PI policy carve outs for cladding – new MO effective 15 February 2020

Effective from 15 February 2020, the Victorian State Government has extended the permitted exclusions in ‘claims made’ professional indemnity policies relating to external wall cladding products to apply to all relevant industry professionals.  

Section 135 of the Building Act 1993 (Vic) allows the Minister for Planning to publish Ministerial Orders in the Government Gazette requiring building practitioners in specified categories or classes to be covered by insurance and to specify the ‘kind and amount’ of insurance required.

Frequently, the kind and amount of insurance prescribed under a Ministerial Order for any particular category or class of practitioner will permit defined exclusions or limitations to the indemnity otherwise required by the Ministerial Order.  It is then a question of checking the particular policy wording in any given circumstance to check that any permissible limitation or exclusion has been ‘picked up’ and incorporated in the policy wording and that the extent of any limitation or exclusion in the policy wording is consistent with that permitted by the relevant Ministerial Order.

In response to the ‘combustible cladding crisis’, by Ministerial Oder dated 11 July 2019 the Victorian State Government introduced a permissible exclusion to policies of professional indemnity insurance required by building surveyors, building inspectors and quantity surveyors to exclude liability in relation to loss or damage arising from building work connected with an ‘external wall cladding product’ or a ‘high risk external wall cladding product’ (as those terms are defined in the Building Act (1993) (Vic)).  The policies required by this Ministerial Order, as is usual, are a ‘claims made’ style of policy.

In circumstances where, absent any reform, it was feared that no insurer would offer insurance to these industry professionals, this reform enabled these industry professionals to continue to be both covered by the required insurance and registered with the Victorian Building Authority.  In short, they could continue to work.

By Ministerial Order dated 17 January 2020, the State Government has now extended very considerably that permissible exclusion to not only building surveyors, building inspectors and quantity surveyors but also to:

1. 1. civil, mechanical, electrical and fire safety engineers;
   2. draftspersons in the classes of building design (architectural), building design (interior) and building design (services); and
   3. architects registered under the Architects Act 1991 (Vic).

In relation to the classes of engineers and draftspersons (identified above) the new Ministerial Order revokes the Ministerial Order dated 11 July 2019 (above) and, in relation to architects, the new Ministerial Order revokes the Ministerial Order dated 12 May 2005.

The reforms are likely to have a significant impact on recovery prospects in any proceedings involving noncompliant external wall cladding products including State Government subrogated recovery proceedings under the recent cladding rectification amendments to the Building Act 1993 (Vic).  This is particularly so in the context of the application to any proceedings of the apportionment regime in Part IVAA of the Wrongs Act 1958 (Vic).

Apportionment legislation in building cases has been in place in Victoria since the introduction of the proportionate liability regime in section 131 of the Building Act (1993) (Vic) (now repealed) as part of a suite of similar nationwide reforms at that time (but excluding Qld and WA) .  The introduction of proportionate liability (and with it the abolishment of joint and several (solidary) liability) was largely brought about by pressure from professional indemnity insurers who paid out on claims in proceedings often involving moribund builders and uninsured defendants notwithstanding the insured professional was less blameworthy than other defendants (although still legally liable for 100% of the claimant’s loss).

This was referred to as the ‘deep pocket’ syndrome because the claimant would deliberately target (that is, by only suing or only executing any judgment against) the defendant/s who had the deepest pockets – typically those defendant/s with professional indemnity insurance cover.   As a result, the risk of under-recovery or non-recovery lay with the ‘targeted’ defendant/s who may not recover in contribution proceedings against other defendants any amounts paid to the claimant.  The proportionate liability regimes transfer the risk of under-recovery or non-recovery from defendants to claimants.

Given that the permissible exclusions to indemnity introduced in the new Ministerial Order in relation to claims involving non-compliant cladding extend to all relevant industry professionals who may conceivably have ‘had a hand’ in any wrongdoing, the pendulum appears to have swung from ‘deep pockets’ to ’empty pockets’.

Authored by:

Daniel Middleton, Partner
Andrew Archer, Special Counsel