Last month, the NSW Government released the much anticipated Design and Building Practitioners Regulation 2021 (NSW) (Regulation). The new Regulation clarifies aspects of the Design and Building Practitioners Act 2020 (NSW) (Act) including the insurance provisions. In this article, we discuss briefly some important insurance considerations that arise and how they will affect insurers.
The insurance considerations
The Act requires that, by 30 June 2023, engineers, design and building practitioners must be indemnified under a professional indemnity policy with an ‘adequate’ level of cover.
Engineers, design and building practitioners are adequately insured under the Act if they are indemnified by insurance that complies with the Regulation against ‘any liability’ to which the practitioner may become subject.
Divisions 4 and 5 of Part 6 of the Regulation deal with how the question of adequacy of cover is to be assessed. They appear to contemplate a subjective assessment having regard to the following considerations:
- the nature, volume and risks associated with the practitioner’s work;
- the length of time the practitioner has been registered;
- a reasonable estimate of claims that could be brought against the practitioner;
- the practitioner’s financial capacity; and
- any limits, exceptions, exclusions, terms or conditions of the policy.
Importantly, there is a requirement in Divisions 2 and 3 for engineering and design practitioners that the cover be retrospective to the date of registration.
How the Regulation will affect insurers
The considerations outlined in Divisions 4 and 5 are what insurers and insureds would have historically taken into account when assessing the risk and pricing a policy during the underwriting process.
However, the Regulation now seems to impose a more stringent requirement on the practitioner to more carefully assess its risk and the terms on which cover is secured.
For example, a practitioner might, in the past, have selected lower limits of cover and/or a retroactive date to reduce premium cost. Any decision of that nature may now render the insured in breach of the requirement to be adequately insured.
These requirements on the practitioner to more carefully assess its risk could be of some advantage to insurers, as it may cause practitioners to undertake a more comprehensive assessment of their business and associated risk for the purposes of undertaking the underwriting process. Ideally, that would result in a more precise assessment and pricing of the risk. There may, of course, be greater price pressure on practitioners at least in the short term.
Much has already been said about the potential impact on the insurance market of the extended duty of care and registration requirements in the Act, which are now supported by the Regulation.
The extended duty of care does have the potential to increase the risk of claims in the short to medium term and place greater stress on insurers and price pressure on insureds. There are obvious difficulties for insurers assessing and underwriting such a retrospective risk.
The risk can, however, be mitigated by the use of exclusions for non-conforming products such as cladding (where the greater risk lies).
If the Act and the Regulation are properly administered and enforced, however, there might be some light at the end of the tunnel for insurers and insureds in the form of a more consistently performing and accountable construction industry.
This article was written by James Baird, Partner and Claudia George, Solicitor.