Non-compliant Cladding and Insurance Exclusions
Insurance specialist Laurence Gottlieb explores the issue of non-compliant cladding and other materials, warning of the changes afoot in the insurance industry.
The issue of non-compliant cladding is causing much concern for property owners, regulators, consultants and insurers. Architects can take measures to ensure that they do not expose themselves to future risks of specifying non-compliant cladding but what about all the projects that have already been completed? Professional indemnity is “claims made” insurance. This means there must be a valid policy in place at the time you first become aware of, and notify a claim or circumstance to your insurer, regardless of whether the claim relates to activities performed in a previous policy period. Therefore, the PI policy you have in place today will be the policy that you notify a claim under if you became aware of a matter today. Not the policy you held when you did the work.
Over the last year or two, the insurance market has begun to harden and it is predicted to get worse over the next few years. Rates and premiums have increased, and underwriters have begun restricting policy coverage. Most PI insurers are now introducing exclusions for claims arising from the use of non-compliant cladding, and due to the claims made nature of PI policies, these exclusions could leave you uninsured for past projects.
Not all exclusions are equal. As always, the devil is in the detail. Some are very broad and exclude “any building material that is non-conforming or non-compliant with the National Construction Code, the Building Code of Australia, the Australian Standards or any other applicable laws or regulations”. This type of exclusion goes well beyond non-compliant cladding and leaves the architect uninsured for claims arising from any non-compliant material or potentially design. This could include tiles, screws, glass, railings etc.
On the other hand, there are more moderate exclusions that seek to exclude claims arising only from the use of non-compliant aluminium composite panels, or even narrower ones that just exclude Aluminium Composite Panels with a Polyethylene core. It is important to note that no matter how narrow or broad the exclusion, it will apply to all projects, past and future, unless it specifically states that it only applies to future work or work after a certain date.
Once an exclusion is imposed, architects should review the cover provided and adjust their activities to reduce their ongoing exposure. They should also be aware of engaging sub-consultants. If you engage a sub-consultant, you become liable to the client for the work of that sub-consultant. Most PI policies provide cover for your legal liability when engaging sub-consultants. However, if a subsequent claim is made against you for the actions or errors of your sub-consultant and that claim is in connection with non-compliant cladding, you may be faced with no cover. For example, if you engage a fire engineer as your sub-consultant, and there is a subsequent claim arising from non-compliant cladding, the client will usually bring the claim against you as lead consultant. Depending on the nature of the exclusion, you may have no cover for your liability nor defence costs relating to the claim. This scenario can be avoided if the client engages the sub-consultant directly.
We recommend that you discuss any non-compliant product exclusion with your insurance broker to ensure you fully understand the extent of the exclusion and the potential impact it may have on your business.
Laurence Gottlieb is the Victorian State Manager of Planned Cover, providing insurance placement and advice, risk management and claims management services, primarily to construction professionals. He is a lawyer by profession and has also worked in corporate finance for different banks in South Africa before moving to Australia in 2002. Since then he has worked at different insurance brokerages and has had 15 years’ experience in professional risks, specialising in professional indemnity insurances.
Planned Cover is an ACA Corporate Sponsor.
Photo: Jennifer Beebe, Pixabay