Combustible cladding claims amidst the coronavirus crisis

Unsurprisingly, the novel coronavirus and the illness it causes, COVID-19, are dominating discussion around the world. COVID-19’s impact on health and the economy remains the subject of great concern and interest. In the construction industry, it has been reported that the outbreak of COVID-19 may lead to construction work ceasing, or at the very least, decreasing in light of material supply chain restrictions and restrictions on movement effecting workers. In addition to new projects, this industry wide slow-down will also have an impact on buildings affected by the combustible cladding crisis, which emerged from the non-compliant use of aluminium composite panel (ACP) cladding products.

Putting to one side the question of whether construction rectification work should continue in the current climate, the likely delay in undertaking rectification work on buildings with ACP cladding arguably masks a series of problems with the broader rectification approach adopted by the Victorian government; an approach which is likely to be followed by other States and Territories.

As reported in our 17 October 2019 update, the Victorian Government introduced reforms aimed at funding rectification of non-compliant ACP cladding, including through litigation directed at wrongdoers responsible for the use of such products. In this regard, the Crown now has the power to ’stand in the shoes‘ of an owner who receives or received government funding to bring recovery claims against building practitioners involved in the installation or use of non-compliant cladding.

While on its face the above approach appears to be sound and justified, it is arguably undermined by the Victorian Government’s decision to allow certain building practitioners to maintain their registration despite their professional indemnity insurance containing exclusion for claims concerning cladding.

Indeed, in Victoria as a result of changes to the Building Practitioners’ Insurance Ministerial Order (MO) in force from 12 August 2019, certain registered building practitioners are permitted to hold professional indemnity insurance policies which exclude liability for loss or damage arising from or concerning work where the claim directly relates to or is connected with the use of an external wall cladding. As a result of the amendment to the MO, it is theoretically open for CSV to pursue a claim against a building practitioner such a building surveyor in respect of the use of non-complaint ACP, succeed with that claim, but be unable to enforce any monetary award if the claim against that surveyor is caught by the ‘cladding exclusion’ in a professional indemnity policy. In Victoria, this is particularly the case for buildings that have not been the subject of the cladding audit¹ and therefore may not have been notified to professional indemnity insurers.

A further problem with the Victorian Government’s current rectification approach is that it fails to account for buildings with non-compliant ACP cladding, which also have other non-related defects (such as design defects or workmanship issues). It was reported last week that 15 Melbourne properties entitled to funding for non-complaint ACPs were also riddled with other construction problems². Consequently, funding would only be limited to the rectification of non-compliant ACPs with the owners being responsible for the cost of all other rectification work. Practically speaking, the above scenario demonstrates that despite the Victorian Government’s best intention of providing consumer focused funding, owners may find themselves out of pocket for the rectification of non-ACP cladding related defects, which are required to be addressed at the same time as cladding issues.

The above problem extends to the subrogated litigation commenced by the Crown. Specifically, it raises the question as to whether the Crown is empowered and prepared to pursue claims in respect non-ACP related defects as part of its mandated claim for non-compliant ACP products, and to the extent that it is, whether it would require a contribution from the relevant owners to its litigation costs.

What is clear is that COVID-19 presents unparalleled challenges, many of which are yet to be identified. However, its impact on the cladding crisis should not mask a number of inherent problems with rectification adopted in Victoria likely to be followed in other States and Territories.