A BUILDER’S GUIDE TO THE DESIGN AND BUILDING PRACTITIONERS ACT AND REGULATION

PART 4 – INSURANCE

INTRODUCTION

This publication is the fourth of a series authored Kreisson, which is intended to be used as a guide for builders to the Design and Building Practitioners Act 2020 (NSW) (the Act) and the Design and Building Practitioners Regulation 2021 (NSW) (the Regulation).

Part 1 of this series introduced the Act and Regulation and explored the definition of “Building Work”. See Part 1 at this link: https://kreisson.com.au/a-builders-guide-to-the-dbpa-part-1/

Part 2 of this series explained the definition of “regulated design” under the Act and Regulation, explored the requirements for design and building compliance declarations, and explained lodgement requirements for Building Practitioners. See Part 2 at this link: https://kreisson.com.au/a-builders-guide-to-the-design-and-building-practitioners-act-and-regulation-part-2-regulated-designs-and-compliance-declarations-part2/

Part 3 of this series explored the meaning of ‘reasonable excuse’ and ‘emergency remedial works’ within the meaning of the Act and Regulation and for the purposes of the ‘reasonable excuse’ defence. See Part 3 at this link: https://kreisson.com.au/a-builders-guide-to-the-design-and-building-practitioners-act-and-regulation-part-3-reasonable-excuse-and-emergency-remedial-building-work/

This article provides guidance regarding the insurance requirements under the Act and the Regulation, as well as difficulties facing practitioners in obtaining insurance.

Insurance Requirements

Under section 24 of the Act, a registered building practitioner cannot provide a building compliance declaration or do building work, or hold out that it is adequately insured, unless it is adequately insured with respect to the declaration and work.

Fines of $33,000 for a company or $11,000 in any other case, apply for a breach of the provision.

‘Adequately insured’ is defined as being indemnified by insurance that complies with the Regulation against any liability to which the building practitioner may become subject as a result of providing a design compliance declaration or doing the work to which that declaration relates, or some other arrangement approved by the Regulation. The expectation is that practitioners are insured under professional indemnity insurance and directors’ and officers’ insurance.

Directors and company officers of building companies will need to consider the adequacy of their current insurance within the framework provided under the Act and Regulation.

In determining whether a policy adequately indemnifies a practitioner, r. 77 of the Regulation provides that the practitioner ought to consider the following:

a) the nature and risks typically associated with the work being carried out;

b) the volume of work typically carried out;

c) the length of time required to be registered;

d) a reasonable estimate of claims that could be bought against the practitioner;

e) the financial capacity of the practitioner; and

f) any limits, exceptions, exclusions, terms, or conditions of the policy.

However, under r. 106 of the Regulation, registered building practitioners are exempt from the insurance requirements under the Act until 30 June 2024.

Extension arises due to issues facing insurers and practitioners

Various issues that have become apparent with the insurance regime in the Act have contributed to the extension to 30 June 2024, including but not limited to the following:

a) insurance industry professionals were not consulted until late in 2020 and there are several areas that need to be agreed;

b) industry professionals have appropriately identified that a standard that is suitable for builders may not be suitable for engineers, yet the Act and Regulation requires both types of practitioners to be appropriately insured;

c) thus, engineering industry professionals have submitted that the role of professional indemnity insurance, and its application, needs to be further clarified with specific consideration of risks that effect design practitioners and their obligations to meet professional standards;

d) given the wording of the Act (namely, that the insurance must cover “any liability” associated with the work and the building compliance declaration), most professional indemnity policies will exclude or otherwise not cover fines and penalties, therefore cover is unlikely for breaches of the mandatory declaration provisions (i.e. if someone gives false and misleading design compliance declarations);

e) design professionals and engineers have professional indemnity insurance that provide cover only for “professional services”. Builders who carry out the works do not usually have insurance that covers them for defective workmanship and may not be providing “professional services” within the meaning of a professional indemnity policy (particularly given their performance of building work and supervision). Accordingly, appropriate cover is unlikely to be available under such a policy;

f) cover is limited by the terms of insurance clauses, the exclusions, and any extensions to the relevant policy. Also, different exclusions are imposed on different entities depending on their size, the nature of their activities, their claims history and other factors;

g) therefore, actually securing insurance that meets the regulatory requirements is an issue, in circumstances where there is lack of clarity as to the level of policy coverage acceptable to the regulators;

h) insurer appetite for construction professionals continues to diminish, thus there are less insurers and reduced competition;

i) the introduction of the legislation has caused some insurers to exit the market due to profitability concerns, and more so has caused insurers to increase premiums; and

j) accordingly, there is a need to ensure that insurance is sustainable and cost effective.

In any event, and given the upcoming commencement of the insurance requirements from 30 June 2024, builders should take steps in consultation with their insurance professionals to ensure they satisfy the insurance requirements under the Act and Regulation.

R. 78 of the Regulation requires registered practitioners to keep written records for five (5) years specifying how they determined that a policy provides for an adequate level of indemnity, and provide copies of those records to the regulator if requested.

For further information in relation to insurance requirements, the DBPA and how they impact you, please do not hesitate to contact Kreisson on (02) 8239 6500.

 

*The contents of this article are not a substitute for legal advice.  You should obtain legal advice appropriate for your specific circumstances.