There was a lot of press during 2019 about the state of the professional indemnity insurance (PII) market in Australia for private building surveyors (also known as building certifiers). We heard of soaring premiums, reduced coverage, increases in excess and the introduction of cladding exclusions. Some insurers pulled out of the market and toward the end of 2019 there was a stop on issuing new PII policies to surveyors altogether. This was because insurers had reached their maximum limits on writing policies for this market for the calendar year. In the wash up of 2019 some building surveyors retired or left what is already an under resourced profession.
During 2019, some governments amended their mandatory requirements for insurance to enable building surveyors to hold policies with exclusions for claims relating to cladding. The end result was that to stay registered and be able to practice, building surveyors were forced to sign up to very expensive but highly compromised PII policies.
This is a national issue. It has been on the agenda of the Building Ministers Forum for over 2 years. The BMF has continued to assure stakeholders that it is in ongoing discussions with the insurance industry about the PII ‘crisis’. Recent reports from industry associations are that the BMF have accepted that the behavior of insurers in 2019 was a reasonable market correction and that enough building surveyors were able to get cover and absorb the increased costs.
I have been a little disturbed recently by reports from a small handful of private building surveyors in Victoria that have completed their PII renewal process for 2020. What they have experienced signals another year of massive increases in premiums and excesses. Here’s what the 3 year comparison looks like in two examples I have been told about. In both cases the surveying firms have similar businesses mostly issuing permits for class 1 and 10 and a small number of low rise class 2-9.
Example 1 Example 2
|31 Mar 18||$53,000||$3 million||$20K||$35,000||$10 million||$15K|
|31 Mar 19||$99,000||$3 million||$25K||$80,000||$ 2 million||$50K|
|31 Mar 20||$171,000||$3 million||$100K||$180,000||$ 2 million||$125K|
My view is that if these examples are indicative of what is to come, it is time for governments to remove the requirement for building surveyors to hold compulsory professional indemnity insurance. I explain why through a serious of questions and answers as follows.
If surveyors don’t have to have PII insurance, where will that leave consumers?
Consumers may be less impacted by a decision to remove the requirement for mandatory insurance than you might think. As is presently stands, consumer protection is already heavily compromised. The allowable exclusions for cladding are very broad and substantially compromise cover and therefore consumer protection. Because of the size of excesses under these newer policies, the building surveyors will effectively be self-insuring. One or maybe two claims will send most businesses into insolvency meaning consumers will not be able to make claims at all and existing projects will have to be transferred. Even if only a small number of surveying businesses close, thousands of owners will be affected by having to transfer their building permits to local government or another private building surveyor. Many private building surveyors will consider it too risky to take on projects that have already commenced leaving governments to wear this risk.
Would this mean surveyors would not hold PII at all?
Not necessarily. Most building surveyors will still prefer to have PII and will voluntarily seek cover. It’s impossible to say what products insurers might offer if cover was voluntary. Some contracts for surveying services will still require building surveyors to have PII cover if they can get it. This may lead to an increased market for project specific policies or for owners having the option to buy cover for their project. There is of course a risk that building surveyors will not obtain cover in the short term and will have to self-insure.
Does COVID 19 have anything to do with all this?
I don’t believe COVID19 has influenced the position that PI insurers seem to be taking in 2020. However, whilst the construction industry continues to operate as an ‘essential service’ I am told that new starts (and therefore applications for building permits) are down by up to 70%. Therefore the financial pressure on building surveyors over the short term must be enormous. To add a business cost increase for PII of around $100K per year, will surely have the potential to cripple building surveying businesses. For most building surveyors their policy renewal date will be mid-year. After 3 months of falling revenues due to COVID 19 restrictions increases in premiums signaled by the examples set out above will hit very hard.
What about claims relating to combustible cladding installed on buildings that are the subject of cladding audits by the governments?
Because PI policies are ‘claims made’ and because of the cladding exclusions that now apply to most policies, if a claim was made today in relation to combustible cladding installed in the past, the current insurer is unlikely to accept that claim. However, for the past 2 or 3 years, building surveyors were advised when renewing their PII policies to notify insurers about any building that they issued building permits for that had combustible cladding. Therefore, if a claim is made against a building surveyor in relation to a building and that building surveyor made a notification to an insurer about that same building, there is at least some prospect that the insurer holding that notification would respond. This is so regardless of any decision the governments may make now to remove the requirement for mandatory cover.
What will happen if the government does not remove the requirement for compulsory PII insurance for building surveyors?
I don’t see how many building surveying firms can sustain businesses paying these kinds of premiums and excesses over the longer term. On the two examples I have given, with next to no notice, the PII costs have doubled to over $3,000 per week. They also need to have enough money in reserves to pay the excess if any claim is made. Those that become insolvent or avoid insolvency by closing their doors would not be able to complete hundreds of existing permits, those permits would have to be transferred, probably to local or state government, neither of whom are likely to have the resources to respond promptly. These costs might drive building surveying business to increase revenue by accepting more applications for permits leading to reduced service levels and a higher risk of claims. We might also see businesses restructure to avoid claims. This is already occurring and it leaves consumers with no one to sue. In late November 2019, we were told that all insurers had reached their maximum for writing policies in Australia. One can only assume that this massive jump in premiums will mean that the maximum value of policies for 2020 will be reached even earlier this year, leaving many surveyors without policies.
The ‘good’ surveyors shouldn’t have claims so they won’t need to find the money to pay excesses and they will be ok.
For many years building surveyors have been one of the few parties in the building chain that holds compulsory insurance meaning that they are joined to a large percentage of building defect claims. Once threatened with legal action, they must make a claim on their PII policy. The Insurers step in to respond to the claim and the surveyor has little say in how the response is managed. It has been common for insurers to settle the claim, however frivolous, rather than incur the legal costs to defend the building surveyor. This whole scenario has led to a disproportionate skewing of liability to building surveyors. Even very good building surveyors have been unable to avoid claims. The likelihood that a building surveyor will have to find these exorbitant excesses to respond to claims over coming years is very high.
Why are insurers charging so much for PII?
The insurance market is pricing the risk they see in the sector. The Insurance Council of Australia has been firm in saying that the insurance market is merely responding to the systemic failures that have manifested themselves in problems like inappropriate use of combustible cladding. They can’t be forced to lower premiums or excesses. They will not sell policies that will put them at risk of suffering losses.
What about other consultants that are required to hold PII such as engineers and architects?
Some engineers and architects are required to hold compulsory PII. In Victoria recently, the insurance orders were amended to also allow these professionals to hold policies with combustible cladding exclusions. These groups have also reported increases in premiums. I do not have any figures to conclude that they are affected in the same way as building surveyors so at this time I don’t know if governments should also remove the requirement for compulsory PII in relation to engineers and architects.
Published on Linked In: 8 April 2020