Flammable cladding and risk

Flammable cladding and risk | Insurance Business

Flammable cladding and risk

The insurance industry must ponder new approaches to cladding, as insurance brokers face client management challenges, writes Matthew Curll

We are still understanding flammable cladding’s serious knock-on effects for the general insurance industry. But one thing is becoming clear – momentum could accelerate, and old methods may struggle to solve the problem.

Rectification costs could theoretically reach billions of dollars and flow through to purchasers of third party liability insurance programs. If a co-ordinated effort between insurers and brokers cannot be achieved, there may come a time when many constructionbased supply, installation and professional advisory and compliance business will have gaps in cover for cladding risk. 

Broker challenges centre around the following:

  • the cost of reinsuring affected properties, and coverage terms including exclusions
  • property owners who rectify non-compliance and seek to pass cost along the chain of responsibility
  • proactive, yet uneven, government intervention (uneven due to Australia’s decentralised government), thus forcing rectification
  • fire, consequent property damage and personal injury

Current forces at play

The Victorian Building Authority issued an order to replace Melbourne’s Lacrosse tower cladding – reported figures suggest $6.5m incurred to date and $9m to replace the cladding.

Two other Victorian apartment towers have orders to remove cladding. Anstey Square apartments on Sydney Road, Brunswick, is clad in the same material used on London’s Grenfell Tower. The cost to replace the cladding is estimated at up to $3m.

The building’s insurance premiums have risen from $29,000 last year to $134,000 this year, according to reports. The excess has increased from $1,000 to $100,000.

Thousands of high-rises are potentially non-compliant. Eight Victorian hospitals have non-compliant cladding. Newspapers report the major builder of the Melbourne’s Royal Women’s Hospital has agreed to replace non-compliant cladding.

Which policies are likely to be affected?

Cladding issues may involve the following policies (subject to exclusions):

  • First party: Property policies, product recall, contract works, ISR/property policies
  • Third party: Professional indemnity and public and products liability policies
  • Hybrid: Mitigation extension, inquiries cost cover, and D&O policies

Insurers will protect themselves by implementing broader product liability exclusions, specific/non-compliant product exclusions, corresponding professional service exclusions, indemnity caps, higher excesses, and subrogated recoveries.

What lies ahead for brokers?

We can’t see brokers being criticised for conduct to date. But things are moving quickly and brokers in the construction sector will need to be dynamic and ensure they have processes to cover themselves.

Many brokers will need to dig deeper to understand the risks involved – they may need to develop new processes and questionnaires. It’s a great opportunity for brokers to strengthen their risk management and client connections. Many brokers and some underwriters are encouraging their insureds to undertake risk audits to assess and rank projects for risk according to cladding composition (especially polyethylene) and fire safety system adequacy.

Brokers must monitor the Victorian Government audit and rectification program. If this gathers momentum and NSW and Queensland follow suit, some insurers will quickly suffer large hits – insurers may drop out rapidly without good communication and collaboration in the market.

The natural tendency for insurers will be to duck for cover as their insurance products become impacted. Brokers must be ready for this to happen at short notice.

Insurers need to be reminded that this is largely now a post-construction risk, so at worst it should result in exclusions or larger excesses and smaller limits, rather than a complete refusal to renew or offer cover to insureds.

We could argue that any long-term solution needs to come from outside the insurance industry – the insurance industry cannot afford to cover cladding removal from all buildings nationwide. But within the insurance industry there may be the opportunity to pull together in advance and do something different, before the forces at play cause a crisis. 

It would be interesting to see what collaboration at a high industry level between the ICA, NIBA, insurers and reinsurers could achieve. This should be encouraged. The Victorian Taskforce has engaged with the ICA but is going to revisit the impact of insurance as things unfold.

Thinking outside the box, major banks have indicated to the Victorian Taskforce that there may be low-cost fi nancing products available to strata plans to assist with rectifi cation costs. Is there a potential business opportunity for brokers and insurers to weave the banking industry into solutions o ered by the insurance industry? It will be interesting to see what unfolds and who will take up the opportunity.

Matthew Curll is a partner at Hall & Wilcox, where he manages product and property liability, professional indemnity, D&O and EPL claims, first party property claims and associated recoveries for clients nationally.