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Economics References Committee
Non-conforming building products - the use of non-compliant external cladding materials in Australia

RATZ, Mr Laurie, Special Risks Manager, Insurance Council of Australia

SULLIVAN, Mr Karl, General Manager Risk & Disaster Planning, Insurance Council of Australia


CHAIR: Welcome. Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.

Mr Sullivan : Thank you, senators. It will be a very brief statement. The role of the insurance industry in this issue is that we price residual risk. In order to do that, we, naturally, rely on their compliant construction of the built environment and the fact that it has been certified as fit for occupation and fit for purpose. Insurers use a variety of methods to then further clarify the risk, but, essentially, we have incorporated all of the safety measures et cetera that the building industry is required to have put into a building in order to determine a fair price for what the residual risk of a total loss may be.

When it comes to non-compliant or non-conforming building products, we are as concerned as anybody else with that, and that has been a long-standing concern. The National Construction Code—and the former Building Code of Australia—is, in our eyes, a very robust set of methodologies for constructing buildings. However, it can be improved. One of the major ways that it can be improved, of course, is through the compliance-checking regimes that are devolved down to state and local governments.

Where an insurer determines, or becomes aware, that a building is not built to a compliant level or has non-conforming building products in there that might present a risk to the building itself, insurers have a range of options open to them. At the worse end of the scale, these include no longer insuring the building, but at the lower end of the scale it might be requiring some kind of rectification or risk mitigation system in order to lower the risks to the building or introducing clauses and exclusions into the policy to limit the amount of risk that the insurer is holding in that regard.

One of the ways that we see that this can be rectified is, naturally, to find out how big the level of risk is out there at the moment—so a national audit, either through the states or conducted nationally—to determine the level of compliance of all of these buildings as they stand out there. I'd suggest that it would be rare indeed to find a building that is 100 per cent compliant with all measures in the Building Code. There are always compromises. Some of them are quite grave. Some of them are things that can be easily rectified or risk-mitigated. Once a national audit program is done, or at least one at the state level, of course the community and those responsible can set about rectifying the non-conforming building product issue or introducing risk mitigation that brings the risk down to an acceptable residual level that can be insured for future use.

In the longer term, we see a need in Australia for more building products research. We quite often use overseas bodies to do this for us because of the lack of capacity here in Australia. The one we often point to is the New Zealand approach to things. The previous witnesses spoke about the leaky building syndrome. It was set up after that in New Zealand. There are organisations like BRANZ, Building Research Australia and New Zealand, funded by the building industry through a levy where they conduct testing on materials like these panels and on building methodologies to determine whether they will be compliant or not.

Senator XENOPHON: Is that primarily for use in buildings in New Zealand?]

Mr Sullivan : It is entirely for use in New Zealand. They did embark on some—

Senator XENOPHON: So, although it mentions Australia and New Zealand, it's basically for New Zealand buildings?

Mr Sullivan : I think that might have been something to do with marketing and trying to bring it over here to Australia, but it is primarily focused in New Zealand.

Senator XENOPHON: And we don't have that protection here?

Mr Sullivan : I wouldn't call it protection, but it's research. It's invaluable research.

Senator XENOPHON: The safeguard can lead to protection.

Mr Sullivan : Absolutely. I will leave my opening remarks there.

CHAIR: The building surveyors that appeared before us earlier today talked about the fact that they're starting to see exclusions in their professional indemnity insurance in relation to external cladding materials. Do you have any insight into that? Are you able to tell us more about that?

Mr Sullivan : I have no direct exposure to those clauses. However, it would be open to any insurer operating in the indemnity space to start to limit the potential losses that they see there arising from matters like choosing to use an inappropriate building material. In general, an indemnity policy is not going to protect you against negligence, and you will start to see, globally, insurers limiting the potential losses in there.

CHAIR: Do you have a view as what's causing the prevalence of the use of non-compliant building materials?

Mr Sullivan : Having listened to the previous witnesses, I agree with many of the points there. It's essentially that we have quite a robust National Construction Code and set of building codes in Australia and an almost bewildering array of regulations, all to do with performance. A number of years ago, there was a move away from having strict deemed-to-comply measures or alternative solutions in there. That does open the door for a range of innovative practices, which is not always bad. However, the lack of compliance checking and certification at different stages through a building process, be it a small standalone house or a very large building like the one we're in now, does leave itself open to corners either inadvertently or deliberately being cut. I'd suggest that most of the time it is going to be price that dictates the innovative solution being adopted, including innovative building materials.

CHAIR: What about owners being left with the responsibility for the cost impact of non-conforming materials?

Mr Sullivan : That brings me back to the urgent need to do at least a state level or a national level audit to determine the size of this problem and then to start looking at who is responsible for doing the rectification work or the risk mitigation work to bring the risk down to a certain level. There have been a number of buildings assessed down in Melbourne, as we understand it, as having non-conforming building products, but they have been left with their occupancy because the risk has been presumably mitigated to a level where it is safe to leave the occupants in place.

Senator KIM CARR: In that case, the owners of the individual units are responsible for mitigation. If you are not prepared to insure them, what protections do individual owners have in that environment?

Mr Sullivan : I am not aware of any insurer not insuring these buildings at this stage. We have a very different situation to that in the UK, where buildings over a certain level do have quite comprehensive fire suppression and fire protection systems.

Senator KIM CARR: But the evidence we are getting is that insurance companies are now considering not insuring buildings that are noncompliant

Mr Sullivan : It would be open to an insurer to do that—

Senator KIM CARR: You have said that yourself?

Mr Sullivan : but we have not seen that occur yet. Insurers are far more inclined to work with the clients to work out how the risk might be mitigated or more finely measured so that they can continue to offer coverage for the building whilst rectification work is being done or whilst additional risk mitigation is put in place. At this stage, we are unaware of anybody being told that we will no longer insure their building. However, at the worst end of this scale, that is certainly a possibility if the extent of their non-conforming building product and the level of risk is so gross—

Senator KIM CARR: Mr Sullivan, if you have a sprinkler system that does not work and the insurance company knows about it, why would you insure the building?

Mr Sullivan : If the sprinkler doesn't work?

Senator KIM CARR: Yes.

Mr Sullivan : Certainly, the building should not even be occupied at that point.

Senator KIM CARR: But it is. We have examples of this, where faults have been found, because buildings have been certified and they have non-conforming safety standards. I presume that, if you were to know about that as well, you would not insure the building.

Mr Sullivan : That would be an option open to any insurer to say that they will no longer insure the building if it is inadequately protected or not up to the code. I am not aware of that occurring; but, in a gross example of it, it would certainly be something that could occur.

Senator KIM CARR: Equally, wouldn't it be the case that, if there were a claim on an insured building, the insurance company may well be reluctant to pay out on that claim?

Mr Sullivan : We do see that from time to time, even with small buildings where, for example, gutters might have been installed incorrectly or with the wrong material, and those gutters have then failed to move water away from the building as should have occurred, and that has subsequently caused a lot of damage to the building. You can see the complication of a claim as a result of that, anywhere up to and including a denial of liability.

CHAIR: So the owner is then left to pursue that matter with the builder, presumably?

Mr Sullivan : Yes.

Senator XENOPHON: And then there is a legal bunfight as to who is responsible for what, as we have seen with the Lacrosse towers.

Mr Sullivan : It is a very uncomfortable position for people who have purchased these assets that turn out to be noncompliant in some way.

Senator XENOPHON: It is more than uncomfortable, isn't it? It could be financially devastating for them, assuming that no-one is hurt.

Mr Sullivan : Yes.

Senator KIM CARR: As you know, insurance companies are not always popular when it comes to major disasters. Are you saying that no building in this country has been refused insurance because of noncompliance? That is the proposition?

Mr Sullivan : Not that I am aware of at this stage, in this context of non-conforming building products. However, it might have occurred, but I would say categorically that it is possible that that could occur.

Senator XENOPHON: Just putting on my suburban lawyers cap, having dealt with insurance companies, I think it is a question of the building could be insured but the claim isn't paid out because the person who is the policyholder has not complied with the terms of the insurance policy; there is an exclusion. That is pretty axiomatic, isn't it?

Mr Sullivan : There are those clauses in all policies and obligations on the policyholder to advise the insurer of any change in the risk circumstances or anything that they are aware of that—

Senator XENOPHON: Which is standard.

Mr Sullivan : It is very standard.

Senator KIM CARR: The owner may not be aware that the building is noncompliant until after the disaster strikes.

Mr Sullivan : Correct. This is why in fairly short order we need to do a national audit to determine that, I would suggest. I think most body corporates, the owners, would be aware that their buildings have issues and problems. As I said, I doubt you would find a building in Australia that is 100 per cent compliant with all measures in the National Construction Code, but most of those are probably not things that would end up in front of a coronial inquiry. So a national audit of where these issues are acute, or perhaps for maximum density buildings, I would start to clarify it.

Senator XENOPHON: This is very important: what do you say the national audit should cover, what buildings should it recover and how urgently should it be done?

Mr Sullivan : I think it should start, naturally, in the metro environment looking at high-rise construction anywhere from three storeys and above, looking initially at non-conforming building products. And this cladding example might be the start. But it would be senseless to do an audit and only look at one issue. You would take the time and the effort to do a complete or comprehensive compliance audit of the—

Senator XENOPHON: Can you on notice provide us a list of the sorts of things that should be covered. Are you aware of the Infinity cable debacle—

Mr Sullivan : Yes.

Senator XENOPHON: where thousands of kilometres of this defective cable—if it degrades it could pose a risk of electrocution or fire—has been installed in thousands of homes around the country. What do you say about that? That is something where you would actually have to find out whether there is Infinity cable in there or other defective cable. That would actually involve cutting through walls, would it not?

Mr Sullivan : Possibly, or looking at the junctions where metering is done, and things like that. It would not be a simple exercise to conduct this audit. You would have to use building surveyors of significant experience and engineers to go about doing this in a non-destructive way. And there may be cases where you do, in fact, need to dismantle a bit part of the building.

Senator XENOPHON: We are talking about a massive exercise nationally, aren't we?

Mr Sullivan : Enormous.

Senator XENOPHON: And you think it needs to start now?

Mr Sullivan : I would think that any delay is only going to end up, potentially—or in the worst case—in some kind of a disaster. I do not think we have the same levels of risk as the UK because of our additional fire suppression and protection systems.

Senator KIM CARR: The problem with that, Mr Sullivan—and we have heard this argument before—is it assumes that the sprinkler systems are themselves compliant and are working. We have had significant evidence to suggest that that is not the case. So we can rest all we like on our great claims to have sprinkler systems, but they have to work. Are you aware of any reports that sprinkler systems in our high-rise buildings do not actually work?

Mr Sullivan : I am aware that if an asset is over a particular value or a particular size insurers will send a risk engineer in, or a fire protection engineer, to have a look at the system to determine if it is compliant. Where there is a failure of compliance, that is raised as part of the premium setting process or even, ultimately, if the error is bad enough, in a decision not to insure the building.

Senator KIM CARR: We have heard evidence today from the various fire authorities of an audit of 71 buildings associated with the G20. Sixty-eight were found to be non-compliant. Is that right?

Mr Sullivan : They are their figures. I am not shocked by those numbers, though, in any way. It depends on the gravity of the non-compliance. If it is going to prevent the successful—

Senator KIM CARR: These are hotels that we are talking about.

Mr Sullivan : I agree. I do not disagree with those numbers. They are not my numbers, though.

Senator KIM CARR: In terms of the scale of the problem, we have had reports of thousands of buildings across the Commonwealth being non-compliant. Do you think that is a reasonable estimate?

Mr Sullivan : I would not be surprised if that is the case. However, I think before going down that path you would have to define what the target group is that you are looking at. I would suspect, as I said in my opening statement, that for most buildings you examine you will not find 100 per cent compliance with all aspects.

Senator KIM CARR: But the MFB in Victoria found that over 170 buildings in the central business district were identified—these were sites that actually had people sleeping over for the night. So they were not all commercial buildings. This was just in the CBD. So maybe the figure of several thousands is not unreasonable.

Mr Sullivan : We certainly need to audit it. I would not be surprised if it is at that level of non-compliance. It really depends on how compliant you require it to be. There could be minor oversights. For example, the sprinklers in this room might be too close to a partitioned wall. It will still successfully suppress a fire in the room but it is not compliant. So you have minor non-compliance issues and you could have, potentially, major non-compliance issues. I think that is why we need to have some kind of audit system put in place so that, as the previous witnesses have said, when the building is given its occupancy, its permit, the owners understand that they have purchased a building that, to the best efforts of all involved, is a building that is compliant with the National Construction Code.

CHAIR: So, who does the audit? And who's going to pay?

Mr Sullivan : Again, it is deeply unpopular to say this, but I think that needs to be a government-run function. They may use private certifiers to do it, but it certainly should be from a government authority, assigning them to do the task and do it to a sufficient standard, rather than self-certification, where a building construction company might be signing off on some measures themselves or bringing in their own private certifiers to do the work.

Senator KIM CARR: Is that because you can't trust them?

Mr Sullivan : I wouldn't go as far as to say that there is collusion or anything like that, but I think if they have the risk of losing their licensing or there are real consequences to not passing a building inspection it will lift everybody's standard of construction to a higher level.

Senator KIM CARR: What other national interventions would the insurance council seek from the Commonwealth parliament?

Mr Sullivan : I think down the track there needs to be some kind of national building research program whereby we are able to examine and understand all building products and building measures that come into the country that can then be endorsed as suitable for use in different circumstances. At the moment with building products coming into the country—putting aside the ones that are blatant counterfeits—there is potential for them to be misapplied in buildings. We had an example a number of years ago of a particular type of insulation being used in commercial construction which was being tested under the building code and found to be suitable for a suitable use. However, the testing methodology was inappropriate, and the industry spent some time, effort and money to have it tested. The Building Codes Board, to its credit, changed the testing methodology. Having a central body that is able to do this on a longstanding basis would lift the standards right across the country.

Senator KIM CARR: What about national licensing?

Mr Sullivan : For builders?

Senator KIM CARR: For builders, or installers—for people who are actually putting this material into buildings.

Mr Sullivan : I think there is a range of reasons that national licensing or compatible licensing across all states is a good thing.

Senator KIM CARR: Where are we actually looking at national licensing? This is part of the problem—so-called compatible licensing invariably ends up at different levels. That's where the ambiguity sets in. As soon as one state looks at a problem, it comes up with a different solution to another state's, so there is no national consistency. Wouldn't that be a question of concern to the insurance council—a failure to develop national consistency in these issues?

Mr Sullivan : Certainly, but we do have a National Construction Code. How it's interpreted locally can sometimes be quite different from state to state. But, having said that, each state faces different natural hazards and has a different building need in some terms. The ability to have national compliance with licensing would be of great benefit to prevent somebody who has failed to build properly in, say, Queensland and has been found locally by the agencies there to have done that and has been penalised to then reappear in South Australia and start committing the same acts. So, some form of national compliance measures, which might involve national licensing, would certainly be of benefit.

Senator KIM CARR: So, the issue that arises is, at what point do people actually have to take responsibility for installation of product? At what point do we actually say that the qualifications that people have are adequate for the task? How do we ensure quality assurance? That is why there was the question of national licensing. What do you say to those propositions?

Mr Sullivan : I do agree that it is an issue. I would not draw the line, though, at just installers and builders. There are issues with those who are qualified to do the documentation around the testing of building materials as they are used in Australia, and that is something that insurers do point out from time to time, and generally we get a very good response from the Building Codes Board. But a way to streamline all of that effort would be some kind of national body that is responsible for the testing and evaluation of the building materials and methodologies that we endorse in Australia.

Senator KIM CARR: If these measures are taken, do you think that could actually encourage lower premiums?

Mr Sullivan : Certainly. Wherever risk can be demonstrated to be reduced—where that residual risk is decreased—you will find that premiums follow it. Whether you build a levy around a town so that it no longer floods or you change the nature of a building to make it less prone to burning down, you will find that premiums start to follow. Where there are fewer claims, the premiums come down.

Senator XENOPHON: I have a couple of questions further to that. You're effectively saying that there must be a national building quality watchdog to enforce laws and codes that are currently not being enforced?

Mr Sullivan : No. My comments are around a national building research organisation that can endorse and rate these materials.

Senator XENOPHON: Which we don't have here but they have in New Zealand, following their leaky buildings syndrome debacle.

Mr Sullivan : That's my understanding, yes.

Senator XENOPHON: Okay. I have just another couple of questions on that. Aluminium composite panels with a polyethylene core: highly flammable, a key factor in the Lacrosse fire and apparently a key factor in the Grenfell Tower fire. They are allowed to be used in this country as building cladding material on single-storey and sometimes double-storey buildings. Do you think they should be banned outright, given the risks they pose, given that it seems to be impossible to enforce those polyethylene core panels being installed on high-rise buildings?

Mr Sullivan : I doubt that it's impossible to enforce that non-conforming building product being used. It really is a question of will and regulation and compliance to ensure that that particular building material isn't coming in. I do think that these composite materials have a role to play in the built environment, but it must be done appropriately and—

Senator XENOPHON: What's appropriate, though—single-storey buildings only?

Senator KIM CARR: So, they can burn.

Mr Sullivan : No, but you might have other risk mitigation systems. I don't think anybody has allowed these polyethylene based materials to be used. Somebody is responsible for having cut a corner. Somebody is responsible for rectifying that. But there are safe materials—sandwich construction and composite construction—that can be used appropriately in some locations. What is missing is the person saying, 'That's appropriate' and 'That's not appropriate' at different stages of the design process and then during construction.

Senator XENOPHON: Hence the need for a watchdog, surely?

Mr Sullivan : Well, certainly some kind of compliance regime that is checking the building at regular periods, independent of the builder, to ensure that what has been approved is what's being constructed.

Senator XENOPHON: It sounds like a watchdog to me.

Senator KIM CARR: Why wouldn't it be cheaper and more effective to just say that we're not going to use them for external building product?

Mr Sullivan : That's really beyond my knowledge and my understanding. The removal of an entire class of building products could have other effects on the building industry.

Senator KIM CARR: We did that with asbestos.

Mr Sullivan : Certainly.

Senator KIM CARR: Was that not a proper thing to do?

Mr Sullivan : Absolutely. But certainly there are safe examples of this sort of building material in use in all buildings, and we don't regularly see these buildings having a problem with those products. The issue that needs to be resolved is working out which of those products is non-conforming and then getting rid of those and stopping them from re-entering the building system.

Senator KIM CARR: That would be a fine argument if this industry could be relied upon to actually do the right thing, and the overwhelming evidence before this committee is that they can't.

Mr Sullivan : Well, I think that comes back to the compliance regime that we've been talking about—that there needs to be an independent—Senator Xenophon refers to a watchdog—sort of arrangement where, at a local level, builders might have that compliance regime visit the site at any time or at regular periods to determine whether what has been designed and approved is actually being constructed and the right materials are in use, and then when something is determined to not be going correctly that compliance regime does result in some considerable action to prevent a repeat of it or prevent the problem from getting any worse.

CHAIR: Mr Sullivan, you might want to take this on notice, but Lloyd's has a Buildoffsite Property Assurance Scheme. Are you familiar with that?

Mr Sullivan : Very vaguely. I will take that on notice.

CHAIR: Yes, if you could take it on notice and give us your views as to whether that is one of the range of issues that we should be looking at.

Senator XENOPHON: And do you support the Queensland government legislation which many of the submitters who gave evidence today said was a big step in the right direction in terms of having some chain of assurance? Could you take on notice whether you think it's a good idea?

Mr Sullivan : I'll broadly say that we're strongly supportive of many elements of that and we'll take that on notice and come back to you.

Senator XENOPHON: Particularly on what you think are the best elements and what you think might be problematic from your point of view.

Mr Sullivan : Yes.

CHAIR: Thank you very much for appearing today.

Proceedings suspended from 14 : 39 to 14 : 50