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 courts’ decisions on your industry and business is an effective risk management practice. 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. I 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 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. And, of course, liability insurance typically excludes claims related to mould.
A builder’s liability is not necessarily limited to 10 years
This ‘longstop’ limitation period, where no claim can be brought 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 for 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.
Purchasing off 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 repurchase 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 some good practice for those who are engaged in providing pre-purchase reports. This includes having appropriate insurance, providing 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 to the ultimate recipient 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 when contracting, and when engaging anyone to perform work on their behalf.
A new RMA?
The former Labour Government has been 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 the new Government will repeal or amend this legislation.
IMPLICATIONS
In the same way that Health & Safety at Work Act fines aren’t insurable, The 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.
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 in this country. It is important to be on top of these developments and ensure you are taking them into account when making business decisions. Regularly updating your risk register and risk management plans is a good way to mitigate the effects of a regularly changing legal and regulatory environment.
Builtin are New Zealand’s Trade Insurance Experts
For more information visit builtininsurance.co.nz
or contact Ben Rickard, Construction Risk Adviser and Director
ben@builtin.co.nz | 0800 BUILTIN
Disclosure: The information presented in this article is general in nature and not intended to be financial advice for individual situations. You should speak to an expert about your specific circumstances and needs.
