Home / Analysis / Cladding fallout: insurers burn building industry
23 July 2018
Insurance impacts from flammable cladding are biting more deeply a year after the Grenfell Tower disaster in London and more than three years after fire raced up Melbourne’s Lacrosse building.
Building surveyors’ professional indemnity (PI) premiums are often doubling, with some rising up to 400% in recent renewals, while residential owners’ corporations are seeing higher prices and excesses for buildings with cladding risks.
Surveyors, who are required to have PI insurance under ministerial orders, are worried cladding-related exclusions could affect their registration and leave projects in limbo.
Problems were apparent before the latest mid-year renewals, with the Australian Institute of Building Surveyors (AIBS) facing a fragmented system involving a range of bodies across state and federal jurisdictions.
AIBS National VP Wayne Liddy says a slow and inadequate response by governments and regulators has contributed to insurers’ unease and the introduction of “extremely onerous” policy exclusions.
“Ultimately, if the insurance syndicates have an understanding of what the requirements are, whether they agree or disagree, at least there can be some dialogue and some resolution, or governments are going to have to start underwriting the statutory building surveyor,” he told insuranceNEWS.com.au.
David Blackett, director at Sydney-based certification business Blackett Maguire + Goldsmith, says practitioners have been frustrated by insurers’ broad-brush approach to the issue.
“The insurance industry has said: whether you have a claim or not, whether you deal with compliant products or not, it doesn’t matter; anyone who touches anything to do with composite facades, from here on we will be issuing exclusions,” he tells insuranceNEWS.com.au.
Some insurers have provided cover without exclusions this year, but the premium increases could be unsustainable for the sector, he says.
Insurance Council of Australia (ICA) GM Risk Karl Sullivan says some PI insurers have introduced non-compliant cladding exclusions in recent weeks, for a number of reasons.
“These include perceptions of gaps in the regulation of the construction process following building certification privatisation and possible gaps in other regulatory frameworks, including Australian Standards and the National Construction Code, which may have contributed to a systemic failure,” he writes on his LinkedIn page.
He says insurers are taking various approaches and certifiers should use experienced brokers who are able to source cover offshore if necessary, to find a product that best suits them.
Much of the business ends up in the Lloyd’s market, attuned to cladding dangers following the Grenfell Tower fire that killed 72 people in June last year. Fire experts told a public inquiry last month that aluminium composite cladding was the “primary cause” of the blaze’s spread.
Other professions affected by combustible cladding issues include architects, structural engineers, project managers and fire engineers.
Some surveyors are said to be accepting policies that are available but do not meet statutory requirements.
The AIBS has advised governments to allow registration of its practitioners with exclusions, as an interim measure so they can continue to work. But it warns this is “most unsatisfactory” for surveyors and the public.
Audits of cladding on private and public buildings are continuing as the country grapples with a problem driven by the high-rise construction boom transforming Australian cities.
The Lacrosse building in Melbourne’s Docklands had cladding imported from China that was not tested to comply with Australian standards. If tests have not been conducted, it remains difficult for someone buying an apartment to know if there is a cladding problem.
In a Senate inquiry submission last year ICA warned the presence of flammable cladding could result in premium spikes or even a refusal to offer cover. Insurers, through ICA, have developed a protocol for identifying risks, with fire engineering contractors available to assess buildings.
ICA is engaging with the Warren Centre at the University of Sydney, which is examining related fire safety matters.
CHU National Underwriting Manager Peter Jones says strata premium rises depend on the percentage of panel polyethylene and factors such as the amount of the building covered and the configuration.
“What we are doing is applying excesses if there is a fire that involves the cladding as well,” he said.
“The excesses in strata have been really quite low in comparison to industrial risks or probably even contents insurance.”
In some cases that could mean an excess jumping from less than $500 to $25,000-$50,000, with the cost spread across owners in developments that may have at least 100 units.
The Building Ministers’ Forum, which includes federal, state and territory ministers, this year received an experts’ report that made more than 20 recommendations to overhaul compliance and enforcement.
The forum will discuss the way forward at its next meeting, expected on August 10, as pressure grows to overhaul the system and deliver greater certainty, and the insurance industry and its clients grapple with the repercussions of the flammable cladding issue.
“As we go into the 2019 renewals process, a lot of us will be holding our breath to see what happens,” Mr Blackett said.