Insurance challenge: rising building defects claims

"This is a widespread issue across Australia," says legal expert

Insurance challenge: rising building defects claims

Legal Insights

By Daniel Wood

This month, the NSW building commissioner ordered the demolition of sections of a Wollongong apartment development called “Wonderfield” because of structural defects. The Victorian government also called on industry bodies to take action because of “the rise of building defects.”

Not surprisingly, according to international law firm Clyde & Co, building defects claims against contractors are also on the up. “This is a widespread issue across Australia and globally,” said Sarah Metcalfe (pictured above), the firm’s special council.

Metcalfe said the current inflationary environment is making the slow progress of these claims – some can take many years – increasingly costly for respondents and their insurers.

Resolve claims early

“Keep claims Inflation at the forefront of your mind in these cases as it will inevitably negatively impact the cost to insurers of resolving claims,” she said. “Resolving claims early or rectifying the defects early, are good ways to mitigate the effects of claims inflation.” 

Metcalfe said these claims are usually about the construction quality but can also involve design failures or defects in the materials used to construct the building.

“The claims are typically brought by owners corporations, sometimes individual lot owners are also named applicants, against the contractor who constructed the building,” said Metcalfe. “Consultants are often named as respondents to the proceeding.”

She said the cases often involve sub-disputes between the respondent parties, for example, the contractor and consultants, about the cause of the defects.

Claims are “usually successful”

Metcalfe said these claims are “usually successful” with most resolved through negotiation.

“This is because it is often a straightforward task to establish that the defects exist and the owners corporations have suffered loss - i.e. the cost of rectifying those defects,” she said. “The owners corporations obtain expert reports from building consultants who explain why the method of construction or material is defective and not compliant with the relevant building contract or the National Construction Code.”

Rectify defects if possible

Metcalfe said the first thing an insurer should do when a building defect claim comes in, is talk to the insured.

“Is it an option for the insured to go back and rectify the defects?” she said. “This will typically be a much more cost-effective option for insurers than defending a dispute in VCAT.”

Metcalfe said there could also be recovery options available to insurers against other consultants or sub-contractors who may have caused or contributed to the defects.

“Rectifying the defects avoids the claims inflation that is very commonly associated with these types of claims,” she said.

Settling a claim: the next best option

If rectifying the defects is not an option, she said, the parties should try and settle the claim.

“Settlement becomes more challenging once a proceeding is commenced because these proceedings often involve significant claims for damages - upwards of $1million - and are usually multi-party,” said Metcalfe.

She said that because of the challenges resolving these proceedings, “they often drag out.”

“COVID-19 and the associated lockdowns, together with the Ukraine War, has resulted in a significant rise in the cost of building supplies and labour over the last few years,” said Metcalfe.

Meanwhile, as a building dispute drags on, she said, the cost of fixing the issues rises because of construction inflation but also because of general inflation.

“It costs a lot more to resolve a building defects claim in two years’ time than it does to resolve it today,” said Metcalfe.

No end in near sight

The Clyde & Co special counsel said the number of claims looks set to continue going up.

“With the pressure contractors are under at the moment, I expect we will continue to see a rise in the number of defects claims brought by owners corporations over the next six to 12 months,” she said.

A report on the Victorian government’s website said some building defects “may be linked to design issues.” The report said common factors causing the defects include time and cost pressures, but also “unreasonable client demands and expectations.”

The government also said there is evidence of a poor culture of regulatory compliance “among limited pockets of practitioners.”

Do you offer insurance coverages to the construction sector? What’s your take on the rising number of building defects claims?

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