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NSW building reforms pose insurance challenge: WTW

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Willis Towers Watson says incoming legislative measures in NSW requiring building practitioners to hold compulsory professional indemnity (PI) insurance may be challenging for the construction industry to meet.

The changes come at a time when PI insurers have already introduced many strict clauses and restrictions such as exclusions for cladding risk in response to the building industry’s quality control issues.

They are the second tranche of reforms under the Design and Building Practitioners Act 2020. The first set of reforms came into effect in June last year, where a retrospective duty of care was statutorily imposed on design and construction work.

The Design and Building Practitioners Regulation 2021 commencing on July 1, requires registered building practitioners, designers and engineers to be “adequately insured” for the work they undertake. 

According to Willis Towers Watson, this is where the challenges lie for the construction industry, although certain regulations including those related to insurance do not apply to a registered practitioner before the end of June 30 2023.

“The first main challenge from an insurance perspective is understanding what level of policy coverage would be considered acceptable by the regulators,” Anthony Kumar, FINEX Australasia Account Executive, told today.

“The second is securing insurance in a very challenged PI market that meets the regulatory requirements for policy coverage and is also sustainable and cost effective."

He says the PI market for this sector of clients is limited and insurers have been carefully reviewing the policy coverage that they offer.

“Cladding exclusions, for example, are now frequently applied and the nuances of the exclusions differ between insurers,” Mr Kumar said.

“Different exclusions are also imposed on clients depending on their size, the nature of their activities, their claims history, and other factors.

“It is unclear what exclusions the regulators will consider acceptable and there is no certainty that PI insurers, having suffered extensive losses in this space, will be prepared to remove or change the exclusions that they would otherwise impose.”

Willis Towers Watson has published a client newsletter outlining what a practitioner’s PI program will need to have to address the new rules.

The broker says the program will have to include indemnification for errors and omissions that have occurred while the insured is participating in the design/building of a class 2 (or class 2 mixed) building.

It must also have, in its “reasonable opinion”, cover that provides an adequate level of indemnification for their professional line of work.

Lastly it must have a retroactive date set at the earliest date from which a practitioner could have potential liability (either the date they first practiced or 10 June 2010, whichever is first).

Click here for the Design and Building Practitioners Regulation 2021.