Building consent reforms: move towards proportional liability

In a significant move for the construction and legal sectors, the Government has announced its intention to implement the most substantial overhaul of building consent processes since the Building Act came into effect in 2004. Two key announcements were made earlier this week:

1. Consolidation of building consent authorities (BCAs): Councils will be allowed to voluntarily consolidate their BCA functions with each other.
2. Shift from joint and several liability to proportionate liability: The existing liability regime will be replaced with a more targeted approach to liability.

Consolidation

The proposed consolidation of BCAs allows local councils to join forces and voluntarily consolidate their building consent authority functions with each other. This could include sharing resources like inspectors or IT systems. The aim would be to potentially improving service delivery and creating more consistency in how building consents are managed. This move is aimed at reducing red tape, enhancing efficiency, and making it easier for the industry to meet the growing demand for new housing.

Proportionate liability

Under the current regime of joint and several liability, each defendant can be held fully responsible for the total damages, regardless of their level of fault. In practice, the reality of who ends up “carrying the can” in large construction disputes is often shaped by who remains solvent and insured once builders or developers have gone into liquidation or been removed from the companies register. Typically, this means:

• those with professional indemnity (PI) insurance;
• those with general liability (GL) insurance (although this is usually capped at a relatively low sub-limit, often around $100,000); and
• councils- which can put an undue financial burden on ratepayers.

Most claims are resolved through these parties negotiating settlements. Unlike councils, PI insurers also have two important tools at their disposal to limit their ultimate exposure: contractual liability caps agreed with building owners, and the policy limits under the insurance cover.

In contrast, proportionate liability ensures that each defendant is only responsible for their proportion of the damage. The goal is to allocate liability more fairly, based on the actual degree of fault each party has in a case. This shift may encourage councils to be less hesitant in signing off on consents and inspections, potentially streamlining the approval process and improving overall efficiency.  For this reason, proportionate liability is likely to be welcomed by councils and PI insurers alike.

Proportionate liability presents several advantages:

• Fairer allocation of responsibility: Defendants are held liable only for their proportion of fault, leading to a more accurate distribution of liability. Similarly, this shifts a greater responsibility onto purchasers to conduct thorough due diligence. By doing so, purchasers are better positioned to assess and price the risk – i. e., determine the fair market value of a property, accounting for any potential issues or risks.
• Reduced burden on councils: Councils are less likely to bear the full financial responsibility, as the party often with the deepest pockets.

However, the move to proportionate liability also comes with challenges. While proportionate liability may provide a fairer allocation of responsibility in principle, it also creates a significant practical issue: the gap between the costs of remediation and the funds recoverable. With key players often insolvent, homeowners may face situations where they are unable to fund necessary repairs. If buildings remain in disrepair due to financial limitations, this will have an impact on the quality of New Zealand’s housing stock.

There has been some discussion about whether a construction-specific insurance product could fill this gap. Such cover is not currently available in New Zealand, and if introduced would likely come with a substantial premium cost. Ultimately, those costs would likely be passed on to homeowners as part of the overall build price.

Another potential drawback could be the increased complexity in litigation. Proportionate liability requires more detailed analysis of the causes of defects and the degree of fault for each party involved. This could make legal proceedings more time-consuming and costly, especially as more extensive expert witness evidence will likely be needed.

What can we expect?

The Government has stated that the reforms will help “ease the cost burden on ratepayers for defective building work” and are a necessary step in reducing red tape to support housing development. However, the challenge will be ensuring that these reforms don’t compromise consumer protection and the quality of building work.

Earlier this year, the Government also indicated that further reforms are on the way to crack down on “cowboy builders” by increasing penalties for careless or defective work. Potential changes may include strengthening the disciplinary process and introducing more robust enforcement tools for the Licensed Building Practitioners Registrar, who oversees the registration of licensed builders.

Although the details of the proposed reforms will be outlined in a bill expected to be introduced early next year, several important questions remain:

1. Will the insurance market adapt to support proportionate liability? Currently, the New Zealand insurance market lacks products specifically designed to cover large building defect claims. Without a comprehensive insurance framework, homeowners may find it difficult to recover costs if a builder or contractor becomes insolvent.
2. When will the new proportionate liability rules take effect? It remains unclear whether the new liability regime will apply only to new builds or also extend to existing buildings. If the rules are applied to claims related to existing properties, there may not be adequate insurance coverage to support such cases.
3. How will increased regulation impact building industry practitioners? The Government’s approach to strengthening enforcement and increasing regulation could have significant consequences for builders and contractors, both in terms of compliance and liability.

Fortunately, we can look to our neighbours across the ditch for guidance. The Queensland Home Warranty Scheme, administered by the Queensland Building and Construction Commission, is a mandatory insurance scheme funded by premiums. It covers residential construction projects valued over $3,300 and provides protection for up to six years and six months against defective work, incomplete projects, or builder insolvency. The scheme acts as an insurer of last resort, stepping in when a builder is unable to meet their obligations due to financial difficulties, insolvency, or failure to complete the work.

A similar approach in New Zealand could offer homeowners a safety net, ensuring they have access to compensation for defects or unfinished work even when a builder cannot fulfil their obligations. This type of insurance scheme could work in tandem with proportionate liability, balancing consumer protection with builder responsibility and helping to maintain trust in the residential construction industry.

While the shift to proportionate liability and the consolidation of building consent functions may be welcomed by many in the industry, it is crucial that sufficient consumer protections are put in place to ensure building quality and accountability are not compromised.