What is required?

Section 192(1)(c) of the Act requires the Department to be satisfied, before registering a private organisation as a building consent authority, that the organisation has adequate means to cover any civil liabilities that may arise in the performance of building consent authority functions.

In determining whether an organisation has adequate means, the Department may have regard to whether the organisation:

• holds an insurance policy that meets the minimum terms and conditions prescribed by regulations made under section 402 of the Act
• holds an insurance policy under a scheme of insurance approved by regulations made under section 402 of the Act²
• has put in place any arrangements that provide for effective consumer protection (for example, by giving a bond or having a guarantor).

The Department has proposed that minimum terms and conditions for private building consent authority civil liability insurance be prescribed in regulations as follows.

• Cover for claims arising in the year the annual premium applies
• Forward cover for at least 10 years for claims arising out of building control work undertaken during the year the annual premium applies. This cover must apply even if the private building consent authority ceases operating during that 10-year period³
• Retrospective forward cover, where applicable, for claims made in future years arising out of building control work undertaken in years prior to commencement of the policy. This cover is only required where building control functions performed in the last 10 years are not already covered by some other form of adequate means
• Continuous cover that may not be cancelled by the insurer without at least 60 working days' prior notice⁴
• Insurer's liability for the costs and expenses of defending or settling any claim incurred, with the consent of the insurer
• A self-insured deductible or excess under the policy that is no more than $20,000 for each and every claim
• A sum insured, not less than the sums specified in Table 1 below, that is the maximum amount of liability of the building consent authority for which the building consent authority is indemnified by the policy (ie, for claims made in relation to building control functions carried out in each year the annual premiums apply)

Table 1

Total value of building projects the building control functions relate to	Sum insured for any one claim	Sum insured in the aggregate for all claims
Less than $5,000,000	$1,000,000	$2,000,000
$5,000,000 or more	$1,000,000 plus $150,000 for every $1,000,000 or part thereof over $5,000,000 of building project value	Twice the relevant sum insured for any one claim5

The Department has proposed that insurance policies may include standard insurance conditions and exclusions necessary to:

• enable the insurer to effectively meet their obligations under the policy
• protect the insurer from specific or unusual events unrelated to building control functions
• protect the insurer from dishonest or malicious clients
• enable insurers to limit their liability in respect of financial penalties that might be imposed on their clients (eg, by a court).

Examples of matters covered by such standard conditions and exclusions include:

• admitting liability, settling claims or incurring costs and expenses without the written consent of the insurer
• giving reasonable cooperation to the insurer and prompt notice of any claim made and of material changes in the risk
• the provision of information
• setting and reviewing premiums
• claims arising from allegations of defamation, ionising radiation, acts of war or similar events
• claims caused or contributed to by dishonest, fraudulent, criminal or malicious acts or omissions
• limiting liabilities to pay fines, punitive or exemplary damages.

Civil liability insurance policies with conditions or exclusions that, in the Department's view, substantially reduce the value of cover may be regarded by the Department as contributing to adequate means but, on their own, may not be accepted as constituting adequate means for the purpose of the Act. Examples of such exclusions would include exclusions relating to weathertightness or toxic mould claims.

How would the Department assess adequate means?

The Department's assessment of whether a private building consent authority has adequate means would be based on an assessment methodology as outlined below.

The Department would assess all of the following components.

• The applicant's risk management arrangements, in particular:
• The likely retained liability
• The capital available to support the likely liability
• Whether adequate means is assured for the full responsibility period

The Department would, as appropriate, seek and consider advice from specialist advisors engaged by the Department from the fields of insurance, law, finance/accounting and risk management. If the applicant does not have similar specialist 'in-house' expertise, the Department would recommend that applicants consider engaging specialist advisors to prepare supporting information. Such information should demonstrate how they have addressed the above componentsin their application.

Appendix A contains a risk management framework that illustrates how an organisation seeking registration as a building consent authority would be expected to plan, implement and monitor its risk management strategy.

What evidence would be needed to support an application?

In completing an application, robust documentary evidence would be needed to show how the applicant has addressed the components used to assess adequate means. An example of robust evidence of available capital would be audited financial accounts and business plans showing how capital is to be used or managed for the foreseeable future.

Exposure to risk

To assess the exposure, among other things, it would be necessary to consider:

• statistics on the number and value of all buildings (if any) for which consents and certificates have been issued in the last 10 years
• the projected statistics for the next year from the applicant's business plans
• any historical claims and outcomes and/or current litigation.

Exposure may also depend on the location and type of buildings to be consented/certified and the scope of accreditation and consequent consenting and certification activities.

The likely liability would generally run off over the 10-year period. It is important, therefore, to keep records of each year's consents and certificates separately to enable an estimate of the likely liability. Initially there would be no history to consider, so projections would need to be clear (as would the assumptions that underpin them).⁶

Operational risk management procedures

Operational risk management procedures would generally concentrate on reducing the likelihood of any errors or negligence occurring, and hence reducing the likely frequency of claims. The assessment of operational risk management would primarily be addressed during the accreditation process rather than the adequate means assessment.

For the assessment of adequate means the Department would, however, take account of operational risk management procedures that reduce liability by reducing the maximum amount and/or the average claim amount - for example:

• any liability cap (limitation on the maximum liability) that is legally and effectively able to be included in contracts
• any client acceptance procedures or criteria that the building consent authority has in place, as these can potentially reduce risk of liability claims.

² No such regulations have been made as the initiation of such a scheme is the prerogative of private enterprise, for example, prospective private building consent authorities and/or insurers.

³ If cover was for less than 10 years (the period allowed by the Act for claims to be made), consumers of private building consent authority services would have substantially less protection than the consumers of territorial or regional authority building consent authority services.

⁴ Notice is required to enable the Department to consult with the private building consent authority and for the authority to otherwise demonstrate that it has adequate means. Failure by the authority to demonstrate adequate means within that time would be a failure to meet the standards and criteria for registration.

⁵ That is, twice the sum insured derived from the formula in the adjacent column of the table.

⁶ Depending on when litigation begins and how long it takes to be resolved, liability could extend beyond the 10-year limitation in the Building Act 2004.