No quick fix

No quick fix

Sloppy work and complacent governments may have caused the construction industry crisis, but Bronwyn Weir says insurers have a big role to play in the renovation job

By Bernice Han

Meetings of the Building Ministers’ Forum – which brings together Federal Industry Minister Karen Andrews and her state counterparts – have traditionally been low-key affairs. But the meeting in December was different.

The construction industry is in crisis, thanks to insurers’ decision last year to get tough with a sector that many see as having been allowed to operate for far too long in a low-touch regulatory environment.

It has resulted in a long list of buildings with serious defects, the most obvious of which is the use of non-compliant flammable cladding on thousands of buildings across the country.

The whole sorry mess came to a head in July when UK-based insurer Landmark Underwriting, which had been providing Australia’s certifiers, surveyors and other building practitioners with restriction-free indemnity policies, bailed out of the market.

The Landmark withdrawal brought to the forefront the scale of the defect issues in the construction industry. So serious are the problems that the remaining insurers offering professional indemnity (PI) cover for building professionals have taken a tough line.

They have applied broad exclusions along with huge excesses and higher premiums, in many cases up more than 500%. In recent months they have also declined to provide indemnity cover for many types of commercial buildings, domestic swimming pools, wind farms and solar farms.

The insurers’ actions caught the construction industry – and the Building Ministers Forum – napping. Having sat for a year on a report, Building Confidence, which was compiled by former senior bureaucrat Peter Shergold and industry regulation expert Bronwyn Weir, the ministers hastily dusted it off and agreed to support its key recommendations (see panel page 30).

They also agreed to pursue further talks to remedy the crisis brought on by the insurers’ refusal to provide construction professionals with exemption-free PI cover, despite such policies being a requirement of their operating licences.

The insurers’ stand is significant, because it has brought to the surface the many failings of the construction industry, the country’s third-biggest sector with an 8% share of GDP and annual revenues in excess of $350 billion.

The ministers will meet with insurers soon to sort out the PI imbroglio. They said after the December meeting that their consultations with the Insurance Council of Australia (ICA) will “discuss a suite of measures to reduce the cost and improve the availability” of PI to building practitioners.

Their communique also acknowledged “there is more to be done” on top of what has already been promised over the course of last year as the building crisis deepened, when worsening wall cracks in the 132-unit Mascot Towers complex in Sydney forced residents out. Six months earlier, safety fears over structural defects in another Sydney building, Opal Towers, triggered a similar evacuation on Christmas Eve.

Predictably, the idea of more talks and pledges to press on with the task of repairing the problem-plagued construction industry have not gone down well with the stakeholders, many of whom have voiced frustrations with the governments’ approach to the insurance issue.

But Ms Weir sees it differently. She says it’s time to stop the cycle of negative talking and instead to be encouraged by what she believes is an “awful lot of momentum at the moment” to reform the industry.

That the ministers plan to continue engaging with the insurers and other industry groups down the road should be seen as a positive, she tells Insurance News.

“It’s good to keep talking about it and working through the issues,” she says in reference to the December communique from the ministers. “I expect the communique reflects a much deeper discussion that was had by the ministers, so they must have particular things they want to raise [with the insurers] that they think can advance the discussion. I think they do need to keep talking.”

Ms Weir, a lawyer who now runs her own consultancy specialising in regulatory matters, prefers not to comment on the scale of the defects problem or give her views on what interim measures should be taken to deal with the fallout of the insurance restrictions.

She says the tendency to put the blame on governments for the building industry crisis is not at all constructive, and warns that the torrent of criticism being directed at governments by construction industry bodies is counter-productive.

She says the criticism suggests that many practitioners may be intent on clinging to ways of doing things that have, directly or indirectly, contributed to the crisis.

“It makes me very cross,” she tells Insurance News. “It’s one thing to blame others and often it’s governments. There has been a systemic failure, and that means failures right through the system, including failures by industry and the insurance market.

“A lot of the problems have arisen from common practices that have been palpably wrong. There needs to be an acceptance of responsibility and the need to change. It’s everyone’s fault.

“I think a lot of the blame game and ‘we did nothing wrong’ claims have to swiftly end. All it does is weigh us down into conversations that are backward-looking.

“It’s really hard to accept that people are committed to solutions and change if they are busy saying they haven’t done anything wrong. I’d like to see a lot more positive and constructive solutions-based discussions.”

The Australian Institute of Building Surveyors (AIBS) and New South Wales peak body, the Association of Accredited Certifiers, are among the trade groups that have been vigorously pushing for more action and less talking.

In particular, they want immediate government measures to end the PI chaos that has left their members reeling and staring at the prospect of financial ruin.

The AIBS, for example, has flagged the idea of some sort of government intervention in the form of a support program or package to ensure PI insurance is available and viable for its members.

Ms Weir says the “incredibly distressing” insurance situation has been extremely challenging for surveyors and other practitioners in the building industry chain.

Fixing the insurance crisis will “to some extent” require a degree of regulatory reform, but she warns that alone will not be enough. It will not deliver the kind of sustainable changes that will hopefully avoid a repeat of the PI saga.

She says the insurance industry has “a huge influence” over the eventual outcome of the crisis. And the way insurers have chosen to respond to the building industry crisis by restricting cover leaves her unimpressed.

“The impact insurers are having on the industry is profound,” she says.

The massive premium increases, reduced maximum cover amounts, broad exclusion clauses and huge excesses forced on building consultants have left them with a “PI product that is severely compromised and unaffordable”.

Many surveyors and other industry specialists Insurance News has spoken to say that having a clean claims record didn’t matter during renewal negotiations.

“I’m not sure what else the insurers could throw at the problem,” Ms Weir says. “If the prices had gone up but the cover remained broad it might be worth paying for, but that’s not what has happened.

“So I think they are whacking this industry in every way possible without leaving the market. I’m not sure that that is helpful, as it will lead to increased insolvencies and good people leaving the sector, which will increase skills shortages.”

The insurance industry’s usual response to such situations is that it is at the end of the risk management process. They provide insurance cover at a price that is tied to the level of risk being transferred to them, and the building industry has to shoulder much of the responsibility for what has happened.

But Ms Weir is not persuaded by this argument. She says the under-pricing of PI products in the years before the insurance crisis blew up is an example of insurers not doing their job to properly understand the risks.

“I would hate to have any sort of suggestion that I’m saying they’re responsible for this situation in its entirety, but I do think that they certainly had a role in all of this.

“If they haven’t been pricing correctly or haven’t been aware of the risk and they’re now saying that they are not carrying enough money to meet these claims, then that is not something that the building industry should have to now shoulder.”

ICA has outlined an action list that could be implemented by governments to break the PI impasse. The list includes implementation of all 24 proposals made in the Building Confidence report co-written by Ms Weir and a national approach to tackle the presence of dangerous cladding materials in high-rise blocks.

Even so, these reforms will take time to deliver the intended outcomes, Ms Weir says.

The Building Ministers’ Forum meeting in July last year agreed to a national approach to adopt the 24 suggestions that are aimed at improving compliance and enforcement nationally.

“Developing legislative reforms and having them passed by governments is not a five-minute job. Even if it were, shifting the industry is not an overnight thing. It’s almost like the insurance industry is saying ‘go off and do that’, but at what point will they consider that has been done? Because it’s not going to be anytime soon.”

The report presented in 2018 called for a three-year period for the reforms to be rolled out.

“Insurers need to be part of the solution. I’d like to see them willing to find ways to assess the risk of practitioners and price accordingly rather than having an indiscriminate and crippling effect on the industry.” Contrary to the widespread perception that governments are taking too long to reform the building sector, Ms Weir believes otherwise.

“Several jurisdictions have been making reforms related to cladding audits and consumer protection issues.

“While these reforms were not within the terms of reference for the Building Confidence report, they are important responses to address public safety and financial impact.

“I believe there has also been an increase in regulatory activity by some governments, so my sense is that some governments are using their existing laws to regulate more effectively and oversee the industry.

“A lot more needs to be done, and it would be ambitious to say that the problems have gone away.

“However, while regulatory reform is an essential part of the solution and this has not fully occurred yet, the messages have been heard and I believe parts of the industry and governments are reacting to improve outcomes.”

In the meantime, she says, the engagement process has to continue. “We need to help keep the momentum going.”

The blueprint for improving building standards

In 2017 the Building Ministers’ Forum commissioned experienced lawyer Bronwyn Weir and former senior public servant Peter Shergold to independently assess the broader compliance and enforcement problems in the construction industry.

The following year they presented the Building Confidence report to the ministers, tabling 24 recommendations to strengthen the National Construction Code.

The proposals cover such areas as registration and training of practitioners, roles and responsibilities of regulators, role of fire authorities, integrity of private building surveyors and the importance of inspection regimes.

Some of the key proposals:

• Registration of building practitioners involved in the design, construction and maintenance of buildings. Practitioners include surveyors, site managers, architects, engineers, plumbers and draftspersons

• Practitioners must undertake compulsory continuing professional development on the National Construction Code

• Regulators be given a broad suite of powers to monitor buildings and building work, and if necessary take strong compliance and enforcement action

• Developers, architects, builders, engineers and building surveyors must engage with fire authorities as part of the design process

• Minimum statutory controls to mitigate conflicts of interest and increase transparency of the engagement and responsibilities of private building surveyors

• Jurisdictions have in place a code of conduct for building surveyors

• Establishment of a compulsory product certification system for high-risk building products

• Building approval documentation for practitioners to demonstrate the proposed structure complies with the National Construction Code

• Set up a building information database that provides a centralised source of building design and construction documentation.