking steps to limit their exposure to this kind of risk.

More information about non-conforming building products including cladding can be found here.