INSIGHTS: Insuring builders: claims by subsequent owners

The landmark Australian High Court decision in 1995 in Bryan v Maloney made builders of residential properties liable to subsequent owners. Since then there has been a number of decisions confining the scope of the decision. In a significant change the NSW Court of Appeal has recently extended its reach beyond dwellings to the owners corporation of a block of serviced apartments.

Recap

Mr Brian built a house for his sister-in-law who subsequently sold it to Mrs Maloney. Mrs Maloney discovered that the foundations were inappropriate for the soil conditions and had the problem rectified before the house was damaged.

Mrs Maloney sued the builder and, to the surprise of many commentators at the time, Mr Bryan was found to owe a duty of care to Mrs Maloney even though he did not build the house for her. In addition but less controversially, the fact that the damages related to the cost of rectifying defective work before it failed did not prevent Mrs Maloney from recovering damages.

Since Bryan v Maloney a number of decisions have confined its application to residential building work to the exclusion of commercial premises. Others since have emphasised that vulnerability is a key factor in deciding whether a duty of care exists.

The NSW Court of Appeal decision

In The Owners – Strata Plan 61288 v Brookfield Australia Investments the courts were looking at the position of an owners corporation of a strata titled serviced apartment block. In this case the owners corporation (formerly called the body corporate) was the successor in title to the developer (having acquired title to the common property by virtue of registration of the Strata Plan). The decision has shaken this landscape up significantly by deciding that:

1. Contrary to the more generally accepted view, there can be concurrent liability in contract and in tort (e.g. negligence) despite a formal contract being in place between sophisticated parties;
2. A duty of care in favour of the developer’s successors can exist to the extent that such a duty was owed to the original owner (the developer) – hence the importance of the first element of the decision above; and
3. An owners corporation is sufficiently vulnerable that a builder can be liable to it for defects in a strata title block of serviced apartments built for the developer who subsequently transferred ownership of the common property to the owners corporation. The argument being that an owners corporation comes into existence when a Strata Plan is registered and has no power to negotiate whether or on what terms it takes title to the Common Property.

Whilst it is possible that the matter will be reviewed by the High Court, for the moment at least, the main implications are:

Brokers:

• You need to ensure that the policy covers this potentially broader class of claimants;
• Ensure that the description of the relevant project works does not curtail coverage for a claim by a successor in title who is a member of this broader class; and
• Recognise that this could lead to increases in premiums in some cases.

Underwriters:

• There may be an increase in the number of claims of negligence made against builders despite a formal contract being in place; and
• The class of people who can bring a claim (and for whom cover will be sought) has been widened by the combined effect of the Court of Appeal’s acceptance:
  • of concurrent claims; and
  • that an owners corporation of a commercial development is sufficiently vulnerable as to justify it being able to make a claim against a builder despite not having had any contractual relationship with the builder.

If you would like to discuss the issues raised by this article please contact an insurance expert at Meridian Lawyers: Douglas Raftesath, Rob Minc or Scott Ames.