Cladding high stakes challenge

By Nikki Mandow | Vol: 42 Issue: 1 | Mar 2019
  • Claims
  • General Insurance
  • Reinsurance
  • Risk Management
  • Insurance Broking
05JOU_0319_800 Journal_Vol 1_Cladding

Aluminium building cladding: the insurance challenge

The construction industry’s difficult adjustment to London’s Grenfell Tower fire leaves insurers struggling to correctly price cladding risks.

In the middle of the night of 14 June 2017, a small fridge-freezer fire set off smoke alarms in a fourth-floor flat of the 24-storey Grenfell Tower in West London in the UK. As a fire crew searched for the source of the fire, it spread out of the kitchen window, setting alight the aluminium composite panels (ACPs) cladding the outside of the building.

These panels’ aluminium front and back sandwiched a highly combustible middle layer of polyethylene that eagerly fed the flames. Fire engulfed all four sides of the building within minutes — and 72 people died.

Grenfell Tower wasn’t an isolated incident. Since 2010, ACPs have featured in tower fires in the UAE, Hawaii, South Korea and France, though none with the same loss of life. Australia has had its own non-fatal ACP fires, in Melbourne’s Lacrosse building in November 2014 and a Spencer Street apartment block in February 2019.

But Grenfell Tower was the catalyst for change — a tragic wake-up call to governments, building owners, construction-related professionals and insurers. In the past 18 months, regulators have started rewriting building codes, tightening enforcement, increasing penalties for breaches and ordering building audits.

Natasha Stojanovich, special counsel with law firm Lander & Rogers and an expert in cladding claims, notes that building owners and body corporates generally have primary responsibility for ensuring their ACP-clad buildings are safe, including responsibility to pay for remedial work.

In the face of these substantial potential costs, owners are looking for other people, such as builders, to pick up the tab. As a result, there’s likely to be a lot more litigation.

The next phase for insuring ACPs

It’s no surprise that insurance premiums have gone up, in some cases substantially, over the past year. Several insurance companies have pulled out of insuring such buildings altogether, and others have introduced wide-ranging exclusions into their policies, both in terms of material damage insurance and PI liability insurance.

Broker Darren Pavic, from Australia’s Bovill Risk & Insurance Consultants, cites one policy that excludes an insurer from paying out for any costs involving ‘any external insulation and finishing system, wall panelling, cladding or facade material of any kind’ which might be noncompliant with building codes or installed in such a way as to be noncompliant.

Auckland-based lawyer Helen Macfarlane, a partner with law firm Hesketh Henry, is a specialist in construction and insurance issues around cladding. (She also lives in an apartment block covered with 100 per cent polyethylene cladding and works in a building with some combustible panels). She and others in the field expect to see insurers raising their scrutiny of building fire safety systems as the cladding challenge enters its
next phase.

The insurance assessment challenge

One problem for insurers is knowing whether a building has combustible cladding on the outside or not. Often external assessment is insufficient to identify the composition of cladding; someone has to take a portion off and get it checked. And building plans and permits won’t necessarily help if, as happens not infrequently, noncompliant materials have been substituted for the ones specified in the original design.

Legislation requiring a register of buildings with combustible cladding is at various stages of completion in the different Australian states and in New Zealand, but until the list is complete, building owners and their insurers need to be proactive.

Jonathan Barnett, managing director of Melbourne-based forensic and fire safety engineering company Basic Expert, points to a number of assessment problems, including a shortage of engineers to evaluate buildings’ fire safety.

Barnett says Grenfell Tower and the Australian reports make clear that building engineering has experienced a failure of self-regulation — ‘otherwise, why did all these buildings get built?’

He notes that while the assessment problems remain, insurers are being cautious. ‘Without the information they need, how do they make a decision?’.

If insurance companies get it wrong, they could face expensive claims, adds Barnett. ‘So they look at the cost and adjust the premium appropriately, or they say “we won’t go there”.’

The uncertain road for building cladding

Peter Jones, national underwriting manager for underwriting agency CHU, says government can help by ensuring regulation and certification systems impose proper standards. ‘We need a plan from governments so this situation is not repeated with other building materials,’ he says.

Jones supports legislation passed in Queensland since Grenfell Tower. The new law imposes much greater liability right across the supply chain for noncompliant materials. 

Helen Macfarlane wouldn’t be surprised to see building owners getting together in class actions over ACP cladding, just as manufacturers and suppliers of cladding have been sued in defective product actions. But none of these defective cladding claims has yet worked through trial to a judgement, she says.

Simon Ladd, a litigation partner specialising in construction and insurance law at New Zealand law firm Bell Gully, notes that the combustible cladding situation is different to that of leaky buildings in that until there is a fire, the cladding problem is outwardly invisible. He expects tighter regulation and a more proactive approach from councils, but says owners won’t necessarily be forced to replace cladding immediately. And he doesn’t think regulators will require apartment owners to re-clad their buildings ahead of schedule, as long as the buildings otherwise meet fire safety standards.

Ladd says New Zealand building owners might think about dealing with combustible cladding in tandem with seismic strengthening or remediation of leaky building problems.

Most observers agree this is the beginning of what could be a long road to deal with noncompliant ACPs. And the situation for insurance companies, as for building owners, construction professionals and regulators, is far from clear.

‘It’s a very difficult market,’ says Darren Pavic. ‘No-one has any idea where it will end up.’

What insurers should be asking about cladding

New Zealand lawyer Helen Macfarlane says insurers need to ask key questions about building cladding and fire protection.

‘They need to be looking at what sort of cladding it is: 100 per cent polyethylene core or 30 per cent or 8 per cent? What are the systems in place to avoid the fire spreading to the cladding or up the building — fire alarms, sprinklers, cavity barriers or fire stopping? How close is the building to neighbouring buildings? Have there been fires there before and were they controlled?’

The Residual Hazard Identification Protocol developed by Australian insurers in November 2017 and updated in December 2018 can also be used to assess risk in ACP-clad buildings, Macfarlane says. 

But the mere presence of combustible cladding should not make buildings uninsurable, she says.

Simon Ladd, from New Zealand law firm Bell Gully, agrees. ‘If I was an insurer, I would be including specific questions requiring disclosure of the cladding system,’ he says, ‘and if there is ACP on the building, then I would want to see a fire safety report.’

What are regulators doing?

Different jurisdictions are taking quite different approaches. For example: the UK has banned all combustible cladding on residential buildings, hospitals, care homes and student accommodation more than 18 metres tall.


New laws impose greater liability down the supply chain for noncompliant cladding installed after 1 November 2017.

New South Wales

Has banned ACPs with a core of more than 30 per cent polyethylene on multi-storey buildings, unless the building passes a fire safety test. Fines can total up to A$1.1 million for companies and A$220,000 for individuals.


Has beefed up inspections of buildings under construction as it tries to improve compliance. It has banned ACPs with a polyethylene core of more than 30 per cent from government contracts; using them on other multi-storey buildings needs specific approval. The government is taking steps to make sure building surveyors don’t have prohibited exclusions from their PI insurance policies.

New Zealand

The Ministry of Business, Innovation and Employment announced it was suspending the CodeMark certification for six ACP products and one certifier.

New Zealand gears up

Lawyer Helen Macfarlane expects heightened awareness and tighter scrutiny will start feeding through to New Zealand insurance policies as they come up for renewal in 2019. She says the New Zealand Ministry of Business, Innovation and Employment and local councils have become active around New Zealand’s cladding-related risks, following the lead of regulators in Australia and the UK. She expects premiums to go up in New Zealand for some buildings, too. ‘If I was an insurer, I would be looking at hiking premiums rather than refusing insurance altogether,’ she says.

The exclusion challenge

Professional indemnity insurers are increasingly putting cladding material exclusions into policies for construction professionals. Broker Darren Pavic says some exclusions can be broader than simply covering aluminium composite panels with polyethylene cores, and some insurers are drafting their own broad definitions of ‘noncompliant’ and ‘nonconforming’. Construction professionals with policies containing such exclusions may be in breach of their statutory obligations to maintain compliant insurance, Pavic says. He’s aware of several construction industry practitioners being given weeks to get compliant insurance or have their professional registration removed.

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