Building Cladding Crisis: Insurance

There has been a huge amount of publicity around non-compliant building cladding but what does it all mean? Kerin Benson Lawyers has created a four part series explaining What the Building Cladding Crisis is about, the Governmental Response, Fire Safety Orders and Insurance. Below is the third of these Newsletters.

A range of stakeholders in the residential apartment building sector have indicated concerns regarding the impact non-compliant external cladding materials will have on building insurance policies.

The Insurance Council of Australia (ICA) has indicated that the non-compliant use of building products such as external cladding materials ‘critically undermines the ability for an insurer to rely upon the safety and performance of the building’. This directly impacts the insurer’s ability to establish their risk exposure which, the ICA stated, influences the setting of insurance premiums.[1]

The ICA has established a protocol for the identification of residual risk presented by Aluminium Composite Panels. This protocol is reproduced as the Appendix to this Newsletter and recommends the approach insurers should take in relation to whether a building should be insured or not. However, each insurer is considering the issues individually and is taking their own approaches to underwriting and considering how terms and conditions might be tailored in relation to coverage, pricing and excesses. Consequently, the responses of insurers range from electing not to insure through to applying higher deductibles and premiums.

It should be noted that, in particular, the testing and identification of aluminium composite panels as recommended by the Protocol will be difficult to comply with given the number of buildings required to be tested and the fact that there are currently no more than four places in Australia which can test to AS 5113 (the new Australian Standard for fire propagation on external walls which will come into force in March 2018).

Raising similar concerns, Insurance Australia Group (IAG) noted the non-compliant use of PE cladding has increased in recent years posing a fire risk much higher than other materials available, particularly when paired with equally combustible plastic foam insulation. IAG also commented that these materials are often being used in a way that does not conform with the National Construction Code and Australian Standards, which was a particular concern to IAG as:[2]

  • this threatens the safety of customers, employees and the broader community;
  • it increases the fire risk of buildings placing upward pressure on premium cost for consumers; and
  • non-compliance is a hidden risk. If the insurer cannot accurately assess risk, the uncertainty results in sub optimal outcomes for customers and insurers.

The Owners Corporation Network has also noted there are insurance implications for existing buildings which discover non-compliant cladding material and do not disclose it to their building insurance company. Conversely, the Owners Corporation Network was aware of one building that did disclose and is now unable to get building insurance, leaving all the owners in that building ‘jointly and severally liable for any debt’.[3]

In addition, the Australian Institute of Building Surveyors (AIBS) has expressed concern surrounding professional indemnity insurance for building certifiers overseeing the initial building work:[4]

… an emerging area of concern for the regulatory system and consumers is the issue of professional indemnity insurance. The current public debate on external cladding is already having a negative impact, with AIBS recently being advised that some insurance companies are inserting exclusion clauses for external cladding and non-complying building products into their policies.

CHU, the country’s largest underwriting agency of strata schemes (it insures 100,000 strata schemes under the QBE brand), has said it has not yet refused insurance to bodies corporate based solely on cladding that does not meet the building code. But the insurer said it had already priced the risk in some buildings as too high to make insurance worthwhile for some property owners. That is, it would be better to spend money on the removal of the cladding rather than pay for annual insurance.[5]

The inability of an owners corporation to obtain insurance has a number of ramifications.

Firstly and most obviously, the need to replace the building with the owners’ own funds in the event of a fire.

Secondly and less obvious is the fact that adequate building insurance coverage is a normal requirement of a mortgage and the mortgagee is likely to take action to ensure the asset is protected.[6]

In addition, some valuation reports prepared for lenders and insurers are indicating that some buildings are not fit for purpose and have an increased risk of fire.[7]

Westpac has commenced an audit of developers of all its residential and commercial projects that are under way and is looking to confirm the compliance of all external wall cladding products with the National Construction Code (https://www.propertyobserver.com.au/forward-planning/investment-strategy/property-news-and-insights/75813-cladding-aftermath-westpac-auditing-projects-for-compliance-with-safe-building-practices.html).

One of the particular problems facing residential apartment buildings is the fact that premiums for building insurance for residential apartment buildings are generally lower than premiums for commercial buildings. That is, premiums on commercial buildings are sufficiently profitable for the insurer to look for solutions to any problems associated with building cladding. However, where the profit margin is slim on a residential apartment building, an insurer has no incentive to accommodate that building and could potentially withdraw coverage entirely.

In the light of the above, some buildings are simply removing the cladding and not replacing it.

Naturally, some building owners will consider simply not informing their building insurer of the fact that there are Aluminium Composite Panels on their building. This approach is flawed given insurance coverage may be voided by failing to disclose such a material fact. Further, some insurance policies have exclusions that apply if the building does not comply with the Building Code of Australia.

Case Study

The Anstey Square Apartments in Sydney Road, Brunswick, are clad in a mix of expanded polystyrene and aluminium composite panelling, the same material that was used on the Grenfell Tower.

Last year, the apartments suffered a small, quick-spreading fire that brought attention to its cladding.

Consequently, in November 2017, the owners were required top pay an insurance premium of $134,000 (which was $29,000 the previous years). In addition, their excess rose from $1000 to $100,000.

Further, in December 2017, Moreland Council gave the Anstey Square owners corporation orders to carry out works to make the 105 apartments safe within three months. The order required immediate action that will cost owners around $250,000.

Finally, the owners corporation researched replacing the cladding, and discovered that it would cost between $2 million and $3 million to replace the non compliant cladding.

The owners have begun legal action against builder to recover the costs of fixing the nine-level tower.[8]

 

Appendix

Insurance Industry Aluminium Composite Panels Residual Hazard Identification / Reporting Protocol[9]

Introduction

Recent multi-level building fires in Australia and overseas have resulted in Federal and State governments inquiring into the potential exposure for buildings in relation to non-conforming and non-compliant building products. Governments are particularly focused on the potential exposure caused by inappropriate use of some types of aluminium composite panels (ACPs).

Insurers providing policy cover for buildings and set premiums according to the residual risk (after any effective risk mitigations present are considered) of damage occurring and a claim being made against the policy. The higher the probability of a damaging event occurring, the higher the premium.

Insurers have invested in the expertise necessary to measure residual risk. Using this, the industry has considered the challenges posed by non-conforming ACPs, beginning with the most fundamental of issues: its identification.

Through the ICA, insurers have agreed upon a Residual Hazard Identification Protocol for the identification of residual risk presented by the use of this building material.

Critically, the evaluation of exposure for each building that has ACPs present needs to be conducted on a case-by-case basis by qualified fire protection professionals including fire safety engineers, to evaluate the most critical exposures, safety to life and code compliance.

Building owners should also consider working closely with their insurer to ensure that the identification and evaluation process adopted for the building, including those engaged to undertake the process, will be considered sufficient for ongoing underwriting of the building.

Purpose

The purpose of the Residual Hazard Identification/Reporting Protocol is to provide a consistent methodology, in circumstances where ACP-type materials are considered to be present, for assessment and reporting of the residual risk, suitable for both building owners (to make decisions) and underwriters (to set premiums).

Intent

This protocol should be referenced by all stakeholders involved in assessing building risk posed by ACPs. Adopting this protocol will produce reports that are consistent across all jurisdictions and will be meaningful to building owners and their insurers.

Approach

The approach includes both the identification of the material used and the installation methodology. This will enable assessment of the risks posed by the use of the materials, which may then trigger consideration of remedial actions to lower a building’s residual risk to acceptable levels.

Residual hazard identification protocol

Reports commissioned by a building’s owner should address 10 critical questions through three steps:

Step 1 – Identification of Materials

The identification of ACPs is the critical first step in the process of identifying the potential hazard to life and property presented by the ACP. It must be undertaken with an almost 100 per cent confidence of the results.

The primary purpose is to accurately classify and quantify the materials present in order to determine the fire load along with its location and proximity to ignition sources.

Once identification and quantification is achieved, this enables respective parties to consider Steps 2 and 3 of this protocol.

Insurers have observed that ACPs typically come in four general categories defined by the composition of their core materials:

A. 50%-100% Polyethylene (PE, EVA Ethylene-vinyl acetate) – Category 3 in the BRE appendix

These are considered the problem materials.

B. 30% PE and 70% inert materials – Category 2 in the BRE appendix

Typically identified as FR (Fire Rated). Inert materials are typically mineral compounds.

C. 7% PE and 93% inert materials – Category 1 in the BRE appendix

These are considered close to non-combustible

D. 0% PE –  Category 1 in the BRE appendix

Typically an aluminium honeycomb or similar core. Also considered close to non-combustible.

In cases where there is no documentation associated with the building’s construction, or where available documentation lacks the necessary information to positively identify the ACPs that have been installed; or where there is sufficient doubt that the ACPs installed are what is documented (substitution), it is necessary for samples of the ACP, along with sarking and insulation materials behind any ACP, to be subjected to testing to clearly identify the composition of the core material and combustibility of the insulation/sarking.

Importantly, visual examination of the ACP or small flame application of a sample, in these circumstances, is insufficient for identification purposes.

ICA members, together with the Engineers Australia, the Fire Protection Association of Australia and registered fire safety engineers, have worked with accredited laboratories to agree upon a series of controlled tests that will adequately identify the core composition of installed ACP materials (including an insulation) on a building.

The tests have been verified by providing known samples of each category of ACP for testing. Each sample was coded and provided to independent labs for testing. Results were then compared to ensure that the testing methods used provided results that accurately identified the ACP into the correct category.

The laboratories that consistently identified the ACP samples into their correct categories are listed in the Appendices to this protocol.

Reports commissioned by a building owner using this protocol should answer the following questions for Step 1:

  1. Who has carried out inspections and testing for the building owner, and testing of the cladding material, what are their relevant competencies, qualifications and experience and what testing laboratories were used to test the samples?
  2. What category(s) of ACPs are present on the building (A, B, C or D)?
  3. What quantity of the material is present (m2)?
  4. What substrate or insulation is present behind the ACP?
  5. What potential ignition sources exist for the ACP given the configuration of the building?

Step 2 – Evaluating the exposure

Using the identification and quantification outcomes of Step 1, the purpose of this step is to provide a consistent report into the exposure of the building regarding the presence of ACPs.

This output is dependent upon the category of the ACP determined in Step 1 and should make findings with regard to four questions:

  1. What exposures exist to the safety of the occupants based on the Step 1 outcomes?
  2. Is the building compliant, with regard to ACPs, with the National Construction Code and associated Australian Standards?
  3. What are the exposures to the property and consequential business interruption risk of a fire involving the ACP?
  4. What exposures exist to the reputation, image and market value of the building as a result of the ACP identified?

Making findings for each of the questions is necessarily complex. Each building with ACPs present will vary in terms of quantification, insulation materials, ignition scenarios, fire protection and suppression systems, as well as occupation type.

Reports commissioned by a building’s owner to make findings on the exposure should consider the following factors identified by insurers:

Step One identified 50%-100% PE or EVA Ethylene-vinyl acetate core ACP

The exposure should be considered similar to that demonstrated by the Lacrosse Building fire (Melbourne), which was an ACP panel fire with fibreglass insulation and reflective foil sisalation in the cavity and an internal building sprinkler system (combined sprinkler/hydrant system sharing a redundant water supply). The Grenfell fire had the added impetus of a combustible foam-based insulation material behind it and no internal sprinkler protection[i].

Where the quantity of 50%-100% PE ACP present is considered to be sufficient to sustain a fire, and relevant ignition scenarios exist, adverse findings to the four questions above should consider the risk as HIGH and Step 3 remedial action may be required.

Step One identified 30% PE core ACP.

The evaluation of the exposure to this type of ACP is more complex, with the existence of a combustible or semi-combustible (fire retardant) insulation or sarking in the cavity being a defining factor.

Recently completed and published full-scale façade fire tests (BS 8414-1:2015) conducted by BRE Global (a fire testing laboratory in the UK) on behalf of the UK Department for Communities & Local Government showed this category of panel, when combined with a PIR or Phenolic insulation, with horizontal and vertical non-combustible cavity barriers (not typically provided in Australia), resulted in flaming above and to the top of the test structure respectively. The prime concern for Australian stakeholders is how much more severe the fire spread would have been without the cavity barriers.

Where a quantity of 30 per cent PE ACP present is combined with combustible or semi-combustible insulation materials, and relevant ignition scenarios exist, adverse findings to the four questions above should consider the risk as HIGH and Step 3 remedial action may be required, unless appropriate internal fire suppression and protection systems exist to reduce the risk.

Where the insulation is considered close to non-combustible – mineral wool or fibreglass, and the sarking has a flame spread rating of less than 5 to AS 1530.2, the risk could be considered as low.

Step One identified 7% or less PE core ACP.

The fire risk presented by this material can be considered as LOW regardless of quantity, ignition scenarios and type of insulation.

Step 3 – Remedial actions for consideration

Remedial actions (if any are required) will be different from building to building and dependent on the category of ACP and insulation/sarking installed. Depending on the quantity of ACP installed, its configuration and installation, there is the potential for actions to be taken that would not necessarily involve 100 per cent replacement.

The report submitted to the building’s owners with regard to Step 3 should address, in detail if necessary, a response to the following question:

  1. What remedial actions are necessary (if any) to address unacceptable risks to the building due to the presence of an unsuitable ACP?

The acceptability of any such (alternative or performance) solutions should be agreed by all parties involved – such as the appointed fire safety engineer, the owner, insurer, regulator and fire authority – before any work is carried out. The importance of consulting with the relevant jurisdiction’s building regulator and urban fire authoritiy cannot be stressed enough in response to this question.

Testing and References

The BRE reference document referred to above can be downloaded here.

The ICA and its members conducted round robbin testing with laboratories to identify those that could accurately classify the different categories of ACP.

The ICA has received positive results from two organisations, both of which can provide the confidence required to identify ACPs correctly for the purposes of this protocol:

CETEC Pty Ltd is a technical and scientific risk management consultancy. With more than 30 years’ experience, CETEC is acknowledged as a leading provider of specialist technical and scientific risk management solutions for the built environment. Through Foray Laboratories, which is wholly owned by CETEC, we can use a range of analytical techniques to assist building owners, building managers, building insurers, fire engineers and other stakeholders to provide advice relating to the flammability potential, composition and toxicity of cladding materials. Foray Laboratories is a NATA-accredited laboratory and is ISO/IEC 17025 compliant. Please contact our head office on 03 9544 9111, visit our website at www.cetec.com.au or email info@cetec.com.au for further information.

CSIRO offers a wide range of specialist laboratory and engineering services to Australian industry and building owners. CSIRO experts can provide testing and identification ACP cladding core via TGA, FTIR or XRD techniques, delivering a comprehensive report classifying materials in accordance with the ICA categories. CSIRO is a Registered Testing Authority accredited by the National Association of Testing Authorities (NATA) for a wide range of materials performance tests. In addition to ACP characterisation, we can provide fire testing to the AS 1530 series of standards as well as full-scale evaluation to the new AS 5113 test for external walls. Our fire safety engineering experts can provide building audit and assessment, advice on structural fixing, regulatory compliance, help with selection of test methods, and independent third-party peer review. Please contact us at firesafety@csiro.au or call our telephone enquiries team on 1300 363 400 and ask for ACM core categorisation. More information at https://research.csiro.au/infratech/fire-safety/

Conclusion

Inspections, assessments and reports commissioned by a building owner to determine the risk associated with the presence of ACPs on a building should be carried out by competent fire protection professionals and including fire safety engineers.

A consistent methodology – yielding responses to the 10 questions above and able to be accepted by the broadest possible regime of underwriters and other building professionals – is essential.

For further information contact:

Karl Sullivan

General Manager Policy, Risk and Disaster Planning

e: ksullivan@insurancecouncil.com.au

[i] *The insulation used was PIR (polyisocyanurate), which does not melt but chars and typically has good fire retardant properties.

 

[1] The Senate Economics References Committee, Non-Conforming building products, Interim Report: aluminium composite cladding, February 2017, p.12.

[2] Ibid, p. 12.

[3] Ibid, p. 12.

[4] Ibid, p. 12 and 13.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] http://www.theage.com.au/victoria/council-orders-brunswick-block-owners-to-fix-flammable-cladding-20171207-h00f43.html

[9] Insurance Council of Australia, “Insurance Industry Aluminium Composite Panels Residual Hazard Identification/Reporting Protocol”, 20 November 2017.

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