New legislation in NSW aims to boost construction industry

For homeowners and investors with interests in the Mascot Towers, Opal Tower and, most recently, Castle View’s Skyview apartments, recent changes to construction-related legislation in New South Wales may have come too late. 

However, builders and developers will be hoping that tougher regulations will instil new confidence in the residential apartment building market.

KEEPING AN EYE ON LEGISLATION 

One expert who has kept a close eye on the legislation as it has progressed through NSW Parliament is MECON Insurance CEO Glenn Ross. 

Founded in 2003, MECON is rated among the top three construction risk insurance providers in Australia, and also has an emerging presence in New Zealand.

Prior to starting MECON Insurance, Ross spent 15 years underwriting engineering risks in Australia and for New Zealand’s Engineering Insurance Bureau, NZI and Lumley Insurance. 

He also spent more than a decade as an insurance broker with Marsh in New Zealand, where he specialised in construction, plant and engineering insurance. 

During this time, he was considered to be a risk manager for Fletcher Construction, one of the top 20 multinational construction companies.

ADVOCATE FOR HIGHER STANDARDS

Ross also served on a multidisciplinary committee that lobbied the NSW Government to improve building standards to reduce the incidence of defects. 

Most recently, he has been working with engineers, fire surveyors, construction companies and other construction industry stakeholders, in conjunction with Equifax and the NSW Building Commissioner.

‘We lobbied for six or seven years to try and get the government to improve building standards,’ he says. 

‘What prompted the government’s action — including appointing a building commissioner — was the media attention on Opal Towers and Mascot Towers, and those buildings are just the tip of the defective-building iceberg.’

THE LATEST RULES

In 2020, the NSW Parliament introduced the Design and Building Practitioners Act 2020 (DBP Act) and passed changes to the Building and Construction Industry Security of Payment Act 1999 (Security of Payment Act) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act).

‘The legislation changes apply to class 2 buildings [multi-unit, multi-storey residential buildings], but I anticipate that the changes will become more encompassing in time — and may ultimately be pushed across to single-level residential building,’ Ross says.

While the industry has welcomed the changes for the most part, there has been some fallout over increased administration costs for construction companies and developers.

‘The larger construction companies are generally on board,’ says Ross. 

‘However, some good builders who dabbled in class 2 buildings, have found the new red tape too onerous and have opted to specialise in other construction classes. Some not-so-good builders have also opted out of class 2 buildings.’

INSURANCE IMPLICATIONS

Ross says insurance brokers need a working knowledge of the changes to the NSW legislation so they can speak confidently to their clients about the risks — and construction clients definitely need to be fully across the new regulations.

‘Changes to the Design and Practitioners Bill to class 2 buildings introduce insurance in a non-specific way,’ he explains. ‘For instance, what counts as “adequate” insurance? Is it what we have in the standard conditions of an insurance contract?

‘As we have seen previously, these definitions are often judged in hindsight by the courts. If there is an accident on site, even if the site and processes comply with normal practice, the court might ask if it’s good practice,’ he says.

NEW RISKS

The legislation also introduces professional practice regulations for builders and introduces new risks that practitioners should consider carefully.

‘The legislation contains [Continuing Professional Development] CPD requirements and outlines penalties for builders,’ Ross says. 

‘Practitioners must be registered, and they also have to make a declaration that a building complies with the Building Code of Australia. That, in itself, has significant implications for professional indemnity.’

UNSUSTAINABLE PREMIUMS

Ross says overall, the legislation has a bigger impact on materials insurance than on liability insurance.

‘WorkCover claims can be lodged many years down the track and can cost millions of dollars. A claim also sets off a cycle.

'If someone is injured and lodges a claim, the workers compensation insurer attempts to sue the person responsible for the injury to recover the monies, which invariably leads to an increase in public liability premium for that person. 

'It’s a flawed system and the volume of premiums — collected from only around 360,000 registered builders — in the space, isn’t currently enough to cover the high awards to injured parties.'

According to actuarial analysis using the national claims database, construction public liability currently runs at a 120-plus per cent loss ratio. Therefore, to make money, insurers would have to virtually double the current liability premium levels.

A RATING TOOL FOR BUILDERS

While the definitions around insurance coverage may need further clarification, Ross believes that the new legislation — and a new online builder-rating tool — will ultimately lead to better-quality building.

‘The commissioner’s committee worked on an independent rating tool (iCIRT) that is rolling out now,’ he says.

The rating tool will allow stakeholders to see how a particular builder is risk-rated using a wide variety of data.

‘It will take much of the guesswork out of assessing builders operating in a certain class of build. That’s fantastic for people buying into a new development, financiers and insurers,’ Ross says.

REWARDING GOOD PRACTICE

Greater transparency should reward construction companies that deliver high-quality buildings with repeat business and greater access to funding, while poor performers are forced to improve, or opt out of the market.

Ross says: ‘As the legislation permeates and the new rating tool has an effect, it should result in a reduction of risk and a reduction in premiums.

'However, construction is currently operating in a very hard insurance market. Liability in Australia has made construction insurance unprofitable, so even with these changes, and risk improvement, I can’t say that premiums will be reduced.’

WELCOMING THE CHANGES

As a 30-year veteran of the construction insurance industry, Ross welcomes the new legislative changes — especially as they mean the regulator now has some teeth to take action against poor-performing builders.

‘The building commissioner now has pretty heavy artillery — including withholding occupational certificates. Plus, the legislation applies retroactively to buildings up to 10 years old,’ he says.

With luck, the changes NSW is making now will result in a flourishing local building industry and make assessing risk in the construction insurance market simpler.

FIND OUT MORE

MECON Insurance CEO Ross will lead an ANZIIF webinar about recent changes to NSW’s construction legislation and what insurance professionals need to know about the new Design and Building Practitioners Act.

Participants will receive a comprehensive paper written by a lawyer for builders which they can share with clients.