Major building defects pose one of the greatest threats to Australia’s construction industry, says founder of LMI Group and insurance guru Professor Allan Manning.
This comment comes on the back of the discovery of major structural damage to a number of Australian high-rise apartment buildings, including Opal and Mascot Towers in NSW which both had to be evacuated.
And, while it is the construction industry in the middle of the fiasco, the insurance sector is being lumped into the debacle, as insurers choose to step out of the market and refuse to cover the risk.
“Insurance deals in the business of managing risk, and when the risk is too high it is unable to be covered. Here we have the situation where so many buildings fail to meet safety standards, and insurers simply won’t offer cover for things that are inevitable rather than genuine accidents,” says Professor Manning.
Professor Manning has been in the insurance industry for more than forty years, working on and managing some of Australia’s largest and most complex claims.
He chats to EBM RentCover about the current challenges impacting property investors in light of the Mascot and Opal Towers fiascos, and dishes out some advice for those who want to protect themselves from similar disasters…
What do you believe is at the root of this issue?
I think there are two root causes. The first is that governments have privatised many sections of the construction industry including the building and electrical testing regime and the certification process of building works. This has proved an abject failure. Secondly, people are focusing on the cost of construction and they are looking for cheaper and cheaper ways to build without considering the old adage – you get what you pay for.
This has meant that some Aussie buildings have been erected with subpar material and by subpar service providers. If many people in the supply and construction game try to maximise their profit on the one hand, and cost on the other, it should come as no surprise we have the failures that are coming to light now.
How do developers and builders get away with delivering flawed buildings?
There are a lot of reasons, from lack of adequate regulation to the importation of inappropriate or non-conforming building materials.
Also, many developers and others in the chain are able to set up a separate company for a construction project and then liquidate it once the building finishes. This means some unscrupulous businesses know they carry little personal risk and do not do the right thing by the end owner (investor), and in far too many cases the sub-contractors are left not being paid. This is disgraceful behavior that needs to be stamped out, and those responsible brought to account.
While some may be pocketing super profits, others are experiencing enormous financial hardship and emotional stress. The actions of some are setting innocent people to fail.
As it currently stands, many believe they can keep doing this; start up a new company and do it all again with impunity. This needs to be outlawed. In some cases there appears to be serious dishonest acts and there needs to be serious penalties to deter this behavior in the future and go someway to righting the injustices of the past.
What’s the impact to the investment property market?
Well, I wouldn’t be rushing out to buy a high-rise apartment. And I think others are cautious too. It is just too big of a risk. If any risk is too big for the insurance industry it should be taken as a giant red flag to anyone who will be taking on the risk personally.
What needs to change to ensure this doesn’t keep happening?
Unfortunately, stats show this is not just an isolated case or two. It is far too widespread.
In cases where we have identified dangerous products, it took nearly six months to get action. Meanwhile, they are still being purchased and installed. Where proof of the danger is provided, there needs to be an immediate suspension on the use of the product.
There also needs to be government controlled or supervised testing of building materials, not just cladding but wiring and other materials that can cause serious damage or loss of life.
Secondly, I am calling for a national enquiry into the construction industry so we have a chance to highlight all bad practices and identify inappropriate materials. I then hope builders and developers who have done wrong are held to account for their actions, just as the rest of us are should we do the wrong thing.
Thirdly, I do not believe building codes are keeping up to date with fast evolving building materials and methodologies.
Finally, I think there needs to be disclosure reforms and more transparency. People need to know exactly what it is they are buying including what products have been used in the construction. The amounts involved and the impact is so great it cannot just be left to buyers being aware.
What about warranty periods?
Typically, building defects take years to be identified by which time the statutory warranty period has expired. If it is a non-conforming product at the time of final completion, I do not think there should be a statute of limitations. If you build a property with non-conforming building materials, and someone innocently buys the home, unit or commercial building not knowing the risks, there should be some comfort for consumers that they will not be stuck with the bill to right the wrong. We have to remember many owners of these units are already mortgaged to the hilt and simply cannot afford the extra costs.
Where does insurance come in?
Insurance exists to help with honest mistakes. We all make mistakes, and if it was not for human error many of us in insurance would be out of the job. This is because so many claims are caused by human error. However, there are some acts that are just plain wrong and/or deliberate acts, and insurers do not cover the deliberate acts of an insured.
Unfortunately, every time there is a major issue like this, the insurance industry is expected to be the savior. The reality is that the cover in place is not a product guarantee and the premiums charged on construction and completed buildings do not include any allowance for such events.
It is a similar issue to flood. Insurers were often badmouthed for not paying out claims where there is no flood cover in place. However, it is not commercially viable for any insurer to pay out claims that are simply not covered by the policy. You either have flood cover or you don’t. If you chose not to insure for flood then you carry the risk. The same is the case if you under insure. Insurers cannot pay out claims for which they were not paid a premium in advance to cover the cost of them having the risk transferred to them.
This is not a matter of insurers walking away from a problem, it is a matter of insurers not wanting to be used as a diversion from those that need to be brought to account.
The insurance industry ultimately can’t pay for certainties. If people are doing things deliberately and knowingly, the innocent policy holders should not be paying for it any more than innocent tax payers.
What advice would you give to property investors?
The amount involved in the purchase of property is significant. Unless the purchaser is an expert in the construction industry, like insurance, they do not know what they do not know.
I suggest they engage a surveyor or engineer they trust to do a full survey on the property. This is more than just getting a copy of the plans. The property needs a thorough inspection and report on the asset they are buying. A prudent person would do that when buying a second-hand car. The same goes for new builds as well as second-hand properties – you do not want someone knowing they have a flawed property and offloading the problem to you.
Also, do research about your insurance. It seems in society people spend more on the latest status symbol such as mobile phones, branded clothes and designer handbags and shoes, than they do on their insurance. Cheap isn’t always best.
Ultimately, buy and beware; be very, very aware. Look beyond the price. Make sure it is well made. And invest in the right insurance in case something does go wrong.
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