Why are defects becoming harder to insure? – Part 1

2022 marked a significant change by insurers in their approach to insuring buildings that contain defects.  It is now becoming inherently difficult to insure buildings that have defects, this article is designed to provide guidance on how to avoid becoming uninsurable due to defects.

What is a defect?

For the purposes of arranging insurance, defects can range from a minor imperfection to a major structural fault.  Common defects include (but are not limited to):

• Leaks (external waterproofing failure)
• Structural issues (including problems with building foundations)
• Building damage (including unrectified damage from an insurance claim)
• Issues with utility infrastructure
• Safety issues
• Non-compliant building products (including cladding)
• Other imperfections, defects, errors, omissions or building issues

Why are defective buildings difficult to insure?

Prior to 2022, some strata insurers were willing to offer cover for strata buildings with specific terms, conditions and excesses applicable – this was designed to limit the insurers liability in a loss.

On 24^th June 2021, the Surfside Condominium (Miami, USA), a 12-storey apartment building collapsed, killing 98 and injuring 11. The collapse was caused by long-term degradation of reinforced concrete structural support in the building.

These issues had been reported in a 2018 inspection and noted as “much worse” in a subsequent inspection in April 2021. The building had approved a $15 million remedial works program prior to the building collapse. A legal settlement in excess of $1 billion was reached covered in most part by insurers of varying parties including the strata building, developer and security operator for the building.

This worst-case scenario has highlighted the exposure insurers have in covering defective buildings, particularly in instances where issues are known, as it increases the demonstrated negligence on the strata building.

Cladding

Cladding is an issue that is becoming a source of tension between policy holders and insurers.  Non-compliant cladding, which is also considered a defect, is on the radar of insurers since the destruction of the Grenfell Tower on 14 June 2017 in London, killing 72 people. The Surfside Condominium collapse on 24 June 2021 in Miami, Florida, demonstrated the extent to which insurers could be liable for losses. Due to these examples, insurers’ appetite to offer cover for buildings with cladding, is becoming more restrictive.

Australian Strata buildings have been required to register non-compliant cladding with relevant authorities.  This is a clear demonstration of a known issue for buildings with cladding that, if left unrectified can increase a building’s liability at the time of a claim.

In some instances, certain Australian State Governments are offering assistance in the removal or risk engineering of cladding, others States are slower to act. (This information may change over time. Please check with the relevant state authority.) Irrespective of assistance provided by government (or expectation of assistance), insurers are now starting to take the stance that, “failure to act in respect of combustible cladding is an unacceptable risk“.

Waiting for government action on cladding may render your building uninsurable, particularly in current market conditions.  If you have cladding, you should speak with us (or your insurance broker) to understand the impact this may have on insurability.

Now that we have given you an introduction to defects, what can you do to avoid being uninsurable?

To read more:

• Why are defects becoming harder to insure? – Part 2
• Why are defects becoming harder to insure? – Part 3