The outcome of legal cases is one of the most common ways that the risk profile of any industry can change. Being aware of the implications of Court decisions on your industry and business is an effective risk management practice. The same applies to new legislation introduced by Parliament. In this article we summarise some recent legal trends that may have implications to your business, drawn from Wotton+Kearney’s NZ Insurance Market Trends Update.
This article is designed to highlight potential areas of risk for building contractors and is not legal advice. We encourage you to seek your own advice if any of the issues below may impact your business.
Negligence Claims Arising from Natural Disasters
This was a trend observed after the Christchurch earthquakes, whereby construction professionals including engineers, architects, project managers and building contractors were the target of legal action. These cases involved claims that poor practices contributed to initial earthquake damage, as well as allegations of inadequately scoped or defective repair work.
With the scale of damage from floods and cyclones earlier in 2023 it is probable that this trend will be repeated. Legal action is possible against the same construction professionals, including geotechnical and civil engineers, if there is a reasonable prospect that negligence on behalf of these professionals may have contributed to flood or storm damage. This action may be taken by insurers, who are looking to recover their costs, or by property owners seeking to bridge the shortfall between their insurance or EQC settlements and their actual remediation costs. The targets of such legal action could even extend to the owners of neighbouring properties. A claim may arise if it can be established that the actions or inactions of a neighbour (such as the creation of hazards like diverting run off or failing to maintain culverts or manage debris) have contributed to the damage.
Additionally, post event remediation could also come in for scrutiny if that work is done inadequately. An example of this is the effect on bracing if damaged wall linings are cut out. In relation to this, MBIE’s Building Performance website states:
“Some work may require a building consent while other work may be exempt from the need to obtain a building consent. However, regardless of whether a building consent is required, all work must be carried out in accordance with the requirements of the Building Code and should not result in a reduction of performance of the building prior to the flooding.”
Implications
This is the minefield that builders will need to navigate if they are engaged in flood remediation work. Failing to meet these required standards could open the contractor up to claims by subsequent building owners.
The same may apply if mould and other toxic substances are not properly removed from a building. Unfortunately, liability insurance typically excludes claims related to mould, which means managing this risk in other ways is even more crucial.
A Builder’s Liability Is Not Necessarily Limited to 10 Years
This “longstop” limitation period, where no claim can be bought against a builder more than 10 years after the event, is written into the Building Act. However, it has been the subject of various Court cases that have sought to clarify just when it begins and ends. The current legal position is that the builder’s limitation period begins when the work at issue done, not necessarily when the total project is completed, which could be months or years later on large projects. The building owner may still have a claim against the Council if the damage is discovered within 10 years of the building consent being granted. And this is where it can get tricky.
In 2022 the Court of Appeal upheld a High Court decision that a defendant can join other parties to a legal action even if that party’s error was outside the 10 year period. This is because the Limitation Act gives defendants two years from the time they are held liable to join other parties that may have contributed to the claim. This period is not limited by the 10-year longstop in the Building Act. At the time of writing this ruling is being appealed to the Supreme Court.
Implications
A builder’s liability does not necessarily end 10 years after they did the work now as other parties may join them to a case later. The length of the run off period for professional indemnity insurance needs to be considered in light of this.
Purchasing Off The Plans
Increasing interest rates and tighter borrowing conditions are leading to greater numbers of buyers being unable to maintain previously pre-approved offers of finance. In the post-Covid period this was exacerbated by increasing property values and construction costs.
Implications
To avoid surprises developers need to be aware of this pressure and stay close to their customers as projects progress. The size of deposits and cancellation terms need to be assessed within this context.
Pre-Purchase Inspections
This area has always been a minefield and is viewed by insurers as extremely risky. In a recent legal case a pre-purchase inspection company was found liable for misleading and deceptive conduct and negligent misstatement. These are all breaches of the Fair Trading Act. In addition, the company’s owner was found personally liable as he performed the inspection and made negligent statements. The Court found that both the homeowner, who relied on the report, and prospective purchasers, were owed a duty of care by the inspection company and that they were entitled to rely on the report.
Implications
The case highlighted good practice for those provide pre-purchase reports. This includes having appropriate insurance; ensuring all limitations and disclaimers are contained within the actual report (rather than in separate documents or as part of an initial engagement letter or quote or provided to different parties than the ultimate recipients of the report) and being extremely careful when making absolute statements.
The Extension of Employment Protections
A wider range of workers are now covered by the protections enshrined in employment legislation. The Court has held that the test for determining whether someone is considered an employee is about the reality of the situation and how the relationship operates in practice, not any particular label applied to the role. This may include students on placement, volunteers, apprentices and interns. The Court also held that just because some activity is considered training doesn’t mean that it can’t also be considered employment. Receiving financial payment is also not required to consider someone an employee, as other rewards (such as food or accommodation) may constitute remuneration for their work.
Implications
Contractors should seek professional advice and be following best practice and when engaging anyone to perform work on their behalf.
A New RMA?
The Labour Government is replacing the Resource Management Act with three separate pieces of legislation. One of those, The Natural and Built Environment Act, introduces new and significantly greater fines and enforcement powers. These fines, currently insured under statutory liability insurance, won’t be insurable under the new law. New civil penalties called Pecuniary Penalty Orders will be introduced and these will be insurable. It remains to be seen whether a new incoming government will repeal or amend this legislation.
Implications
In the same way that Health & Safety At Work Act fines aren’t insurable, Natural and Built Environment fines won’t be either. Environmental practices should be prioritised and managed in the same way that health and safety practices are now. Builders can expect enforcement of breaches of environmental laws to increase and become more punitive.
The Difference Between the Liability of a Trust vs a Partnership
For the purposes of the Health & Safety at Work Act and Resource Management Act partnerships are considered to be “people”. This means they can be charged and found liable for fines and the fines can be larger because those acts have higher penalties for non-individuals. The individual partners should not, in principle, receive a criminal conviction. Whether the Court can reach beyond the partnership and into the pockets of the individual partners to satisfy any fines is as yet unclear.
In contrast, trusts are not considered people. This means trusts can’t be prosecuted under these acts, it is the individual trustees that are held liable. Consequently, the maximum fines available are lower, but the trustees can be convicted and may have those convictions entered into their record.
Implications
The structure of your enterprise, which your accountant may have recommended specifically for tax purposes, can have substantial unintended consequences when it comes to the liability of both the entity and its principals in law.
Are Subbies Insured by Contract Works Insurance?
It is common and indeed recommended that subcontractors are included as insured parties on contract works insurance. This avoids having multiple policies and multiple insurers covering the same project and the challenge this would present in the event of a large claim. It is also typically more cost effective and efficient.
However, a recent case from the UK has established that just because a subcontractor is included on a contract works policy doesn’t mean they can’t be held liable by another party to the contract for damage covered by the policy. In this specific case the damage was caused by defects in the installation by the subcontractor. The contract works insurer, after paying a portion of the claim, brought proceedings to recover their cost from the subbie. The Court decided that it is the underlying contract that should determine the intention and scope of responsibility by the parties, despite it being clear that the subcontractor was an insured party under the contract works policy. The building contract made it clear that the insurance would not extend to claims arising from defects and it did not include any authority or intention that the principal contractor would arrange such insurance on behalf of the subbie.
Implications
Just because a contract works policy may by default show that the insured parties “includes sub-contractors”, this doesn’t mean that a subbie who causes damage will automatically be covered, especially if the underlying contract says something different. Subbies need to ensure they understand and comply with the terms of their contract, negotiate any changes that may be necessary to manage their liability and ensure the contract clearly establishes that they are covered by contract works insurance arranged by the main contractor or principal.
In Summary
Court decisions in New Zealand, as well as Australia and the UK, can have implications on the risk environment building companies operate within. It is important to be on top of these developments and ensure you are taking them into account when making business decisions. Frequent reviews of your risk register and risk management plans is a good way to mitigate the effects of a regularly changing legal and regulatory environment.