Building a Stronger Industry: The impact of Building Safety legislation on construction and insurance
The UK perspective
The Building Safety Act 2022 (BSA22) was introduced in the UK to create a new regime for building safety in the wake of the Grenfell Tower tragedy. The Act has brought about several significant changes to the way in which higher-risk buildings are designed, constructed and subsequently maintained and managed.
The dutyholder regime, introduced by BSA22, requires any developer, principal contractor, and principal designer involved in the construction of a new higher-risk building to comply with new duties:
- The developer/client must make suitable arrangements for the planning, management, and monitoring of a project and ensure that the employees are competent to do the work they are contracted to do.
- The principal contractor and designer must comply with the competence requirements set by the British Standards Institution (BSI) and cooperate, share information, and ensure work complies with the Building Regulations.
Building owners and managers are also accountable for the safety of their buildings and are required to carry out fire risk assessments, provide electronic building floor plans to the local fire services, and check and repair lifts and firefighting equipment on a monthly basis. Failing to do so can result in an unlimited fine and/or imprisonment for up to two years.
To date, the government has yet to publish its final proposals for the detailed dutyholder obligations. It remains to be seen whether these will, as recommended by the Hackitt report, require dutyholders to ensure compliance with Building Regulations, or impose some lesser duty. The government’s initial proposals could be viewed as considerably watering down the proposals contained in the Hackitt report, although from an insurance perspective one can see why that was the case. How the government responds will affect whether these duties will fall within cover provided by existing policies.
To address historic building safety defects, the BSA22 introduced three new remedies with an extended limitation of up to 30 years: Remediation Orders, Remediation Contribution Orders, and Building Liability Orders. Combined with the government’s attempts to obtain a pledge for major housebuilders to rectify defects for which they are responsible, together with the prohibition on the ability of freeholders responsible for defective buildings to charge leaseholders for defective cladding and the qualifying leaseholders – including leaseholders of low value properties - for non-cladding defects, the government’s objective is clear: those responsible for defects must pay. Their refusal or failure to do so will not be tolerated.
That said, we are seeing freeholders and housebuilders refuse to undertake remedial works, or refuse to commit, preferring to wait and see if insurers will do so. The Department of Levelling Up has already taken its first legal action against a freeholder failing to fix building safety defects.
One of the issues that remains to be determined is the ability of insurers, in circumstances where they have accepted liability and provided an indemnity, to avail themselves of the new remedies set out in the BSA 2022. We expect this to be the subject of future disputes.
A major challenge for the market is the availability for insurance to (i) assess the safety of buildings, and (ii) the rectification of defective buildings.
The Financial Conduct Authority (FCA) has published a report on the availability of insurance for multi-occupancy buildings, highlighting that the supply of insurance has contracted significantly, and premium rates have doubled between 2016 and 2021, driven primarily by the risks from properties with flammable cladding or other material fire safety risks.
The broker sector, led by organisations such as the British Insurance Brokers’ Association (BIBA), has pledged to review their practices for the distribution of insurance for multi-occupancy buildings and has called for government action in making insurance exempt from Insurance Premium Tax for buildings that require or are undergoing remediation.
The Government has already introduced the Professional Indemnity Insurance (PII) scheme, which indemnifies EWS1 surveyors, to provide relief to those in the industry. However, professionals in the remediation works of high-rise buildings may still face significant issues in obtaining adequate PII insurance, in particular if the remediation involves fire safety engineering/performance. The government is refusing to underwrite these risks, and their proposals for the dutyholder regime, as well as their failure to publish the new Building Regulation regime envisaged by Hackitt, is exacerbating these difficulties.
The Australian perspective
Recent Australian reform on building and product safety has been instigated not only by the Grenfell disaster in London, but also by local combustible cladding fires and high-profile apartment construction failures (such as in Sydney’s Opal and Mascot Towers).
Industry and product regulation
Constitutional competences as between the Commonwealth and the states has hampered the uniformity of legislative response, however each of the jurisdictions has committed to implementing the recommendations of the 2018 Shergold-Weir Building Confidence Report (BCR), which address:
- registration and training of design and building practitioners;
- the roles and responsibilities of regulators;
- the role of fire authorities in the building design and approvals process;
- the integrity of private building surveyors (i.e. building certifiers or inspectors);
- collecting and sharing building information and intelligence;
- documentation and record keeping;
- inspection regimes;
- post-construction information management; and
- a compulsory product certification system for high-risk building products.
Progress in implementation among the jurisdictions is disparate. In Victoria, stage 1 of the BCR implementation is directed broadly at practitioner registration, building approvals, regulatory oversight and consumer protection. In Queensland, part 6AA of the Queensland Building and Construction Commission Act 1991 establishes a “chain of responsibility” for non-conforming building products, with each industry participant responsible for their individual contribution to the final building product’s incorporation in a building. Non-conformance is defined in terms of expected safety and performance in accordance with any represented standards, for “intended uses” by which the product is intended or likely to be used in a building.
New South Wales presently leads the country with the scope and speed of its Construct NSW legislative program. The Strata Schemes Management Act 2015 requires developers to post a bond equal to 2% of the project build price as security against any significant defects which come to light in the two years following occupation. The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 enables close regulatory scrutiny of builders and projects, funded by a building work levy. The Design and Building Practitioners Act 2020 imposes strict registration and insurance requirements and mandates design and building compliance declarations for “regulated designs” and structural “building elements”. That Act also creates an extended, non-delegable duty of care owed by anyone who “carries out construction work” in favour of each owner of the relevant land, including owners corporations, individual title holders and, importantly, all subsequent owners. Extensive further NSW legislation is presently open for public consultation.
Since 2018 and in the aftermath of the Grenfell fire, the Australian insurance market has seen significant tightening in PI cover for building industry professionals, with substantial increases in premiums and excesses, lower policy limits and growing difficulty in obtaining exclusion-free cover. Several states have temporarily permitted building certifiers to hold PI cover with cladding-related exclusions. Gaps in the local PI insurance market have hampered NSW’s efforts to implement broad design insurance cover. That state is now considering decennial (10 year) liability cover to provide residential apartment owners with an insurance of first resort to cover rectification of serious defects in critical building elements. Both mandatory and voluntary decennial schemes are presently being investigated.
With property developers, financiers and insurers all operating in Australia across state boundaries, the need for a uniform and comprehensive national approach to building safety is obvious. All indications are that the construction industry faces significant re-regulation and cost. Governments are hopeful that implementing the BCR’s recommendations will restore public confidence in the local construction and building regulation industries and encourage insurers to return to the Australian market in greater numbers.
The United States perspective
Unlike the United Kingdom, the majority of the jurisdictions in the United States have not adopted a formal Building Safety Act. However, the state of Florida is the exception. On May 26, 2022, the governor of Florida, Governor Ron DeSantis, signed into law Senate Bill 4D, which is now commonly referred to as the Building Safety Act (the “Act”). The bill was proposed and passed as a direct result of the collapse of the Champlain Towers South condominium in Surfside, Florida in June 2021. The Act was employed in an effort to ensure that condominiums and residential buildings are both structurally sound and maintained in a manner to ensure the safety of the residents. Unlike the United Kingdom, the Act applies to both existing construction as well as new construction. The Act amended existing laws and imposed more stringent requirements for the upkeep and maintenance of existing structures.
Included within the Act is the requirement for a “milestone inspection” by a licensed design professional to be performed on a condominium building that is three (3) or more stories in height. The timing of said inspection must be within thirty (30) years of the date the final certificate of occupancy was issued or within twenty-five (25) years of the issuance of the certificate of occupancy for buildings located within three (3) miles of the coast. The milestone inspection is a two (2) phase inspection commencing with a visual inspection and, if required, a second inspection relating to the structural integrity of the building and, to the extent necessary, destructive testing to assess the level of structural deterioration.
In addition to the inspection requirement is the requirement to conduct a structural integrity reserve study within ten (10) years of original construction and for new construction, and every ten (10) years thereafter, as well as prior to transition. For homeowners associations existing as of July 1, 2022, the structural integrity reserve study must be performed by December 31, 2024, and every ten (10) years thereafter. The study must include an evaluation of several components of the building, including but not limited to the roof, foundation and primary structural components.
Effects of the insurance industry
The implementation of the Act certainly imposes increased responsibility on the members of the condominium board of directors. In the event the board fails to stay in compliance with the inspections and reserves requirements of the Act, such failures could constitute a breach of the board of directors’ fiduciary duty. The Act also includes several changes to existing law that may affect liability claims in the future. The extent of the effects of the Act on liability claims continues to be a topic of discussion in the industry and we anticipate seeing this as an emerging issue in future claims.
Other related safety measures in the US
In addition to the above, while the majority of the states have not implemented a formal Building Safety Act similar to that in the United Kingdom, the majority of jurisdictions have adopted common safety measures such as those contained within the National Fire Protection Association (“NFPA”) 285. NFPA 285 was updated in 2018 and adopted by the International Building Code following the Grenfell Tower tragedy. NFPA 285 deals directly with the issues and causes of the fire at Grenfell Towers. NFPA 285 implements a testing procedure of the characteristics of exterior wall assemblies that may be constructed with combustible components. Most states prohibit the use of certain exterior cladding materials including that which was used at Grenfell Towers. However, recently we are seeing an abolition in certain jurisdiction of the NFPA 285 testing requirement as well as the relaxation in the restrictions of the use of cladding with combustible materials. States such as Massachusetts, Indiana and Minnesota, as well as the District of Columbia, have exempted cladding constructed with combustible material from the NFPA testing where fire safety measures such as a working fire sprinkler system were in place.
The costs of implementing the NFPA 285 testing appear to be the main reason some jurisdictions have done away with the requirement. For those jurisdictions that do require NFPA 285, the overall responsibility to implement the procedures lies directly with the design and construction team. For those limited jurisdictions that do not require NFPA 285, the question becomes whether the benefit of the cost savings outweighs the risks and potential liability of not implementing the testing. The overall effect of relaxing the measures of the NFPA 285 is a growing concern and a frequent topic of discussion amongst the design professionals and construction teams in the United States.
Going forward, it is important for those in the construction industry to stay informed about the changes brought about in the various jurisdictions and understand the implications for their businesses. By adopting new strategies and working together, the industry can ensure that buildings are safe, and that insurance coverage is available to those who need it.
Chris Doran of Weightmans, Luke Preston of Carter Newell Lawyers and Sunny Sparano of Marshall Dennehey will be discussing these, and other issues, at the ILG360º London Annual Conference 2023 covering Building a Stronger Industry: The Impact of the Building Safety legislation on Construction and Insurance, on 15th March 2023. Should you wish to join us, please register below.Register