Government considers capping councils' liability for covering costs of shonky building work; MBIE hesitant, builders supportive, insurers want risks mitigated

Ratepayers have forked out around $1 billion in the last decade for local councils to settle building disputes, according to a study commissioned by the Ministry of Business, Innovation and Employment (MBIE).

The leaky home saga in particular has seen building companies go bust, leaving local councils to settle the tab with property owners.

Fear of being left out of pocket has prompted councils to be risk-adverse when issuing building consents, slowing much-needed development.

Ratepayers have been lumped with this bill because New Zealand uses ‘joint and several liability’ to allocate liability when multiple parties are responsible for the same loss. This means a claimant can recover damages from any or all of the parties that caused the loss. If one of the parties is no longer in business, the onus falls on whoever’s left standing.  

Looking to the future, the prospect of ratepayers covering potentially huge costs associated with coastal retreat and sea level rise is the hot topic of discussion among local and central government authorities.

Local Government New Zealand (LGNZ) has for 15 years been calling for a move away from joint and several liability to enable councils to share the risk with property owners and the building industry.  

Now, as a part of the much-awaited Building Act 2004 review, it might have a shot at getting its way. 

MBIE is consulting on whether to change the law so councils found to have contributed to a defective home or commercial property pay no more than 20% of the total loss.

It has put its finger on 20% as it maintains this portion would align with councils' supervisory role in the building process.

However, its preference is to keep things the way they are, noting that if the buck doesn’t stop with the local councils, then it stops with property owners and those in the building industry.

In other words, someone has to pay, and if it isn’t local councils, then it’s property owners and builders either directly or via their insurers.

Builders happy to take risk from councils…

An LGNZ spokesperson explains why councils want change: “Local authorities providing building inspection services are subject to a strict regime of accreditation to ensure appropriate systems are in place to deliver building services.

“This has not proven to make any substantive difference to the apportionment of costs when subject to litigation, and under the current legal system, ratepayers are the ones bearing the cost of joint and several liability.”

Likewise, New Zealand Certified Builders wants to see councils' liability reduced. In fact, its CEO, Grant Florence, believes councils shouldn't be lumped with any liability at all. 

“Councils are a wedge-point in terms of productivity in the industry. Quite rightly so; they’re protecting the ratepayers.

"But I think they make a lot of decisions, particularly around building consenting, where logic would say, why would you worry about that?

"If somebody’s prepared to have glass in their bathroom that wasn’t AAA safety rated, then they make that choice and it’s just recorded on the LIM. It’s a buyer beware stance. In the liability sense, the same thing applies.”

… with compulsory insurance providing a safety net

Florence recognises uninformed consumers may be left in the cold: “There may be a deficit. But that’s around educating consumers.”

He also believes it should be mandatory for the owners of new buildings to take out insurance over building work.

With only 40% of new homes and renovations protected by guarantee and insurance products, MBIE is also consulting on this as a part of its Building Act review (as detailed further here).

It agrees that if councils' liability was capped, insurance would be necessary. 

“Anyone in the building industry supply chain is happy to take on risk provided they know what this is," Florence says.

"All too much there’s an issue when people start pointing the finger at others. Often that’s just because it’s unclear who has the risk.”

Insurers want risks reduced 

However insurers are only prepared to stand behind builders and property owners if a number of the risks the sector faces are mitigated.

Insurance Council of New Zealand CEO Tim Grafton says the insurance industry would only be willing to fill the void left open by local councils’ exposure being reduced if insurance over building work was mandatory, building standards were improved and better policed, and insurers were able to chase negligent parties in disputes.

He says builders are prone to bankruptcy, and commercial buildings are known to have compliance issues when it comes to fire protection and the installation of non-structural seismic constraints.  

Insurers see builders as high risk, so increasing their exposure will come at a cost.

Grafton says making it compulsory for the owners of new builds to take out insurance will reduce this cost.

“The larger the pool, the lower the premiums will be,” he says.   

However the LGNZ spokesperson says: “While the implementation of compulsory building insurance has the potential to address risks in the industry, LGNZ is mindful that expensive administratively heavy regulatory processes could dump another unfunded mandate on councils, many of which are already stretched for resources.”

MBIE, as a part of its Building Act review, has made a raft of recommendations around improving oversight of the building sector. Read more about its proposed changes to building material and prefabrication regulation here and insurance here.

The public has until June 7 to make submissions on MBIE's consultation document.

Listen to Jenée Tibshraeny discuss the liability issue on this week's Two Cents' Worth podcast episode. The panel discussion starts about half way through. 

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.