Building industry heading down the gurgler

By ANDREW LAXON

Des Barnes got the call from his broker two days before Christmas. His insurance had run out and nobody else was prepared to cover his one-man building inspection firm. He was out of business.

At 60 and recently diagnosed with arthritis, Barnes was planning to retire in a couple of years and tidy up the 3.2ha lifestyle block in Ramarama, south of Auckland, where he lives with his wife Nina.

After 16 years as a builder, followed by 23 as a council building inspector, he set up his own company in 1998.

Most of the work was prepurchase checks for house buyers. Barnes had a perfect claims record and didn't even do certification work - the private sector equivalent of council building inspections - which was causing so much trouble for some of his colleagues because of the rotting homes crisis.

Yet the rejection letter from Lumley General Insurance underwriters explained that his work was unfortunately "too close to building certification for our tastes".

A few weeks later, he still feels stunned by the news which threw him into an unexpected early retirement.

"I just wonder how many people are in the same boat as me and how many more it's going to affect. It's so frustrating because it's totally out of my control. I've gone through all the options I can."

Barnes was well aware of a growing problem in the building industry. He had watched in sympathy last October as his near neighbour, Drury-based Rose McLaughlan, went under because she could not get any insurance either.

Her firm, A1 Certifiers, was Auckland's second-largest building certifier. It had handled 5500 jobs worth $800 million, including 2500 still at various stages of construction when the Building Industry Authority shut it down. All 13 staff lost their jobs and McLaughlan had to sell the company's assets - from trucks and computers to first aid kits - to repay clients whose work she could no longer complete.

Walking through her deserted office now - "It's like a bloody morgue," she mutters - McLaughlan vividly remembers the day the BIA cancelled her approval.

"In the morning I had a business worth three-quarters of a million dollars. By the afternoon it was worthless."

The case made national headlines.

Graham Coe, the immediate past-president of the Master Builders Federation, warned that the whole building industry would be kneecapped if insurers withdrew from the market.

Everyone agreed building certifiers would be worst affected at the start. They were a growing industry, created by the Building Act reforms of the early 1990s to compete with council inspections. (Some certifiers estimate they were performing half the inspections in the country before the leaky building crisis. The figure has now shrunk back to a quarter and is likely to fall further.)

The catch was that under the Building Act they needed insurance cover for 10 years to stay in business. If insurers refused to cover them, certifiers could not choose to carry on their business anyway, as other professionals could. The Building Industry Authority had to close them down by law.

The prospect terrified other certifiers. Auckland's biggest firm, Approved Building Certifiers (ABC), wrote to Internal Affairs Minister George Hawkins when A1 collapsed, warning that the authority would be forced to close down four or five more businesses by Christmas.

If ABC faced the same restrictions as A1, wrote general manager Matt Palmer, they would be shut down too with the loss of 40 staff and contractors' jobs.

More than 15,000 inspections on over 3000 sites - most of them multi-unit developments - would have to be handed back to councils, creating major delays for home owners and cash-flow problems for the building industry.

The frightening thought for other certifiers was that McLaughlan had no relevant claims against her. Yet she was turned down by every professional indemnity insurer she tried, in New Zealand and overseas, because she had inspected many leak-prone buildings and was therefore judged an unacceptable long-term risk.

Their responses in letters to brokers made it clear that other certifiers would soon suffer a similar fate as their own insurance policies came up for renewal.

ACE Insurance announced it planned to exclude leaky building cover across the whole building industry.

Allianz bluntly replied: "We want nothing to do with this account any more", while Lumley General summed up the prevailing mood among insurers.

"As there have been no changes to the current construction process we have no confidence that leaky buildings are not continuing to be built. Our view is that it is impossible to quantify the risk for building certifiers and therefore we will not provide any insurance for that group."

In November QBE, the only insurer left for certifiers, told brokers it would not take on any new clients but offered a hint of comfort to those left.

"We are trying to accommodate our existing clients in what has turned out to be a very high-risk class of business," warned professional indemnity manager Alex Robertson.

"In some cases our terms may be unacceptable to them but we have no option other than to withdraw totally from this section of the market."

QBE's response was a compromise, which in theory allowed certifiers to keep operating - avoiding a direct repeat of the A1 Certifiers fiasco - but in practice would force many out of business.

The company effectively excluded leaky buildings from its coverage but without using the sweeping language which had prompted the BIA to close down McLaughlan's firm.

The new rules hit Auckland's two biggest remaining certifiers over the Christmas period. Approved Building Certifiers and Nationwide can no longer work on any multi-unit developments bigger than two units or with a unit title (owners in body corporates are seen as increasingly likely to pool their financial resources and sue).

They effectively cannot work on houses with monolithic claddings, the seamless plaster-style finishes regarded as a leading cause of leaks. The restrictions all apply retrospectively, so even many houses passed by certifiers five years ago are no longer covered.

The owner of ABC, Neil Boler, says the restrictions mean his firm has lost 40 per cent of its business to councils and laid off three of its 15 staff.

Boler believes his company, like other certifiers, panicked at first and gave away too much business, which he is now trying to claw back. He remains hopeful that ABC can ride out the crisis.

Nationwide general manager Ray Kitney is not nearly so optimistic. His company's business is down 10 to 15 per cent in Auckland and has almost halved in Wellington, where most work lies in new apartments.

Kitney reels off the names of five other certifiers who have been forced to stop work, including Rotorua Building Certifiers and Gibson Connon in Whangarei.

Michael Skelton, who ran the Rotorua business, confirms the combination of council competition and a higher premium forced him to shut down, as his annual profit wasn't enough to pay his insurance bill.

Gibson Connon manager Ross Connon says he had to make all five of his staff redundant and hand back all the work to Whangarei District Council.

In Tauranga, Bay Building Certifiers managing director Wayne Wellington says he is waiting for the renewal of his company's insurance in a few months with "real concern".

If they run into the same restrictions faced by Auckland certifiers, he predicts the inexperienced council would be swamped by the extra work as it tried to set up a new inspection service from scratch.

Other professions are also starting to feel the pinch. Institute of Building Surveyors president Kevin Longman expects all his 60 members - whom home buyers rely on for accurate inspection reports - will have lost cover for leaks, rot and mould by the middle of this year. They are already responding with "all care but no responsibility taken" clauses in their contracts with customers to protect themselves from legal action.

"None of us can get out of it," he said. "We can't obtain the cover so it's a fact of life. We're just at the mercy of the insurance industry."

Longman concedes the move is "a little unfortunate" but maintains that home owners are not disadvantaged by devalued reports, as the restriction will apply across the whole profession.

Consumers Institute chief executive David Russell disagrees.

"That's nonsense because clearly it is downgrading the service. If the faults could reasonably be expected to be picked up by a building surveyor in the normal course of his business and he missed them, then to try to exclude responsibility for having failed to do the job properly in the first place is certainly failing the consumer."

Builders do not yet have to be registered or carry insurance. Some belong to the Master Builders Association, which runs its own guarantee scheme, or the Certified Builders Association, which had to abandon its attempt to launch a guarantee last year after its insurer pulled out for fear of leaky building claims.

President Garry Shuttleworth says the association has managed to revive the idea with an underwriter after eight months hard negotiating, by clamping down on the design and building features which caused the problem in the first place - such as lack of eaves, balconies directly over downstairs rooms and the combination of seamless plaster finishes (known as monolithic claddings) and untreated timber.

Premiums for most architects are rising but have not been affected by leaky building claims, according to Graham Strez, claims director for the Architects Cooperative Society, which organises cover for about 90 per cent of the country's 600 firms.

However, some smaller firms outside the society are no longer insured for leaky buildings. The subject remains highly sensitive among insurance companies. QBE's New Zealand chief executive Ross Chapman turned down a Herald request for an interview.

However, in this week's Australian Financial Review, the company's managing director in Australia, Raymond Jones, confirmed that all professional indemnity rates there would rise this year - one survey predicts across the board increases of almost 30 per cent - because of corporate disasters such as the collapse of HIH Insurance in Australia and Enron in the United States.

Insurance Council chief executive Chris Ryan yesterday confirmed there would probably be similar general increases in New Zealand.

Brokers predict New Zealand insurers will gradually ease up on their leaky building exclusions, especially as the building industry improves its act. They note that Auckland councils have already made treated timber and better-draining wall cavities compulsory on any suspect house plans.

But most certifiers who spoke to the Herald believe more fundamental reforms are overdue. Boler wants the Government to copy Australia's system of builder registration and compulsory insurance, paid for by an increased building levy, so homeowners have some comeback when builders or developers go bust.

Back in Drury, Des Barnes' local MP, National's Paul Hutchison, says he still finds it disturbing that an ordinary building inspector should be so badly affected by the problem.

And for her part Rose McLaughlan, who is still sorting out her business affairs, wants to see monolithic claddings taken off the market, untreated timber banned and the people who approved them in the first place held responsible.

"Standards New Zealand approved chemical-free timber and the Building Research Association of New Zealand have tested and approved all of these products that are being used.

"They issue appraisal certificates, which building inspectors all over the country base their inspection and their processing on - and their systems are still failing.

"You can't tell me that every building inspector in the country's a bad one and that every builder in the country's a shonky builder. I know some really, really good builders that have leaks and they've done everything that they possibly can."

How the building industry is affected

EXCLUDED

Building certifiers: The private sector equivalent of council building inspectors. Big firms have lost large amounts of work and are struggling to survive. Several smaller firms have gone under.

Building surveyors: Often used by house buyers for pre-purchase inspections. Surveyors want to deny any liability for leaks through their own exclusion clauses, which the Consumers Institute warns may be illegal.

PARTIALLY EXCLUDED

Builders: Unlike most of their colleagues, builders do not have to carry insurance. One group (Master Builders Federation) runs its own self-funded guarantee. The other (Certified Builders Association) has been denied cover for eight months but hopes to relaunch in two weeks.

Architects: Most are still covered by a group scheme but some smaller firms have been hard hit.

STILL COVERED

Engineers: No reported problems so far but worried about surveyors' plight.

Councils: Facing the most claims but effectively self-insured through a ratepayer-funded levy system.

What causes leaking and rotting homes:

* A combination of poor design and suspect building methods and materials, including lack of eaves on roofs

* no protective flashings on windows

* leak-prone seamless plaster wall claddings

* rot-prone untreated timber frames

Repair costs: Estimates range from $240,000 to $3 billion

Homes affected: Government experts estimate 18,000 homes may be at risk. Since November its Weathertight Homes Resolution Service has taken 2183 calls and received 403 applications covering 781 homes nationwide.

* If you have information about leaking buildings,
email the Herald or fax (09) 373-6421.

Herald feature: Leaky buildings

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