Blog Question on Non-conforming cladding

Blog Question on Non-conforming cladding

I received the following question from an old friend who I first met while handling a complex claim for his company in 1984.

I rang yesterday looking for advice or some information from LMI on the building cladding issue and if the commercial insurance underwriting industry are already or are considering paying claims out for “damage or loss” to the buildings. I wonder if its just a matter of time before a clever legal challenges “damage or loss” policy interpretation.

My view is that the building owner/s have not suffered a loss or damage that triggers either an ISR or Business pack property or BI cover and that the matter is really a preventative building risk management issue. Could an argument be put that the building is lost or damaged as no longer fit for purpose? As when the properties /buildings were clad the building material was “legal” nor faulty.

Does LMI have a paper position on cladding that you would be willing to provide me? 

Would appreciate your knowledgeable view.

Best regards

Rob [surname and email provided]

Coincidentally, when Rob was ringing I was delivering a full day training session on the ISR and we went through the policy exclusions in detail during that session.

If an Insured were to lodge a claim for damage to the building stating that it was now physically damaged as a result of the presence of non-conforming materials my view is that Under a Mark IV Modified Industrial Special Risks (“ISR”) wording, Policy [Perils] Exclusion 4 would come in to play and in particular Perils Exclusions 4 (c) and or 4 (e)/ I reproduce both below:

“The Insurer(s) shall not be liable under Sections 1 and/or 2 in respect of:…

4. Physical loss, destruction or damage occasioned by or happening through:…

(c)        error or omission in design, plan or specification or failure of design.

(e)      faulty materials or faulty workmanship.”

As this is a discussion paper and not a specific building, I need to cover both exclusions as I am not sure which would apply.

The catch 22 for any insured is that if the design was not faulty and the materials were not faulty, then there is no damage and of course is not trigger for a claim under the ISR policy.

The whole idea behind these exclusions is not to provide any protection by way of product guarantee or workmanship guarantee. Without this exclusion we would see even more appalling building practices, short cut, save a few bucks here type attitude that we see with far too many developers, builders and trades, often fueled by end customers who want the most inexpensive build possible. I am not singling out any builder, trade or owner involved in the cladding issue but this is what I have seen personally in buildings following insured events such as fire, storm etc and also in the repair of some of these buildings after the event.

I am sure that many of those involved were not aware of the fire risk that the material(s) creates and were focusing on the aesthetics, the thermal benefits, the low ongoing maintenance costs as well as the relatively low cost of the materials.

So, unless there is subsequent damage caused by the faulty workmanship, a faulty product or a faulty design, such as water entering the building where it ought not to and this water causes damage to other property, then the cost of rectifying the faulty product, faulty workmanship or faulty design is not covered.

This rectification work, that I believe would not be covered would include any redesign work, the hire and erection of any scaffolding, cherry picker etc, the removal and disposal of the old cladding nor the cost of purchasing and installing the old cladding.

The cost or reinstating and subsequent damage is covered by the write back provision to Perils Exclusion 4 which reads:

“Provided that this exclusion 4 (a) to (e) shall not apply to subsequent loss, destruction or damage to the Property Insured occasioned by a peril (not otherwise excluded) resulting from any event or peril referred to in this exclusion.”

Despite the protection of Perils Exclusion 4, there is still a risk to insurers that they may not have rated for when insuring buildings that have non conforming building materials. This risk arises where it was originally accepted by the approving body that the material used was in accordance with the appropriate code(s) and regulations. However, due to the spate of fires around the world, most notably the Grenfell Tower in London, the Flame Tower in Dubai, and most recently the apartment complex in the Spencer Street, Melbourne, it is no longer approved.

Should an insured event occur in one of the buildings that meet this criteria, the risk is that an authority may now order the cladding be removed before they will issue a building permit for the repairs to the building due to the insured damage. The cost of the upgrade to the building would be considered under the Extra Cost of Reinstatement Memorandum which reads:

Extra Cost of Reinstatement 

“(Applicable to buildings, machinery, plant and all other property and contents; other than those specified in items (b) to (i) under Basis of Settlement).”

“This Policy extends to include the extra cost of reinstatement (including demolition or dismantling) of damaged property necessarily incurred to comply with the requirements of any Act of Parliament or Regulation made thereunder or any By-Law or Regulation of any Municipal or other Statutory Authority; subject to the following Provisions and subject also to the terms, Conditions and Limit(s) or Sub-Limits of Liability of this Policy.”


(i)       The work of reinstatement (which may be carried out wholly or partially upon any other site(s), if the requirements of the aforesaid Act. Regulation or By-Law so necessitate, subject to the liability of the Insurers not being thereby increased), must be commenced and carried out with reasonable despatch, failing which the Insurers shall not be liable to make any payment beyond the amount which would have been payable under this Policy if this memorandum had not been incorporated herein.

(ii)      The amount recoverable shall not include the additional cost incurred in complying with any such Act, Regulation, By-Law or requirement with which the Insured had been required to comply prior to the happening of the damage.

(iii)     Co-insurance shall not be applied to the amount recoverable under this memorandum and any amount specified shall not be taken into account for Co-insurance purposes in terms set out in any clause contained in this Policy.

(iv)     All other Industrial Special Risks and/or Fire and Named Perils insurances covering the property effected by or on behalf of the Insured shall be on a similar basis.

(iv)     If the cost of reinstatement of damaged property insured is less than fifty per cent (50%) of that which would have been the cost of reinstatement if such property had been destroyed, the amount recoverable hereunder shall be limited to:

(a)      the extra cost necessarily incurred In reinstating only that portion damaged; or

(b)      whilst applying to such property insured, the Sub-Limit stated herein,

whichever is the greater. In the event of a Sub-Limit not being stated in this Policy the Insurers liability shall be limited to the amount as described in sub-paragraph (a) of this provision.

There are building products that have been imported into Australia, such as electrical cabling and products containing asbestos, where the Extra Cost risk is not there for the Insurer as the products were not to code and so Insurers have the protection of Proviso (ii).

Many of the buildings with composite paneling at the date of writing do not have an order on it to remove the existing paneling. As was the case, according to media reports, with the building in Spencer Street, then there is a risk that the Extra Costs of Reinstatement Memorandum can be invoked and that Insurers cannot rely on the said Proviso (ii).

The protection offered to the Insured in this situation is to the maximum of any sub-limit under the Extra Cost of Reinstatement Memorandum and, if it is present, the Additional Extra Cost of Reinstatement Memorandum.

The question then moves to whether inaction by an Insured in not removing cladding known to pose newly identified dangers is failing in their duty and policy condition to act with reasonable care? That is a huge discussion point which I will touch on in tomorrow’s blog answering a different question on cladding.

I appreciate the whole issue around the building cladding is complex, particularly the question of who is responsible for the removal and refit? While all this is being sorted out the question then arises as to whether any further delays in endangering lives and making these buildings less affordable to insure due to the added risk that the material has created. My own view is that we need some serious leadership in this country on a range of issues such as this and as I mentioned yesterday flood mitigation.

Rob, I hope this answers you very topical and interesting question.

As always I would welcome any readers comments and their own take on the current situation.

We have also sat down and spoken to a company who manufacture a sandwich panel product, and we will be sharing the videos shortly on this for more information. Keep an eye out.


2 responses to “Blog Question on Non-conforming cladding”

  1. Robert Cooper says:

    Seeing the Spencer Street building fire and the Lacrosse Apartment fire that involved cladding was caused by discarded cigarette butts, along with inconsiderate drivers starting bushfires from flicking their Butts out the window, perhaps more should be done in this area of risk? Perhaps start banning smoking in all apartment buildings and their balconies. Substantially increase fines on any smoker who simply flicks his Butt away, whether walking down the street or from their cars. Make it compulsory that they all carry small containers to put their own butts in. The non-conforming cladding needs ignition. Sprinklers can put out the fires inside these buildings before they get to the cladding, but it appears it is the smokers causing the risk. Having said that, I am concerned about gas fired barbeques on such balconies too.

  2. Allan says:

    You are right on the money Robert. One of the issues is that there are so many transient people in some of these apartment blocks now. They will not have insurance and being people of straw their will be no right of recovery and you can never bring back a lost life.

Leave a Reply