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.
7.35Local 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.
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.
7.39A 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.
7.42Our 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:
|SINGLE DWELLING||MULTI-UNIT DEVELOPMENT|
|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.
7.45Unlike 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.