Claims inflation has emerged as a key challenge for insurers in building defects proceedings commenced by owners’ corporations, law firm Clyde & Co says in a market insight update. 

In a stable economic environment, delays, while still frustrating, may not be such a cause for concern to respondent parties and their insurers. 

But the current inflationary environment means these proceedings, which are often slow to progress and can be difficult to resolve, are becoming increasingly costly to respondents and their insurers. 

“The claims inflation cost is significant,” the law firm says. “Claims inflation should be central to decisions being made by insurers and their insured respondents. 

“Typically, the longer a building dispute takes to resolve, the more costly it becomes to resolve. It is also usually the case that where an owners’ corporation has evidence to prove building defects, it will succeed in its claim.” 

The law firm cites as an example a Victorian Civil and Administrative Tribunal (VCAT) decision in which the applicants were successful in proving the building defects. 

The dispute involved a claim for damages brought by the owners’ corporation and 22 lot owners of a 23-apartment building in the Melbourne suburb of Brighton against the builder of the complex, Shangri La Construction. 

The applicants’ quantity surveying expert first estimated the raw cost of rectification in November 2018 at about $6 million. Towards the end of the trial in July 2022, the expert gave evidence that covid-related supply issues have pushed up the cost by 12.1%. 

VCAT preferred the evidence of the expert over that of the builder’s quantity surveying expert, who submitted that a 5.2% uplift was appropriate. 

“The main explanation for the difference in uplift was… that Covid-19 had driven up building supply costs,” Clyde & Co says. 

“A claim of $6 million in November 2018 ended with an award of damages in the applicants’ favour some 2.5 years later of $10.5 million plus costs,” Clyde & Co says.