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

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.

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13 Comments

“building standards improved and better policed” and so say all of us. Viewed some consent documentation recently for a new house and the word “reasonably,” as far as the relative council’s supervisory responsibilities were concerned was mentioned over and over again. So much so that don’t think even our best QC would be able to hold their feet to the fire for a mistake they might have overlooked. Surely the best means to improve building quality is at the very start with the actual builder. Builders and their work needs to be audited and rated and a register maintained accordingly. Believe most people would be happy to pay for that information before employing one. In other words make sure sure you have a straight one at the beginning rather than having to use regulations and authorities to straighten him or her up half way through

I would suggest that rating of such builders would be worth while for the builders without the customer having to pay for a report. It'd be like having a Quality rating. My biggest issue is that Councils charge an arm and a leg for their regulatory oversight and then are the proverbial jelly when trying to nail them down on an issue. This MUST change. They either provide a positive contribution to the process of building which is worth the cost (Yeah Right!) or they are largely a hinderance, screwing the public while adding nothing (the reality).

The insurance industry could contribute by requiring the builders to meet certain standards. This standard could be the above "rating", which would require regular audits to maintain, including the standard of workmanship, materials etc. This would reduce risk to the Insurance industry as well as the customer, and be good advertising for the builders. All legislation would require would be that the builder carry insurance.

Wgtn city council want to spend ratepayers money to allow building at Shelly Bay, yet the same council has warned of rising sea levels and the need to stop building at sea level. I bet they want to limit there liability. This would be an unintended consequence where the mayor and council should be liable. To reduce it would allow them to say one thing and do another with more impunity than they currently have.

Seriously!! Insurers would fill the void?? Sure they would as far as collecting premiums. But claims? Now that’s another story isn’t it. Just a cursory preamble if you like, through the Canterbury EQ sagas, the difficulties and treatment of claimants,good genuine people not the opportunists, would reveal just how complicated, convoluted and calamitous the claim process became including judgements in the high court which are little short of contradictory and cross legged. And that is all about the insurance of existing structures. Given that background does anyone seriously believe that the insurers would provide policies without enough loopholes to aerate a gorgonzola cheese.

I’m sure leaky house people would rather make an insurance claim than have to sue 3 parties in the vague hope of a payout.

If you ever had had to fight an EQ claim for your home and family, you would never have written that.

I wonder what percentage of Christchurch folk had to go to court compared to leaky home folk? My guess is the majority of Christchurch claims were settled fairly and easily, I don’t think this was the case for almost any leaky home.

Appreciate your thoughts & have no intention to diminish the severity and hardship, the total scandal in fact of LHS. You may be interested to learn though that it was a common tactic of insurers to declare, falsely, EQ damaged houses as LHS & therefore not their responsibility. But in all honesty it is difficult to comprehend some of the outright despicable behaviour, of some insurers (and EQC) until you experience yourself having to fight tooth and nail for the restoration, integrity and preservation of your prime asset ie YOUR FAMILY HOME. We have described our situation quite a few times on this site. There have been thousands like us. We didn’t see the behaviour coming and until it actually happens to you, you wouldn’t believe it anyway. We can only hope there is no next time for the rest of NZ including you.

Builders are high risk - the insurance people understand that right.

I would suggest separating coastal retreat from sea level rise. As we have seen locally here in Hawkes Bay, coastal retreat has been rather significant in some locations. The media conflation of coastal retreat with sea level rise is laughable in regards to the lack of scientific scrutiny. Sea level rise is still in the mm/year range, which has very little effect on the coastline as compared to other man-made issues (or other natural issues). I'd suggest that the hot topic of discussion for the future is in relation to far more immediate issues, such as improving water quality, sorting out an RMA that is functional, Improving infrastructure to match expected future population increases, etc. Claiming that the hot topic is sea level rise is laughable...

Exactly, Yankiwi. The effect of SLR is counterbalanced by aggrading coastlines (e.g. Christchurch's beaches), by tectonics (Kaikoura coast from Oaro to Marfells Beach is safe from many centuries of SLR because it got pushed up between 1.5 and 6 metres just recently, and Wellingtom got its 1.5m push to the sky in 1855), and by adaptation (levees, as per NL). Plonk a cube of concrete every 10km on the beach next to potential trouble spots, run a survey every decade, and stop worrying.....

Ah, my teenage idol. Alfred E. Neuman. “ What, me worry?”

Same thing in Auckland. Council posturing about climate change and rising sea levels, yet still allowing beachfront building at places like Omaha and Orewa. Omaha only exists because of huge rock groynes built and maintained by ratepayers, like wise Orewa's sea wall.