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PI pullout chips away at building industry’s foundations

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The thousands of building surveyors, certifiers or construction industry operators who are required by regulation to have professional indemnity (PI) insurance are facing a dilemma that may well force them out of business.

The only insurer in Australia providing PI cover free from exclusions is pulling out next week. Like all the other insurers who have already abandoned the market, the insurer decided the risks associated with the crisis-plagued building industry are simply not worth the gamble.

In states such as Victoria, NSW and Queensland, exclusion-free PI is a licence requirement for building surveyors and many associated specialists.

Industry sources insuranceNEWS.com.au spoke to declined to reveal the name of the insurer, which is based overseas. But one thing is for certain: the growing crisis in which the Australian building industry finds itself has ramifications for the insurance industry.

That the situation has come to this is not a surprise.

In the UK, some safety inspectors have temporarily stopped operations after insurers pulled the plug on PI cover to the construction sector following the Grenfell Tower fire in 2017.

The PI problem in Australia has been brewing for several years as it becomes increasingly obvious many of the high-rise buildings sprouting up in cities across the country are potentially problematic.

Flawed fire safety designs and the use of flammable cladding materials, similar to that found on Grenfell Tower, are spooking insurers – and rightly so.

“Because of the cladding issue and the highly variable responses from each jurisdiction – and they have all gone in different directions – there is a high lack of confidence for those underwriting professional indemnities,” Insurance Council of Australia GM Risk Karl Sullivan told insuranceNEWS.com.au.

“Exclusions relating to working with cladding have come into nearly every product and prices have gone up for PI covering certifiers, surveyors and building professionals.”

No wonder. After years of underpricing, the Australian PI market has finally caught up with the realities of the situation.

The average PI insurer loses about 16 cents for every dollar earned, according to last week’s Ministerial Construction Council extraordinary meeting, called by the Queensland Government.

“Claims are increasing substantially higher than premiums earned and we’re presently seeing a rebalancing of the smaller Australian PI insurance market as part of a global shift,” the council says in a post-meeting communique obtained by insuranceNEWS.com.au.

Bovill Risk & Insurance Consultants MD Chris Bovill describes the situation as “very serious”.

“While there are many building surveyors who currently have compliant cover in place, thereby allowing them to continue to practice, their policies will expire over the coming 12 months,” he told insuranceNEWS.com.au.

“If the current market turmoil continues and they are not already insured through the remaining market, they may face difficulties with their regulators in satisfying the required PI insurance obligations.”

insuranceNEWS.com.au understands some states are accepting PI policies that are “non-compliant”, while Victoria and NSW are considering their options.

Queensland so far wants the status quo to remain.

“That may require a change in its position in the coming few months if it begins to impact the process of securing building approvals,” Mr Bovill said.

“The resolution often touted by many in the insurance industry is for all regulators to allow PI policies with exclusions.

“This does not resolve the issue of consumer protection, but simply transfers the potential liability from the insurer’s balance sheet to the balance sheet of each individual building surveyor, most of whom would become insolvent if faced with a $1-$2 million claim for re-cladding.”

Victoria’s Planning Minister Richard Wynne believes a “national approach to insurance” could be the solution.

“We are holding a lot of meetings with insurers and their representatives to talk through the issues, give them a fair hearing and find a way forward,” he told insuranceNEWS.com.au.

“We will have more to say on cladding shortly, but we are also looking for a national approach to insurance because this is a national problem. We are in regular contact with our interstate colleagues and are fully aware of the urgency in finding a solution.”

Whatever Mr Wynne and his counterparts are planning, half-baked measures won’t solve the problem.

Their response must address the systemic issues plaguing the building industry. Otherwise, they will be hard-pressed to find insurers willing to provide exclusion-free PI covers or similar with less stringent conditions.