Melbourne apartment blocks

If you are an owner of an apartment with non-compliant building material issues you need to read this special report.

Governments’ assertions they are acting on non-conforming building products that gave rise to the cladding scandal and Lacrosse apartment fire in Melbourne is of little comfort to strata property owners who now bear the brunt of the industry’s failings and potential accusations of insurance fraud.

According to Owners Corporation Network executive officer Karen Stiles, owners face loss of insurance cover, property depreciation and bills for rectification work. Worse, the onus is on “unskilled volunteers” to make enormous decisions about how they manage non-compliance issues, especially in relation to insurance.

There are more than 85 properties in Melbourne where non-compliance with National Construction Code rules around the use of building materials has been made public knowledge.

“These owners are in an invidious position, trapped by a regulatory system that has totally failed them and that will now attempt to make them accountable,” Ms Stiles said.

“How are the Lacrosse owners going to pay the now estimated $40 million to rectify the defective cladding they were not responsible for installing? Why should the owners in the other named buildings bear the brunt of increased insurance premiums, or questionable cover in the event of a major claim?

“Why do state governments insist on making the consumer pay for the industry’s shocking short cuts? Consumers have more protection when buying a $10 toaster than they do when purchasing a $1m apartment.”

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Insurers may reassess premiums

There are also less-known problems with insurance. According to the Insurance Council of Australia if insurers became aware of new information that alters the risk profile of a building, they may choose to reassess their premiums accordingly.

“That is a commercial decision for individual insurers,” the council’s general manager of communications and media relations Campbell Fuller said.

Evidence that an insured building is non-compliant with building codes has the potential to complicate the approval process in the event of a claim.  In addition, if policyholders become aware of information that materially alters the level of risk they face, they are obliged to notify their insurer, Mr Fuller said.

That’s where owners become the casualties, because if they are in one of the buildings identified by the Victorian Building Authority as containing non-conforming cladding or non-compliant use of cladding, they now have an obligation to inform their insurer.

Mums dads and grandparents charged with making enormous decisions

And if owners of buildings that haven’t been tested suspect they too have compliance issues, there are safety risks attached to not commissioning an independent inspection, and financial risks attached to doing so.

Ms Stiles said, “We are talking about around $1 trillion of the common wealth being managed by unskilled volunteers. Think about that. These mums and dads and grandparents are not equipped to make these enormous decisions, and nor should they have to be.

“Many will simply ignore the problem, unless forced to address it. Others will arrange an inspection, and then be faced with the dilemma of how to deal with it. The building ‘experts’ are not regulated, the lawyers are overwhelmed with defects claims, and the owners are innocent pawns being played by dodgy operators.”

Ms Stiles said this could all be avoided if the governments funded an effective regulatory system and imposed a statutory duty of care on the builders.

Mr Fuller said many insurers inspected high-rise buildings prior to agreeing to underwrite them. They also rely on policyholders making declarations that a high-rise building is fully compliant with Australian building standards.

Can owners be guilty of fraud?

Where a policyholder is aware a building is not compliant, but does not disclose the information, it is considered insurance fraud and may lead to complications in the claims approval process, and potential criminal penalties, he said.

Ms Stiles said the implications for owners if claims were denied due to non-compliance were “potentially catastrophic”.

“Financially many, if not most, would be ruined if a claim for a major event is denied,” she said.

There’s an information vacuum

Ms Stiles said she was not aware if the individual owners or owners corporations of the buildings identified in the VBA audit had been directly informed as to the non-compliant status of their building.

“I would hope they have been advised of the VBA audit findings.”

Owners corporations and strata bodies were often left in an information vacuum regarding the provision of compliance reports and certifications, she said. The amount of information given depended on how reputable the developer and builder were.

“Some developers hand over everything down to the internal finishes and maintenance schedules. But the majority fail to hand over critical documentation,” Ms Stiles said.

“Owners corporations can spend years and many thousands of dollars trying to obtain what by law they should have. But once again there is no enforcement.”

Where a building is found to be non-compliant, it can also make it difficult for owners who want to sell. For one thing, potential buyers may struggle to obtain finance.

“Where we are made aware a building is non-compliant we wouldn’t lend to it,” a spokesman for one of Australia’s major banks said.

He said the bank generally relied on information from valuers as to whether a property meets the building code.

Ms Stiles said many owners simply cannot achieve a resale of their property.

“Every week owners are confronted with stark reality that the dream they bought has become a nightmare. Some sell at a huge discount, because they have no option. Others can’t find a buyer,” she said.

“In all of this apartment owners and residents are the victims of a system that fails to make wrongdoers accountable, and governments with no appetite for change.

Lives could be lost

“I hope it doesn’t take a massive tragedy to change this. We’ve had a stark warning with Lacrosse. Fifty-nine lives were lost in one building in China which had similar cladding. It’s time for governments to act decisively.”

Strata Community Australia chief executive Kim Henshaw said the secret report by the NSW Department of Planning leaked in The Australian, which indicated there could be 2500 buildings with Lacrosse-style cladding issues in NSW is “enough to send a shiver down the spine of anyone who owns real estate in Sydney”.

“All it would take is one incident and you’d get trampled on your way to the exit [out of the property market],” Mr Henshaw said.

The issues extend well beyond cladding, too. In recent weeks there have been revelations of non-compliant firewalls in some developments, high levels of asbestos in some imported building materials and there are still thousands of metres of Infinity Cable that have not been uncovered and replaced, despite the recall.

Mr Henshaw said fire dampers, which prevent the spread of fire between apartments, are another case where non-compliance is rife. He said that in a multi-residential building in St Leonards, an inspection found that all the fire dampers had been installed backwards, rendering them ineffective. It cost the building owners millions to have them redone, he said.

“This is not uncommon.”

To disclose or not disclose?

He said buyers and owners are starting to think, “What happens if I sit on information about non-compliance?”

Insurers say owners must disclose, but Mr Henshaw said then there was a risk to the destruction of the value of their property.

Strata managers and members of owners corporations should still take the step to get buildings tested for compliance, so they can make an informed decision, he said, with the bottom line being keeping people safe and mitigating the liability.

“Owners buy into a building in good faith. When conveyancing takes place, the responsibility is on buyers to make whatever inquiry is necessary,” he said.

There are some different requirements for buying off the plan, so he suggested buyers request a formal statement from the builder and developer that when the property is complete, it will meet the requirements of the building code.

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  1. Valuers cannot be held liable when they are trained to be say structural engineers. This happened when I was a young valuer in the late 1970s.
    Richmond old factory….structurally unstable that Valuer could not have known….even though one large wall crack was evident.
    Case was ended.
    Valuers do not and can not hold themselves out to be engineers. It is not reasonable.
    But check with Institute of Valuers today.

    New point:
    Standards Australia produce good and bad Standards.
    Watch the final report from the 2015-16 Senate Inquiry- non conforming building products. Melbourne evidence 15 Feb was dramatic against the impact test method for toughened glass….15cm shards were presented to all four Senators. And the consumer was not represented on the glazing standard. Tough questioning of Standards as well as the glazing association.

    The mantra that “governments can’t tell Standards what to do” is utter rubbish.
    Sometimes the public interest is so strong that intervention is needed.

    Another example:
    Overwhelming radiation effects on fibre insulation surrounding cooling ductwork in roof spaces. The thermal test method is hopelessly inadequate. The cooled air is rapidly heated. The public are stranded in ignorance and utterly powerless to change the Standard.
    I have the 100% backing of the ductwork industry ADMA to demand changes to the test method. But oh no….Standards Australia refuse to do the right thing. In these two examples, the Public Interest is deficient. They are a law unto themselves.

    Politicians are weak and the will of big powerful companies running the Standards Committees. Small companies who try desperately to influence Standards are systematically ignored.

    Further proof needed: read the Productivity Commission Nov 2006 report into Standards Australia. A total overhaul were the recommendations. This did not happen.

  2. The Building Replacement Insurance Valuation is to determine if the level of cover is adequate for the building and provide a recommended sum insured.

    This is a compliance matter where the cladding has not met the Building Code of Australia Requirements, plain and simple and has nothing to do with the valuation, and the question should be asked on who certified the building, to be fit for council approval of the final inspection with the certificate of classification and to be onsold to owners.

    The Quality Assurance of the windows is in question, with the use of sub standard materials, substituted for the materials that were used in the test.

    Remember when the Asbestos was found in the Great Wall cars, and there was a recall.

    Quality is supposed to be fit for purpose, but when it is made for the lowest price, then this forces the manufacturer to take short cuts.

    The problem now is that the owners are now stuck with the problem in rectifying the building and face increased insurance premiums as a result of the cladding identified.

    So does this mean that insurance cover may be refused because of this cladding in the building, the same as asbestos.

    There was a case where a Strata Titled building with an Asbestos Roof used the same insurer for 10 years, and then could not get insurance until the roof was replaced,to the amount of $35,000.

    No Doubt, there is going to be a lot of discussion and passing the blame on this.

    Then there is the Sinking Fund Forecast, to make sure there is enough monies to maintain the building over the next 15 Years.

  3. The question of quality of valuations is, I believe, one of the biggest issues facing strata owners and the Strata Sector of the Insurance Industry.

    Strata owners because they do not have sufficient advice in being able to assess the basis on which they will engage a particular valuer, for example, is that valuer capable of handling the style of building due to its size and being heritage listed, what level of Professional Indemnity cover does the valuer have by comparison to the value of the reinstatement of the building, is the valuer providing a correct reinstatement value based on the time between the date of the valuation and when a loss may ultimately be settled?

    From an Insurance Industry perspective we need to do more to provide support to Executive Committees and Strata owners to understand and deal with these issues, so that they do not merely engage with the cheapest valuer and can make informed decisions.

  4. What a joke regarding the quote from a prominent Bank Spokesman in this article…

    “He said the bank generally relied on information from valuers as to whether a property meets the building code.”

    What valuer would ever check building compliance in a walk through inspection! We just had 2 valuations on properties this week $500.00 and they were on site less than 15 minutes…there is no way valuers would take compliance responsibility on board… does anyone disagree?