CLADDING RISK PERSISTS DUE TO AN ABSENCE OF INDUSTRY STANDARDS
Following the fire-related tragedies of recent years there has been a greater focus by insurers on properties that use aluminium composite panel (ACP) cladding, particularly for those buildings exceeding eight floors or involving a residential strata.
- We are now seeing ACP emerge as a discussion point with regard to general liability.
- Some insurers are now capping or sub-limiting liability exposures.
- There are no industry guidelines for the management of ACP cladding risk.
- The confusion around responsibility for removal of ACP cladding is also causing professional liability exposure.
- Insurers are either imposing a blanket exclusion or a very small sub-limit for those with ACP-associated risks.
- Professionals such architects, surveyors, certifiers and fire engineers have been left exposed.
- To date there have been no restrictions in relation to ACP-associated risks imposed by those insuring directors and officers.
To date insurers have not restricted cover. That said, however, we are now seeing ACP cases emerging as a discussion point with regard to general liability cover.
When seeking cover for buildings containing ACP cladding there is an expectation (particularly in the context of larger property owners with substantial portfolios) that reviews have been conducted to determine potential exposures. In addition, it is expected that these site audit reports are augmented with details on how potential issues with flammable materials are being remediated, including what risk management programs are in place.
Additionally, clients acquiring property are being asked about cladding and remediation as part of the due diligence and purchase process, and some insurers are now capping or sub-limiting liability exposures.
Despite these requirements there are no industry guidelines currently in place for the management of ACP cladding risk. The Federal Government has made some effort towards coordinating consistency among state building codes, however, enforcement of codes and rectification of flammable cladding already in use remains a matter for state governments.
In lieu of a set of national standards, industry bodies are attempting to fill the gap.
In lieu of a set of national standards, industry bodies are attempting to fill the gap
The Federal Government is also attempting to mitigate any future ACP cladding incidents by introducing a bill to ban the import of combustible cladding altogether
In July 2019 the Insurance Council of Australia (ICAS) released a Residual Hazard Identification Protocol for the identification of residual risk presented by the use of ACPs and other combustible facade materials.
The protocol provides building owners and underwriters with ‘a consistent methodology’ for the ‘assessment and reporting of residual risk’ associated with ACP cladding.
The Federal Government is also attempting to mitigate any future ACP cladding incidents by introducing a bill to ban the import of combustible cladding altogether.
If successful, this bill would prohibit the import and use of ACP for any purposes: a move that some say is ‘over reactive’. The outcome of this is yet to be seen but it is likely to have little impact over the next six to 12 months, given that much of the current focus is on removing all combustible cladding from existing properties – something that is projected to cost the Australian economy well in excess of $2 billion.
The persistent confusion around industry standards for the responsibility and removal of ACP cladding is also stimulating debate about it as a professional liability exposure.
The Lacrosse Tower judgement (Australia’s first judgement on liability for combustible cladding) saw the property builder pass 100% of its liability to parties responsible for compliance, including the building surveyor and other consultants. Several months on from the judgement, rate increases and additional restrictions on coverage related to ACP cladding risk are occurring.
As a result, professional indemnity (PI) coverage is where the biggest immediate impact has been felt with insurers either imposing a blanket exclusion or a very small sub-limit for those with ACP associated risks.
Professional advisors including architects, surveyors, certifiers and fire engineers have been left exposed. In addition, there is the risk that, if a solution is not reached at a regulator and governmental level, current and future projects will be negatively impacted due to the difficulty for professional consultants to obtain the necessary compliance certification.
To date there have been no restrictions imposed by those insuring directors and officers in relation to ACP-associated risks. However, there has been a greater focus at the point of renewal on gaining a clearer understanding of potential exposures. We anticipate that in the future, directors and officers insurers may look to limit their exposure to ACP-associated risks.
With general liability premiums rising and market capacity contracting, the next six to 12 months are going to be nothing short of interesting. Businesses with high risk exposures (including but not limited to ACP cladding risk) will need larger deductibles and solid risk management strategies to attract insurers and convince underwriters.
Manager – Corporate
T: (02) 9242 2036
M: 0407 887 470
Insurance industry aluminium composite panel and other combustible façade materials, residual hazard identification/reporting protocol, Insurance Council of Australia, 29 November 2017
‘Full cladding removal not always necessary’, Insurance Business, 10 September 2019
‘Cladding considerations’, Gallagher Market Overview Report H1 2019
‘Property, liability rates on the rise’, Insurance News, 19 July 2019