Building Contractors Insurance and Director Liability

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Building Act Amendments - Building contractors insurance and director liability

Proposed changes to the Building Act 2004 will make significant changes to pre-contract disclosure by building contractors undertaking residential works. The licensing of builders under the Licensed Building Practitioners scheme will remain voluntary; however as from 1 March 2012 building practitioners will need to be licensed to carry out restricted building work. As from that date unlicensed building practitioners will have to engage a licensed building practitioner to either carry out or supervise restricted work. Prior to entering into a construction contract a prospective building contractor will be required to provide the consumer with information of the skills, qualifications and the license status of persons who will undertake the work.

All licensed building practitioners undertaking restricted building works will therefore need to revisit the basis of their professional indemnity insurance. In particular, licensed building practitioners who are principals of small-to-medium entities should assess their risk and the scope of any professional indemnity insurance where they are providing the building service, or supervising others undertaking restricted building works.

Surety schemes and insurance

Building contractors will also be required to provide the consumer with a statement of what, if any, surety or insurance backing is available to cover the cost of fixing any faults arising from the building works(assuming that a building contractor is unable to satisfy the new remedy obligations). Financial surety schemes such as a guarantee or home warranty insurance product are not currently mandatory. This disclosure requirement is likely to see increased demand for surety and related insurance products.

Directors project role - disclosure

Where the building contractor is a company the pre-contract disclosure requirement will require a statement of the role that each director of the company will have in the project. This requirement seeks to address the potential for a claim in negligence against directors, particularly in small-to-medium building enterprises who are, on the one hand officers of the company, but who may also be directly involved in the management and delivery of the project. The starting point is that limited liability is not intended to provide company directors with general immunity from tortious liability. A finding of personal liability however is determined on a case-by-case basis with the enquiry necessarily commencing from a position of dispute and uncertainty. The proposed disclosure requirement is intended to provide direct evidence of the circumstances of the transaction and the director's project role. It will be difficult for a director to subsequently disclaim a representation of project involvement given the onus is on the building contractor to ensure a written contract exists and that it complies with the regulations minimum information requirements. If the statement of the director's project role is either absent from the contract, or is inaccurately described, then the building contractor is at risk of a prosecution under section 369 of the Building Act 2004.

If you would like further information please read the related articles on disclosure, indemnity insurance, director liability and dispute resolution, or contact Simon Gaines at http://www.gaineslaw.co.nz/building-act-2004-amendments-building-contractors-insurance/