Chapter 7
The building sector: room for a special case?

A cap on building consent authority liability

7.33Despite our conclusion against proportionate liability, we recognise that local authorities remain attractive potential defendants because of their resources, especially if another major liability event emerges. We therefore considered whether local authorities warrant some further protection from excessive liability. Our conclusion is that such protection is justified, and we recommend caps on building consent authority liabilities to provide it.

7.34Local authorities have different characteristics to other potential building sector defendants. They are not participants in a market, which they have entered voluntarily and with a view to profit. Rather, they are second level regulators and supervisors under the Building Act 2004 and any regulations made under it. They are themselves supervised by the Chief Executive of the Ministry of Business, Innovation and Employment (MBIE). They can be regarded as gatekeepers, in that so long as they perform their supervisory role satisfactorily they will reduce the risk of unsatisfactory building work and therefore of litigation and other costs to other market participants, including consumers.115 They are not volunteers, unlike for example auditors and professional adviser gatekeepers, who choose to provide audit, supervisory or other professional services in the expectation of making a profit. Building consent authorities can and do charge fees for work done.116 However, any fee must be reasonable and based on the activities undertaken. While an auditor can include in his or her audit fee the cost of maintaining professional indemnity cover, the building consent authority cannot add a loading to its consent fees to allow for the risk of later being held liable in tort.

7.35Local authorities also have limited opportunities to insure against potential liabilities, particularly when such liabilities stem from a major event with potential for uncollected shares. At the beginning of the leaky homes crisis, local authorities had access to cover for liabilities as building consent authorities through Riskpool, a pooled insurance fund participated in by most New Zealand local authorities. This was a form of mutual self-insurance. The fund proved able to cope with claims for the first few years of the crisis. Once it became clear that claims would continue to mount, especially from larger and northern local authorities, Riskpool acted to decline cover for all further leaky home claims from 2007. The mutual self-insurance model continues to function for more routine, non-extraordinary risks. But the experience of leaky homes leaves especially larger or highly exposed local authorities with no effective insurance options for major public liability risks.

7.36The particular difficulty for local authorities is that their status as potential deep pocket defendants arises mainly from their inability to withdraw from providing services. Their ability to pay stems from ratepayers, not from business profits or insurance. A private sector gatekeeper, such as an auditor of large commercial companies, has the option of withdrawing service from a particular customer or type of customer, or withdrawing their services altogether, if the risk of damage to profits or reputation or the insurance risk is too great. The only effective options local authorities have to reduce risk is to invest more in training and systems to minimise the risk of liability in the first place, or to manage the building consent function as efficiently and competently as possible within available resources. This turns the uncollected shares from leaky homes into costs that will ultimately be borne by all ratepayers, rather than a risk that falls only on owners and purchasers of, mainly, homes using monolithic cladding and related techniques. While some might regard this result as a satisfactory, if not ideal, form of risk-spreading, the results are far too unpredictable, arbitrary and unfair on ratepayers as a class to be readily supportable.

A cap on local authority liability

7.37We are proposing appropriate caps on building consent authority liability, to enable the unique situation of local authorities to be addressed without unduly preventing the plaintiffs from recovering, in most situations. There should be little disruption to other parties, because the cap is only on building consent authority liability. Joint and several liability would continue to operate for all parties, including for local authorities, up to the level of the cap. This means that local authorities can and will have to accept liability for part or all of uncollected shares, below the cap level.

7.38We do not expect that caps need be introduced immediately. The Financial Assistance Package may help pull local authority liabilities back towards their share of responsibility,117 and the Building Act 2004 amendments may also enable authorities to better manage their liability risk from normal or routine claims. Rather, we have concluded that a backstop cap ought to be placed on building consent authority liability to mitigate any excessive effects on local authorities that could arise from a future major liability event, stemming from future acts or omissions, where local authorities are again very likely to constitute the “last person standing”. The relevant cap should apply to new events, acts or omissions arising no earlier than the closure of the Financial Assistance Package scheme to new claims, on 23 July 2016.118

7.39A critical choice is the level of the cap. A cap needs to be set high enough so that the normal run of plaintiffs can expect to recover full compensation even where they have to look to the local authority for the share of another party, but not so high that it would offer authorities no effective relief in another major liability event. The cap therefore needs to reflect likely building and repair costs, which should be drawn from the best available evidence. Also, as we are dealing with an unknown date in the future, any cap level should be subject to regular review or updating, for example by application of a suitable building and construction-related price index.

7.40For likely repair costs we have started from the Report prepared in 2009 by Price Waterhouse Coopers for the then Department of Building and Housing (PWC Report).119 The PWC Report is a relatively recent and thorough review of likely actual costs for repairs in a major weathertightness liability event involving thousands of claimants. We recognise that future liability events, if they occur, may not relate to weathertightness. However, weathertightness cases typically involve extensive and expensive repairs, and probably provide the most comprehensive information we have regarding potential costs of major repairs. We have in any case cross-checked against average costs of residential building consents, as discussed below.
7.41The PWC Report notes that repairs to individual units in multi-unit developments tend to cost less than repairs to standalone single dwellings – although of course the cost for the whole development is far higher. Given the increasing importance of multi-unit developments in major cities, we consider that we should have separate caps on liability for local authority liability: one for single, standalone dwellings; and one for units in a multi-unit development. We also propose an overall cap per development.120 This is to reflect that many repairs in such a development will be common to or for the benefit of all owners, and also to ensure that there is still an effective cap on liability, in very large developments.

7.42Our recommendation is that the liability for building consent authorities held liable in tort for acts and omissions relating to building consents and all related work be capped as follows:

Cap at $300,000 Cap at $150,000 per unit
  Cap at $3 million per development

7.43The caps should be inclusive of all court or tribunal-awarded amounts, including interest and costs.

7.44The levels for individual homes and units have been set taking into account the cost of a major repair – in leaky home terms, a full recladding of the property.121 We have also considered the average costs of residential building consents over several months in 2013. These averages indicate an average of $360,000 to $380,000 per consent.122 It should only be in the most serious or extreme cases that a local authority is faced with meeting the whole of a claim, or up to the full value of a consent. The cap we propose is therefore set at a high level and most claims involving a local authority should be unaffected. We expect, however, that the existence of the cap will provide the intended backstop, should another major liability event occur.

7.45Unlike a scheme for auditors, we do not recommend compulsory insurance – the deep pocket credentials of local authorities are well established. However, we anticipate that having a cap will make it practical for local authorities to arrange insurance if they wish, either individually or mutually. Restoring the ability of local authorities to better manage building consent-based risks through appropriate insurance is perhaps the strongest justification for introducing the proposed caps.

115There is an extensive international literature on the role and potential use of gatekeepers in “risky” markets or service areas. Effective use of gatekeepers as part of a regulatory scheme may reduce the need for parties to protect and pursue their own interests, including through frequent resort to litigation. The design of the regulatory scheme for building works in New Zealand is clearly outside our terms of reference. But it is relevant for our review that the role of local authorities in the building sector is the socially and economically useful one of gatekeeper.
116Building Act 2004, s 219.
117The rate of uptake of the Financial Assistance Package is controversial, and the split between applicants who would or would not otherwise have a claim against a local authority is unclear. However, a recent information release from Auckland Council suggests at least a material impact on the most significantly affected region and Council, with the Council reporting payments to 144 homeowners under the Financial Assistance Package: Rob Stock “Auckland’s $300m leaky home bill” Sunday Star Times (New Zealand, 23 March 2014).
118This means that existing leaky homes claims, and any potential claims where relevant acts or omissions have occurred but not yet been discovered will not be affected by the cap – they will dealt with under existing provisions, including the Financial Assistance Package where appropriate, up to its close-off date.
119Price Waterhouse Coopers, above n 77.
120The extent of each “development” should be determined as a matter of fact in each case, based on the number of units consented in the resource consent, or for which building consent was granted, or were actually built.
121The PWC Report evaluates a full re-clad for a standalone home at $300,000, and $120,000 for a unit in a multiunit dwelling: see Price Waterhouse Coopers, above n 77 and Appendix E at 54. The PWC figures are expressed in 2008 $ terms.
122We have not differentiated between single and multi-dwelling consents.