How to Avoiding Combustible Cladding Excess in Your Insurance Renewal

This questions about combustible cladding on a building have been answered by Lia de Sousa, Whitbread Insurance Brokers and Sahil Bhasin, Roscon Group.

Question: Even though we have a letter from a qualified expert claiming that the facade presents no risk, our strata insurance renewal quotes still reflect a combustible cladding excess.

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An issue that I find rather interesting is that of strata insurance. It’s perhaps the largest expense for strata and yet we seem to lack competition in pricing from this sector. The brokers appear to have their favoured insurers I have noted over many years with one, in particular, coming out as preferred/recommended on 80% of occasions. Coincidence or what?

I’ve recently been involved in three strata insurance renewals. Two are quite straight forward (albeit hefty pricing increases of up to 20% have been applied this year) the third though saw our current insurer applying a combustible cladding excess of some $100,000 or 10% of the Building Sum insured (so $120,000 for us) in the event of a fire with “cladding” contributing to the outcome. Some insurers declined to even quote for the fact that our building has part wooden and part copper facades (no flammable PE cladding in sight).

And this is all despite the fact that a qualified expert provided a letter to the developer claiming that the facade presented no additional risk to normal. These days it would seem that most new buildings are more than simply brick and concrete so this “cladding” is not simply PE cladding but any covering applied to a building would add an unwanted cost to insure strata buildings than before the Docklands fire. So to say this whole debacle is not having an impact across the board would be completely false.

It would seem that insurers are taking the whole PE cladding issue way out of context and we are paying for the very unfortunate occurrence of a very small number of buildings.

I’m interested if others are experiencing similar issues in rising insurance pricing, non-competitive quotes, special exclusions leaving them exposed due to combustible cladding and whether they have ideas or insurers they have used to better manage these rising costs.

Answer: Simply obtaining a letter from to the developer claiming that the facade presented no additional risk to normal will not suffice these days.

Response by Sahil Bhasin: Simply obtaining a letter from to the developer claiming that the facade presented no additional risk to normal will not suffice these days, where it used to in the past.

Based on our experience the insurer will put you in a high-risk category unless you can prove otherwise, as they want the following questions answered:

Risk Assessment Questions Strata Insurers are asking on Cladding/EPS:

• A copy of the plans identifying the areas that have cladding/EPS
• % of the building that has cladding/EPS
• How the cladding has been affixed to the building
• The type of cladding used e.g Alucobond Plus, Vitrabond FR, etc.
• For multiple products, you will need to provide the information above for all products.
• Is there monitored detection to common areas?
• Are there any commercial tenancies?
• Is the property sprinkler protected? If so, is there 100% coverage?

Roscon has developed a report titled a ‘Materials Assessment Report’ in conjunction with CHU, Whitbread, Chubb and other insurers and brokers, to assist Owners Corporation Managers accurately assess the above requirements so you don’t get placed in the high risk category.

In some cases we have seen insurance premiums quadrupling, we just completed one for an Owners Corporation who didn’t get this report in time, as the insurance went from $28K to $130K.

This week we have successfully lowered the insurance of two Owners Corporations by over $20K per year.

Materials Assessment Report is great value and will hopefully save the Owners Corporation the report costs in the insurance renewal.

Our Materials Assessment Flyer can be view and downloaded, plus take a look at this short 3min video detailing our Materials Assessment Report.

This post appears in Strata News #253.

Sahil Bhasin
Roscon Group

Response by Lia de Sousa, Whitbread Insurance Brokers:

1. How a quality insurance broker should operate

   As a specialist Strata Insurance broker, Whitbread approach 6 Strata Insurance markets (insurers) when sourcing Strata Insurance quotations for our clients. A number of these markets are only available through insurance brokers, therefore using a broker can help ensure greater competition when it comes to insurance premiums (pending the property’s risk profile).

   Note: The specific risk appetite of some insurers may restrict their ability to provide underwriting terms. Without any background knowledge here, the risk appetite of different insurance could possibly explain one insurance company consistently being recommended over others. This is only an assumption, however.

2. Insurance rate increases + tightening risk appetite.

   In general, Australian insurance markets are hardening, which explains the 20% price increases mentioned.

   In the current insurance market, we are witnessing rate increases of at least 10-20% on almost all strata insurance policies, even for those risks that are deemed ‘good’ in the insurer’s eyes.

   Why are rates increasing?

   Over a sustained period, insurance companies have experienced high loss ratios, putting upward pressure on insurance premiums, and invoking tighter policy conditions e.g. excesses, exclusions and restrictions on the insurers risk appetite (the risks they are able to cover).

   What is a ‘high loss ratio’?

   A high loss ratio occurs where an insurer’s claims payouts are a high proportion of the total funds in the insurer’s premium pool. This can present a problem, because a loss ratio that is too high, can subsequently put an insurance company in poor financial health. If the insurer exhausts their premium pool with too many claims payments and not enough incoming money to top off the premium pool, they would be unable to pay insurance claims.

   In response to a high loss ratio, insurers may take the following measures:

   • increase premium rates to bring ratios back into balance
   • acquire more capital from their reinsurer to top up the funds, and / or,
   • place restrictions on the types of risks underwritten (risk appetite), e.g. decline insurance on high-risk properties, more likely to have a sizable loss i.e. building with cladding or highly flammable building materials.

   The above scenario is currently occurring in the Australian insurance market, where international reinsurance companies which fund our insurers, are dictating higher insurance rates to Australian insurers. This ensures reinsurers can continue to keep premium pools in balance and pay claims. Australian insurers have their hands tied and are forced to pass on higher insurance premiums, and greater cover restrictions to the consumer.

   Strata buildings with ‘at risk’ combustible building materials, EPS, defects, or a poor claims history can have high premiums and excesses imposed, or even be declined cover. As a Strata broker, it can significantly limit the number of insurance companies we are able to approach to place insurance, making it increasingly difficult to obtain cover for certain types of buildings, and/or at a reasonable cost.

3. Non-compliant cladding, combustible building materials & the insurance market response

   In reference to the scenario for property 3, we have explained how the hardening insurance market and narrowing risk appetites have affected the Strata insurance.

   • Cladding excess / insurers refusing to quote despite no cladding present
     • Some insurers will still impose policy conditions e.g. ‘cladding excess’ or refuse to quote based on the presence of cladding or specific building materials like copper or wooden facades. Whether cladding or not, the insurer is more concerned about the fire risk or combustibility certain material present, and the increased fire severity / loss size that may result.

       As in the building 3 example, although referred to as a cladding excess, the excess would likely be imposed due to certain building materials. Sometimes they are non-compliant, but in other cases, they simply present an increased fire risk.

       • Read more about cladding on VBA website here
       • Read more about the increasing list of non-compliant / problematic building products here
   • Cladding excess $100K or 10% of Building Sum Insured
     • In order to keep loss ratios in balance, the insurer would have imposed this as a policy condition. This would help keep the premium down for the OC, but protect the insurers premium pool should a significant cladding / building material related loss occur.
     • In some cases, we have seen a cladding excess applied for all insurance claims at a Strata property, which in most cases is unfounded.

4. Negotiating better policy conditions. Information is everything.

   As an insurance broker, it is our job to represent the OC. We are continually negotiating with Strata insurance companies to reduce premium rates where possible and remove blanket excess where they don’t apply.

   To enable us to negotiate and achieve better Strata insurance policy conditions, information is critical. Without detailed information on buildings with Aluminium Composite Panels (ACP), or other combustible building materials the insurer will always assume the worst – loading premiums, and / or imposing policy conditions.

   Unfortunately, a letter from an expert doesn’t typically suffice in these circumstances. We recommend engaging a fire engineer to obtain a full, detailed report which can be provided to the insurer so they can gain a thorough understanding of the risk.

   Even after a Strata policy has been placed, and the premium paid, some insurers will refund a loaded ‘cladding’ premium to the OC if the engineer’s report indicates the risk is less than initially assessed.

In summary:

To ensure you get the best possible outcome when it comes to Strata Insurance, we recommend engaging a professional Strata Insurance broker.

A specialist Strata insurance broker will be able to guide you through the strata insurance process.

A broker will be able to:

• Provide advice on the types of information, and reports you need to obtain for the insurer to get the best possible rates from the outset
• Know the best insurers to approach based on your specific building risk
• Access strata insurance markets not available to the general public (i.e. ‘broker only’ insurers and policy wordings)
• Negotiate the best possible policy conditions when it comes to imposed excesses and exclusions
• Negotiate the best premium based on your specific risk
• Provide personal advice and recommendations for your OC on insurance placement and any issues that arise throughout the policy period.
• Manage any insurance claims on behalf of the OC, representing your case to the insurer, and always seeking the greatest settlement possible.

Should you have any further questions, or wish to engage Whitbread’s advice on Strata Insurance placement in what is an increasingly tough market, please don’t hesitate to get in touch. We will be happy to provide assistance.

Lia de Sousa
Whitbread Insurance Brokers
T: 1300 424 627
E: [email protected]

This information is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.

Question: Are there circumstances where non-fire rated Aluminium Composite Panels comply with the National Construction Code? If not, who is responsible to replace?

Are there circumstances where non-fire rated Aluminium Composite Panels comply with the National Construction Code? If not, who is responsible to replace?

We are in a four storey apartment building with a Certificate of Occupancy issued in late 2013.

Answer: Regardless of the amount of cladding present, buildings should undergo a risk assessment to identify whether the cladding constitutes an undue risk of fire spread at the façade of the building.

Aluminium Composite Panels (ACP) is prominently marketed in three variations, 100% polyethylene Core (Combustible), 30% Polyethylene Core & 70% Mineral Core (Fire Retardant), 10% Polyethylene Core & 90% Mineral Core (Non-Combustible), however, all 3 fail AS 1530.1 (1994) as they are Combustible.

The words ‘Fire Retardant’ and ‘Non-Combustible’ are marketing terms used by the manufactures which don’t link to any Australian or International standards.

Some of the only items used for cladding which withstands AS 1530.1 (1994) are concrete tilt panels and bricks, as the testing regime requires items to withstand a furnace at 750 degrees for 30mins. See the ‘Non-Combustible’ 10% Polyethylene Core & 90% Mineral Core fail the Australian Standard test.

By the nature of the question, the following statements assume the Owners Corporation you reside in has received a Building Notice.

Prior to your Owners Corporation receiving a notice or order via the Municipal Building Surveyor, the Victorian Cladding Taskforce led by the Victorian Building Authority have verified that there is an unacceptable level of danger to life, based on the combustible external cladding that does not comply with the Building Code of Australia.

If you have received a Building Notice it will denote that the external walls of the building consist of combustible materials, which is contrary to specification C.1.1 of the Building Code which requires all external walls and attachments to be non-combustible.

As an Owners Corporation you are now required to ‘SHOW CAUSE’ in writing within 30, 60 or 90 days why Occupation of the building should not be prohibited or why you should not replace all combustible materials and or carry out other items denoted in the notice or order.

We understand this is a very frustrating and stressful time for all owners and occupants of the building, as the notice is an encumbrance on selling your asset, in turn reducing the asset value and increasing your insurance premium.

You are now required to undertake a Fire Engineering Review in line with the International Fire Engineering Guidelines to look at possible Performance Solutions or Deemed-to-Satisfy Provisions which only a Fire Engineer can submit. This process can save considerable funds on rectification works, rather than just replacing all the combustible materials which could cost millions of dollars. For this to occur a Fire Engineering Brief and Fire Engineering Report will need to be completed.

These two documents provide an approach to justify the performance solutions identified through qualitative and quantitative analysis statements. Statistical and or supportive evidence will also be used where assumptions for fire engineering analysis are made.

As you have mentioned the building was constructed and Occupancy Permit issued in 2013 the cladding would form part of a Building Defect claim as the Owners Corporation and hold the builder responsible under the Statutory Warranties: Section 8 of the Domestic Building Contracts Act 1995 for 10 years from the date of the Occupancy Permit or the Certificate of Final Inspection. This includes the National Construction Code, guides to standards and tolerances and Australia Standards.

The builder can be held responsible under the Statutory Warranties: Section 8 of the Domestic Building Contracts Act 1995, when building works do not comply with:

• The Contract
• The Planning Permit
• The Building Permit
• The National Construction Code (NCC) – Formerly BCA
• The Building Act or its Regulations
• Relevant Australian Standards

All domestic building work must be carried out:

• In a proper and workmanlike manner and in accordance with the plans and specifications
• In accordance with and comply with all laws and legal requirements
• With reasonable care and skill
• So that the home will be suitable for occupation on completion
• Materials supplied will be good and suitable for purpose

If Builder is in breach of a section 8 warranty:

• The works can be considered defective/non-compliant works
• Owners can seek damages
• Damages equate to the costs for the works to be rectified
• Subject to a test of necessity and reasonableness
• Necessary to produce conformity
• Rectification would not be unreasonable

As your Building is over 3 storeys the ‘Home Warranty Insurance’ doesn’t apply.

At the time of replying to your question, Roscon is one of two Fire Engineers in Victoria that has been granted access to the Risk Matrix the Victorian Building Authority used to direct the Municipal Building Surveyor to issue your Owners Corporation a Building Notice.

This allows Roscon to look at the initial rating of a building (Extreme, High, Moderate or Low) and subsequently design Fire Engineering solutions and run design simulation through the Victorian Building Authorities, ‘Risk Matrix’ to reduce the risk rating of a building, thus reverse engineering solutions and presenting a compelling argument to have the Building Notice revoked as quickly as possible, lifting the encumbrance on selling your asset and restoring the asset value.

As a registered domestic and commercial unlimited builder, Roscon can also assist in the Project Management of any Building or Emergency Orders which require rectification works, including advising the committee of funding options available rather than raising special levies.

As the industry leading Fire Engineers for cladding, our team look forward to assisting Victorians through this difficult period.

This post appears in Strata News #210.

Sahil Bhasin
Roscon Group

Q&A What Percentage of Combustible Cladding on a Building is Dangerous?

Question: Our Strata Corporation has sent us a letter and they are investigating all buildings under their control; however, they stated that only buildings with 30% or more combustible cladding are to be forwarded to insurance companies for review. Is this correct?

Our Strata Corporation has sent us a letter and they are investigating all buildings under their control; however, they stated that only building with 30% or more built with combustible cladding are to be forwarded to insurance companies for review. Is this correct? Or does it depend on whether the cladding conforms to the correct Australia standards?

Answer: Regardless of the amount of cladding present, buildings should undergo a risk assessment to identify whether the cladding constitutes an undue risk of fire spread at the façade of the building.

Some insurers are using the percentage of cladding coverage as an interim parameter to adjust insurance premiums on buildings with aluminium composite or expanded polystyrene cladding. This is because the issue is new and guidelines are still being developed on a State and Federal Government level.

Cladding on the external façade of a building is required to be non-combustible for any residential building 3 stories or greater under the National Construction Code. Any amount of combustible cladding can undermine the fire engineering design of the building, as this has been prepared under the assumption that the façade cannot be set alight. Regardless of the amount of cladding present, buildings should undergo a risk assessment to identify whether the cladding constitutes an undue risk of fire spread at the façade of the building.

A detailed cladding assessment would consider the location of the cladding and the manner with which it is installed as well as the existing essential safety measures (fire safety) systems which are present at the site, each of these is equally as important as the total cladding coverage. Examples, where the amount of combustible cladding coverage may be a very small percentage but would add significantly to the fire risk, include:

• Any situation where cladding has been installed near or above a required exit such as to make the exit unusable in the event of a fire – this is particularly relevant where there no alternative exit pathway.
• Where cladding has been installed as the walls of balconies, but the fire sprinklers do not extend to the balcony area.
• Where the cladding is a strip of narrow width but has been installed as a continuous element which spans upwards across more than 2 levels. If a fire occurred at the base of such a panel it would easily move upwards to floors above.
• When cladding is located near common ignition sources this can be near bin storage, balconies, electrical equipment etc.

Conversely there can be situations where there is a large percentage of cladding coverage which does not constitute an undue risk of fire spread at the façade because it may be a non-continuous architectural feature that is not considered to form part of the external wall of the building, with non-combustible elements separating panels and acting as a ‘firestop’.

All these factors need to be considered when assessing combustible cladding at a building.
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This post appears in Strata News #175.

Sahil Bhasin
General Manager
Roscon Group
T: 1800 767 266
E: [email protected]

Read next:

• Managing the Cladding Crisis: aluminium composite panel (ACP)
• Strata Finance: The guide for Owners Corporations

This article is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

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