Preparing for the second wave

There’s a second wave of cladding litigation coming – and insurance brokers need to have robust conversations with clients about the need to act. Now.

BY MARTIN WANLESS

Just last month, the cladding issue that’s been rumbling along ever since the 2017 Grenfell Tower disaster in London, was brought back to the forefront of everyone’s minds as footage was broadcast from the Italian city of Milan.

A 20-storey apartment building up in flames; the fire rapidly fuelled by cladding. Fortunately – miraculously – no one was seriously hurt, and no lives were lost: but that was down to good fortune, rather than good planning.

And it’s a stark reminder for all of those involved in buildings with cladding – from consultants to builders, owners to strata committees – that this is still very much a ‘live’ issue, which states are addressing through different rectification schemes.

And the rectification work is likely to see a ‘second wave’ of legal activity.

“Victoria alone is doing $600m of cladding rectification,” says Todd Woodard, Professional & Financial Risks, Portfolio Manager – Commercial PI Asia Pacific of Liberty Specialty Markets.

“There are a lot of building owners waiting around for guidance from the government, and a lot of litigation that was waiting on the Lacrosse decision (see breakout on page 36).

“Over the next 18 months the industry will see a number of claims being paid out, and some Australian underwriters are putting a framework together about how to deal with cladding claims, in order to reduce costs.”

“There’s an enormous pipeline of litigation, and a substantial number of cases already underway,” confirms Jonathan Newby, Partner at Colin, Biggers & Paisley Lawyers. Newby was involved in the Lacrosse case, which was the first to go through the court system.

Victoria alone has committed $600m to fixing non-compliant cladding, however this money will be recovered from somewhere, and the Victorian Government has said this will be pursued from builders and building consultants.

“However, they won’t go down that path until they actually know how much money they’re going to spend,” says Woodard.

“There’ll be exposure on the strata side, on property managers, on the real estate side of the industry, whereas previously there’s been more talk about the construction side of things.

“Construction companies are always near the top of the list for insolvencies, and if the builder, engineering firm or contractor has gone out of business, it’s going to be the strata owners who are left.”

It’s expensive business, and it’s no surprise insurers are taking a very cautious approach.

“The NSW Government is estimating each residential building is going to cost $4m to fix,” says Newby. “That’s not my experience. Yes, there are some that can be done for the low millions, but there are buildings that will cost in the region of $20m to rectify.

“If the contractor bears the cost of that initially, then there’ll be subsequent proceedings to try to get contributions from the fire engineer who signed off on the use, the architect who nominated the use of the material in the first place and the certifier, who should have caught the problem.

“You then get the snowball effect, and the aggregate cost would be in the billions and that’s more than the insurance market can bear. I can understand why many have walked away.”

THE CHALLENGES THAT AWAIT

For building owners and strata committees that haven’t yet begun the rectification process, the onus is on them to identify whether or not work is necessary – and

“Construction companies are always near the top of the list for insolvencies, and if the builder, engineering firm or contractor has gone out of business, it’s going to be the strata owners who are left.”

“Quite simply, if you’re involved with a building that has cladding, you have to do something. At the very least, you need to get it signed off verifying it is compliant.”

– STEVEN TCHEPAK, CHU UNDERWRITING

Steven Tchepak, National Underwriting Manager of CHU Underwriting, says it’s not an issue that can be ignored any longer.

“A few years ago, if a client wasn’t fully aware about the cladding issue you would excuse that. But over the past few years there has been plenty of media coverage on the topic, and the need to check and rectify cladding is what we as insurers would call ‘material fact’ – it’s something that people are aware of.

“Quite simply, if you’re involved with a building that has cladding, you have to do something. At the very least, you need to get it signed off verifying it is compliant.”

For brokers, having a comprehensive understanding of the risk exposure created by non-compliant cladding on a client’s property is incredibly important, says Peter Ooi, Manager, Underwriting Strategy at SUU.

“Having that detailed understanding will help support an insurer’s assessment of the exposure relative to their specific underwriting appetite.

“Further to having a comprehensive understanding of the risk exposure, it is vital to be able to share a plan for remediation work, if remediation work is necessary, as well as risk mitigation steps taken to address the exposure in the short term.

“It’s important for brokers and their clients to know that a lack of information, lack of remediation planning, if warranted, and a lack of risk mitigation will further increase challenges with insurance placement on top of an already difficult position.”

THE LACROSSE APPEAL

In April this year, the Court of Appeal of the Supreme Court of Victoria gave judgment in various appeals related to the Lacrosse Apartment fire in 2014, providing some insight into how future litigation may proceed.

Colin, Biggers and Paisley represented builder L.U. Simon, who had successfully been sued by the owners of the building. The court of appeal ruled that L.U Simon was entitled to pass through 97 per cent of its exposure to the owners to the building surveyor, Gardner Group, the architect, Elenberg Fraser and the fire engineer, Tanah Merah, with L.U. Simon retaining three per cent.

This decision set out three key findings, according to Colin, Biggers & Paisley: • The debate over whether or not ACPs ever complied with the ‘deemed to satisfy’ criteria of the BCA has been settled, with the court holding that they did not and do not. • Whether a builder took reasonable care in the discharge of its duties is to be looked at in all the circumstances. There were certain findings as to the builder’s state of knowledge around

ACPs that aggrieved some parties but sustained the finding that the builder had sought out and deferred to subject matter experts. • The court also took up a point upon which there has been some judicial uncertainty concerning the proportionate liability regime. Based on the reasons, if a claim by its character is not one that relies on a failure to take reasonable care, it is not apportionable.

“However, we need to see these issues being addressed. Understandably, COVID-19 has delayed some work happening, however, building owners need to have a plan in place to deal with any cladding issues – and begin that work.”

PROACTIVITY IS KEY

Those conversations around cladding and the risks that come hand in hand are critical, because in every aspect of this being proactive is essential: especially when it comes to insurance.

“What we look for when we’re providing insurance is a level of proactivity,” says Tchepak.

“We are prepared to continue to support clients in this market, if they can diligently show that they are taking all steps that a reasonable person should be expected to take. We actually haven’t declined to offer cover exclusively because of cladding – we may have due to a combination of cladding and other defects – but not purely based on the cladding.

“However, we need to see these issues being addressed. Understandably, COVID-19 has delayed some work happening, however, building owners need to have a plan in place to deal with any cladding issues – and begin that work.”

CHU prices the risk of cladding into the premiums and excesses offered to the insured.

Many other insurers, however, have put cladding exclusions into policies, which Tchepak views as potentially problematic moving forward.

“The strata legislation, regardless of where you are, does require owners corporations to ensure full replacement and reinstatement value, so if you’re providing an insurance policy that excludes a component of a building, it would require legal advice as to whether it’s meeting a requirement of the Act.”

From a risk management perspective, the need to take action certainly falls into the ‘urgent’ category.

“If an incident did occur, everyone who may be a party to the claim will become involved,” says Tchepak. “So, if you’re in charge of actioning matters on behalf of a building, and evidence comes out that you were aware of a hazard or had noncompliant cladding and chose to not do something about it, it may not end well.”

Far from being old news, cladding is about to make headlines again – and all of those involved, from brokers to building owners, builders to certifiers, must be prepared to act.

INSURANCE COUNCIL OF AUSTRALIA ACP CATEGORIES

Last year, the Insurance Council of Australia published four general categories of ACPs (aluminium composite panels), ranging from A (high fire risk) to D (non-combustible).

A. 30-100 per cent Organic Polymer and 0-70 per cent inert – similar to Category 3 in the BRE appendix. Inert materials are considered those that do not contribute to combustion. ACPs in this category typically have close to 100 per cent organic polymer in their core and were identified by most manufacturers as PE (Polyethylene) core. Some core binders are polymers other than PE.

B. 8-29 per cent Organic Polymer and 71-92 per cent inert – similar to Category 2 in the BRE appendix. Typically identified by ACP manufacturers as fr, FR, Plus or rated Class B per EN 13501, and typically have around 30 per cent organic polymer in the core. However, some State Regulations limit the PE content to less than 30 per cent for this category.

C. 1-7 per cent Organic Polymer and 93-99 per cent inert – similar to Category 1 in the BRE appendix. Typically identified by ACP manufacturers as A2, rated as Class A2 per EN 13501. These are considered as having very limited combustibility. Testing to EN 13501 and obtaining class A2 is a valid alternative.

D. 0 per cent Organic Polymer and 100 per cent inert – similar to Category 1 in the BRE appendix. Typically, panels tested or deemed noncombustible by the building code (National Construction Code). These could be aluminium skins with low adhesive aluminium honeycomb cores, compressed fibre cement core or even compressed fibre cement panel. Steel panels with calcium silicate or similar core.