Insurance implications of the VBA’s “tough stance” on building practitioner conduct

27 May 2020

You do not need to search far to find evidence of the Victorian Building Authority’s (VBA) tough stance on registered building practitioners in the wake of the ‘combustible cladding crisis’.

Indeed, the VBA’s press reel has of recent times run hot, with multiple media releases concerning suspensions and prosecutions taken in relation to ‘dodgy’ practitioners’ conduct. With headlines such as ‘VCAT upholds building surveyor’s suspension’, and ‘VBA determined to fight fire engineer’s attempt to avoid disciplinary action’, it is clear that the authority has adopted a ‘tough on practitioners’ mandate in an effort to renew consumer and industry confidence in the building industry.

Consistent with the VBA’s tough stance, and despite the implications of the coronavirus pandemic, in the week ending 15 May 2020, the VBA reported:

  • issuing two show cause notices and one notice of decision;
  • conducting eleven cladding inspections across five municipalities; and
  • conducting thirteen cladding expert panels, which rated six buildings ‘high risk’, five buildings ‘moderate’ risk and two buildings rated ‘low’ risk.

These statistics make it clear that the impacts of the ‘cladding crisis’ are likely to be felt in the industry for considerable time to come, and the prevalence of cladding related insurance claims and notifications is only likely to increase.

The Show Cause process

Pursuant to section 182 of the Building Act 1993 (Vic), if the VBA reasonably believes a ground exists for taking disciplinary action against a registered building practitioner, and it proposes to take that action, the VBA must issue the registered building practitioner with a “show cause notice”.

A show cause notice:

  • states that the VBA intends to take disciplinary action in respect of the building practitioner’s registration (and where the building practitioner has multiple registrations, for example if a registered building surveyor is also registered as a building inspector, which of the registrations the notice relates to);
  • sets out the relevant facts and circumstances (i.e. in the context of cladding, which building or buildings are alleged to have non-compliant combustible cladding);
  • sets out the proposed disciplinary action and the grounds for it; and
  • invites the building practitioner to make representations (in writing or orally) about the notice within a set period of time.

Detrimental findings by the VBA have a significant impact on building practitioners, and may expose the individual to financial penalties, a suspension of their registration (including immediate suspension) or reprimands. The VBA’s show cause notices can include both concurrent and cumulative penalties, which can significantly impede a building practitioner’s ability to continue to practise. In some instances, the VBA deems the building practitioner’s alleged poor conduct to be of such a degree that a notice of immediate suspension is required, impeding the practitioner from completing current projects, possibly exposing that person to a greater volume of claims for compensation.

In addition to related non-completion claims, a significant secondary impact of the show cause process is the rise of related claims for projects that include the use of non-compliant combustible cladding.

Insurance implications

As a consequence of the VBA’s increased use of show cause notices dealing with the alleged use of non-compliant or non-conforming external wall cladding products, we have seen a rise in notifications by building practitioners, particularly by building surveyors, seeking indemnity for ‘Inquiries’ cover (and to notify possible related Claims).

What is clear is that responding to a show cause notice is time consuming and costly and often causes tension between building practitioners and their insurers.

In circumstances where:

  • a significant portion of professional indemnity policies which provide Inquiries cover (which would on their face respond to a VBA inquiry) only do so in respect of costs associated with responding to or participating in an inquiry but otherwise exclude cover for fines and penalties; and
  • show cause responses require a fast response, unless an extension of time is granted by the VBA,

the following list of issues may help both building practitioners and their insurers to navigate the show cause process.

For building practitioners

  • Act quickly: It is imperative that building practitioners act quickly to notify their insurer if they receive a show cause notice. In addition to notifying their insurer of the inquiry, practitioners should immediately begin to collate material relevant to the projects referenced in the show cause notice. For example, for show cause notices relating to cladding, a building practitioner’s file is likely to be voluminous. While it is important to provide full and unfettered access to the insurer (or a private lawyer), it can also be greatly beneficial for the building practitioner to highlight key documents and their overarching views so that a response strategy can be formulated.
  • If the building practitioner wishes to appoint a private lawyer: A building practitioner might be keen to appoint a private lawyer they have worked with in the past, or who they know has the right skills and experience to help them respond to the show cause notice. If a building practitioner intends to appoint a private lawyer, they should first seek their insurers’ consent to avoid later issues with indemnity, including being potentially out of pocket for a portion of the legal fees incurred.
  • Considering enforceable undertakings: Consideration should be given by building practitioners to offer to accept an enforceable undertaking to mitigate their exposure to the more serious proposed penalties detailed in a show cause notice. In this regard, it is critical that the insurer’s consent is obtained noting the possible implications that an undertaking may have in respect of any subsequent related claims for compensation. Specifically, we have observed an increase in prevalence of related claims by affected property owners, who are able to ‘piggy-back’ off the VBA’s show cause process, including by any admissions or concessions that might be made by the building practitioner as part of the response process. This can have an implication on indemnity in relation to any related claims.

For insurers

  • Act fast on indemnity: For insurers, and bearing in mind the above, it is important to quickly resolve any indemnity issues and make sure this is clearly and accurately communicated to the building practitioner (and the broker). An insured building practitioner’s decision to appoint a private firm can have significant costs implications, both in relation to the show cause notification and possible related claims, meaning coverage issues need to be carefully set out in an indemnity response.
  • Work proactively with brokers: There is clear merit in both the building practitioner and the insurer working proactively with brokers to, in effect, manage and streamline the response process. We have seen that by taking steps to determine policy response as soon as possible and ensuring that this position is communicated to and, importantly, accepted by the building practitioner, costs and time in responding to the show cause notices can be reduced. For example, where:
  1. indemnity is granted, be it in respect of Inquiry costs only, say shortly after receipt of the show cause notice; and
  2. the insured building practitioner accepts the above position;

panel lawyers can be appointed to assist the insured to respond to any show cause notice. The obvious benefit to this approach is that insurers avoid having to incur the cost of retaining coverage counsel while the building practitioner gets she benefit of panel lawyers with expertise in this area of the law without being out of pocket for the difference between panel rates and rates charged by non-panel lawyers.

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