Building law reform – risk and liability proposals
By: Stephanie Woods
Published: 7/06/2019
Liability of building consent authorities

The Ministry of Business, Innovation & Employment (MBIE) is currently consulting on a range of proposed reforms to building law.  One area of consultation relates to the allocation of risk and liability in the building sector.  One option being considered is a requirement for builders to offer guarantee and insurance products for all residential new builds and for significant alterations.  MBIE has also considered, and at this stage rejected, changes to the liability regime for building consent authorities.

Why are changes needed?

Research commissioned by MBIE has found that homeowners have a limited understanding of risk when commissioning building work and of how to manage that risk.  The research also found that enforcing the implied warranties in the Building Act 2004 can be difficult (or impossible if the building company has gone into liquidation), and that there was a lack of awareness of the availability of guarantee and insurance products.  It is estimated that such products are only used in around 40% of new home builds and renovations.  In Canada and Australia, such products are compulsory.

Although the sample size was small, these findings will not come as any surprise to anyone working in this area.  Unfortunately, it is often only after problems arise that consumers become aware of the need for such products, or of the limitations in the products offered to them.

What is being proposed?

Owners of new builds and those carrying out significant alterations would be required to purchase a guarantee or insurance product that provides cover for 10 years (to align with the protection provided by the implied warranties in the Building Act 2004).

These products provide protection against the risk of non-completion due to the builder going out of business, and also against the risk of defects.

Importantly, it is proposed that information about the warranty/guarantee product would be required to be included in the property’s Land Information Memorandum (LIM) so that new owners would be on notice that the cover was in place and could ensure that arrangements were made for the cover to be transferred.

The proposal includes provision for homeowners who wish to self-insure to opt out, but this would require an active election.

MBIE suggests that all types of residential buildings should be covered, but feedback is sought on whether the existing market will have capacity to provide guarantee and insurance products for high-rise apartments and mixed residential/commercial use buildings.

There are three options for defining what is a “significant alteration” being considered:
  1. Contracts with a value of more than $30,000 – this would align with the requirement to have a written building contract for all building contracts over $30,000;  
  2. Contracts with a value of more than $100,000 – this might more accurately align with what a typical consumer might consider to be a significant project, and a point at which most residential owners would prefer not to self-insure, but could create confusion given the different requirements in respect of a written building contract; or  
  3. An alteration that affects the structure or weathertightness of the property – this option focuses on the troublesome areas where insurance is most necessary[1] but would be a less clear definition to apply, potentially leading to uncertainty about when cover was required.
 
There would be a set of minimum standards for products being offered, including in relation to the:
  • Type of product (e.g. insurance, guarantee)
  • Types of events covered
  • Minimum levels of cover
  • Period of cover
  • Nature of redress
  • The maximum claim value
  • Disputes resolution processes
  • The ability to transfer the product to subsequent owners

One issue flagged in the discussion paper is whether the New Zealand market will have enough capacity to offer these products if they become required.  In Australia, when several States mandated purchase of these types of product, this led to the collapse of the private market and government intervention was ultimately required.  These types of products can be unattractive for insurers as they involve long tail liability insurance (10 years), for which a single fixed premium is paid at the outset. This means it is difficult for insurers to manage the risk.

MBIE believes that the New Zealand market will be able to respond to the demand but says that it will be doing more work to confirm that this is, in fact, the case.  

Liability of building consent authorities

MBIE also considered whether any changes should be recommended in relation to the position of Building Consent Authorities (BCAs).  The Law Commission, for instance, has previously recommended that liability of BCAs be capped.

Currently, it is not unusual for a BCA to be the last person standing in relation to a building defect claim.  Because of the operation of joint and several liability, BCAs may then face payment of a disproportionate share of the damages.  BCAs also have limited ways to manage the risk (which is ultimately borne by rate payers).

However, MBIE says that it has heard mixed views about whether the financial risks that BCAs face in performing their roles are significant.

Its research indicated that BCAs had paid out an estimated $1 billion for the period 2008-2018, of which about $332 million covered the cost of defects incurred by other parties who were unavailable to pay their share of the claims.  However, this is in the context of consents issued during the same period valued at approximately $75 billion.  Ultimately, the research estimated that around 2.5 per cent of residential building contracts resulted in disputes settled in court, or by other disputes resolution processes, and claims in court have been steadily decreasing since 2012 as the leaky building crisis recedes.

In light of the above, MBIE is proposing to leave the liability setting for BCAs unchanged but it is seeking feedback on this proposal. 

Next steps

The proposals can be found in the Building System Legislative Reform: Discussion Paper (Part Four: Risk and Liability) which was published in April 2019.

Consultation is currently open until 5.00pm on Friday 16 June 2019.

We would be happy to discuss if you require any assistance in making a submission.
 
 
[1] Most liability policies currently have exclusions for weathertightness related claims.


Stephanie Woods, Senior Associate
 


Email: stephanie.woods@wynnwilliams.co.nz
Telephone: +64 27 406 2775
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