Why insurance will not meet the cost of removing and replacing non-conforming building materials
The vast majority of insurance policies that insure buildings and or the liability that may arise from owning or occupying one, contain a number of standard exclusions found across the entire market that specifically exclude claims arising from faulty workmanship, faulty materials and or faulty design.
These policies include but are not limited to residential home, residential and commercial strata, contract works, industrial special risks (“ISR”) policies, business packs, rural packs and the list goes on.
The reason for this is quite obvious if you think about it. What would happen if policies covered this. Some, lets be frank here, many in the construction industry would take the approach that they need to take no care as insurance would pick up any shoddy work, rubbish materials or design that simply does not and would never work.
How would that benefit society and how could it ever be funded.
All of us have to take responsibility for our actions. The person who made the mistake whether that be the one that did the faulty work, or depending on the circumstances designed, chose, designed, recommended, manufactured or imported the faulty materials needs to rectify the problem.
Where insurance steps in, at least within quality insurance policies, is to assist innocent parties from the resultant damage caused by the faulty workmanship, faulty materials, faulty design.
For example, if I take an ISR policy for example, if a builder used the incorrect screws to fit down a roof and during a storm the roof was blown off and the interior of the building and its contents were damaged the policy would not cover the cost of labour or materials to replace the screws but the storm damage to the roof sheeting, the water damaged building and contents would be covered.
The ISR insurer would then look to recover from the builder who used the wrong screws or the designer who called for the wrong screws or the supplier who supplied the wrong screws, that is whoever was responsible for the incorrect screws to be fitted to make good the resultant damage. This of course is complicated between the storm damage which would have happened and the contribution the incorrect screws made. I will leave this complication out of it as this is a case by case issue.
But what is important is that the liability policy, whether this is a construction liability policy, a broadform public and products liability policy, or a professional indemnity policy contains a similar exclusion around making good faulty materials, faulty workmanship, or faulty design.
The cost of redoing the work, replacing the parts or redoing the design is not covered. That is a business risk that rightly ought to remain with the business or individual concerned. The resultant damage is, depending on the quality of the policy, covered.
I often have to explain that Products Liability policies do not cover the product but the liability arising from the use or failure of the product.
There are very sophisticated product guarantee products available in the general insurance industry but due to their high cost and the amount of risk management / quality assurance programs required to obtain the coverage, it is not very often taken out.
For government, which I might add has been taxing general insurance mercilessly for as long as I have been in the industry to contribute to the cost of making good the non conforming materials when these exclusions have for the reasons outlined above been in place since the very introduction of these policies shows a complete lack of understanding on how or why insurance works.
The harsh reality is that the this has been all brought about by the failure of government policy and government oversight.
I started this blog in October 2011 and during that time I have posted many articles about non conforming building materials and recalled building products. Not just the flammable paneling but extremely dangerous electrical cabling, and other materials that should never have come into this country. It has been so hard to get for me and I know many others to have government and regulators take any action. I got to the point where I thought it would take a death of some innocent person before we got action. But that is another story.
I end with one last point that I do not believe is being considered, at least not publicly. That is the issue of betterment. Let me take the electrical cabling I fought so hard to get taken off the market. It was copper coated aluminum with a faulty plastic sheet. The product was 70% of the cost of a product that genuinely met Australia Standards. Who is going to meet the cost difference between what was paid for the original product and the correct one.
The flammable paneling was used because of its light weight, its insulating properties, its sleek clean appearance and of course the cost. So if we have to do separate insulation, reinforce / strengthen the building to carry the weight of the replacement cladding who is going to wear this? The tax payer?
If this was an insurance matter and in most cases it is not, the cost of betterment would be to the owners as they would have had to pay for this in the first place.
As I was about to sign off this post, I thought of another problem we have to address during natural catastrophes and that is demand surge. With so many buildings needing to be rectified, the urgency of the situation coupled with the basic economics of supply and demand and the greed we have seen so clearly in the construction industry who is going to monitor that and keep it under control.
As I was driving along discussing the crisis in the construction industry with a senior colleague he pointed out the Glen Iris Fire Station pictured here that was built by government, [and funded in the majority by fire service levies on the insurance industry], at a cost of $5.5 million that had to be completely demolished to ground level as the floor of the station could not cope with the weight of the fire trucks. This basic requirement was not addressed until tax payers money was wasted building the entire building only to be knocked down again.
I could go on but the failure in this example are of course not isolated and the topic for another day.
Back on topic, I hope this explanation of why property and standard liability insurance should not and will not be meeting the cost of fixing this mess helps.