In December, the High Court of Australia handed down a decision with major implications for the construction industry and insurers in NSW. The judgment dismissed an appeal from developers in favour of strata owners. The developers’ failed argument was that they should be able to limit their liability for building construction failures when that work was delegated to others.
Industry experts have said this judgement - The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301 - ends the proportionate liability regime used by insurers and construction professionals in NSW for the last two decades.
“This decision is a landmark ruling, significantly strengthening the laws in favour of property owners by holding builders and developers more firmly accountable for their responsibilities on a construction project,” said James Rigney (pictured above).
Sydney-based Rigney is a partner and construction insurance specialist with global law firm Clyde & Co. He brought this case to the attention of Insurance Business back in October.
Rigney said the main parties impacted were builders, developers and their subcontractors.
“Given the greater level of focus on developers following Pafburn, insurers underwriting D&C PI policies [design and construction professional indemnity policies] for developers and head contractors may need to carefully examine coverage issues,” he said.
The construction expert said a close look is particularly necessary because, up until now, these policies typically required the developer to have provided a professional service, which can be difficult to establish when the developer’s role is minimal.
“Additional challenges can arise when claims involve defects stemming from installation or workmanship issues, which are often excluded under D&C PI policies,” said Rigney.
Another consideration, he said, is that the directors of building or development companies could now be sued personally.
“If such claims arise, it raises the question of whether D&O [directors and officers] policies might respond, potentially increasing insurers’ exposure to risks that may not have been anticipated or priced into their policies,” he said.
Rigney said these impacts are likely to put upward pressure on premiums and policy terms.
Insurers can start to manage these new challenges, he said, by tailoring their questionnaires more specifically. These documents, he said, should specify insurance conditions and exclusions appropriately and according to, for example, whether the construction project is domestic, commercial or industrial.
“They should also assess the specific roles of their insureds, as certain employees may be involved in a type of building work not anticipated by the relevant policy,” said Rigney.
He gave an example that demonstrated the complexity of this risk management challenge.
“For example, a director might be held to owe a duty because of its ability to substantively control building works, even if is not exercising that control,” said Rigney. “That means that a duty may arise in the absence of a specific conduct or service.”
He noted that D&O policies typically exclude liability arising from the professional services being provided.
“However, D&O insurers should consider how their D&O policies will operate in the event of claims against directors, and whether additional exclusions should be incorporated,” said Rigney.
He also advised insurers of developers and builders to engage in “rigorous scrutiny” of any contractual counterparts on projects to ensure their solvency so that the exposure of the developers and builders does not increase.
“Some insurers may adopt a practice of attempting to exclude claims for certain insureds under the DBPA [Design and Building Practitioners Act 2020 (NSW) (DBPA)],” said Rigney. “Otherwise, insurers will want to price any additional risk into their insurance policies where possible.”
What role can brokers play?
Rigney said brokers in the construction sector can help encourage better risk management practices among insured parties. He included demonstrating the financial security of the insured and their contracting counterparties to the insurer.
“Brokers can also speak with their insureds and assess what contractual regimes or protections are in place,” said Rigney.
For example, with clients who are developers.
“Are there contractual indemnities that are wide enough that will flow from the builder to the developer in the event of the developer having some liability under the DBPA and then seeking to cross claim against the builder for liability that flows from that?” he said.
After this Pafburn judgement, Rigney said it remains undetermined whether consultants including certifiers (building surveyors), engineers and other construction professionals can seek to apportion their liability. Rigney said his firm believes they likely will be able to plead apportionment if they are responsible for a fixed scope of works that they have not delegated.
“The Pafburn decision has left the door open for consultants to continue to plead proportionate liability in certain circumstances instead of relying on cross claims, helping to reduce litigation costs for their insurers,” he said.
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