An Australian Federal Court ruled that property damage caused by combustible cladding happened at installation, not when it was discovered. This shifts insurance coverage timelines backwards and reveals gaps in how developers organise protection. Your current project setup likely has this same vulnerability.
What you need to know:
- Courts now rule damage occurs at installation, not when issues appear years later.
- Your designer’s insurance during construction is more important than coverage when defects show up.
- SPV wind-up timing and board documentation become vital legal safeguards
- Seven-year run-on periods extend claim windows but don’t cover backward-dated damage.
- Risk registers and multiple layers of defence are your best protection against unpredictable future problems.
A recent Australian Federal Court case shifted how property developers should consider risk. Not because it created new laws, but because it revealed a gap most developers are unaware of.
The case concerns combustible cladding, specifically regarding when property damage occurs for insurance purposes. The court determined that the damage took place during installation, not when the issue was found years later. This shifts the entire insurance coverage period to an earlier time.
I’ve spent 40 years organising property developments. I’ve seen asbestos change from a protective material to a liability. I’ve observed combustible cladding shift from a compliant product to a catastrophic risk.
The pattern remains consistent: issues with technological advancements appear only after usage.
Why the Asbestos Lesson Matters Now
When I was younger and new to the industry, asbestos was the major regulatory shift. It was installed everywhere: sheeting, sprayed-on fireproofing, bathroom wet areas. Perfectly legal. Perfectly compliant. Then it became a problem.
Here’s what most people overlook: asbestos and combustible cladding pose fundamentally different risks. Asbestos was a fire-resistant material that remained inert unless damaged. Combustible cladding, on the other hand, was the opposite: an accident waiting to happen.
The industry’s response to asbestos mainly targeted tradespeople’s occupational health. There was little concern for building owners or occupants. The main issue was installing it after the ban started. Eventually, the cost of removal was passed on to homeowners during renovations.
Combustible cladding doesn’t provide that option.
Bottom line: Asbestos was manageable because you knew where it was and could control when you disturbed it. Combustible cladding is different. The risk is present from day one.
What the Grenfell Tower Fire Unveiled
Nobody realised combustible cladding was a problem until Grenfell Tower in London. The fire resulted in 72 deaths. The subsequent inquiry uncovered an important issue: the refurbishment opted for cheaper combustible cladding that saved £293,368.
That cost-cutting decision led to a £15 billion remediation program across Australia. The ratio is staggering: 1:51,000. For every pound saved, the industry now pays 51,000 pounds in remediation costs.
Here’s what I find interesting about Grenfell: the building was undergoing modifications at the time, while residents still lived there. The flames from an apartment fire reached the incomplete facade panels and funnelled up behind them, causing the inferno.
Would the fire have happened the same way if the panels were complete and the gap sealed? I don’t know. Nobody does. But the question highlights an important aspect of risk timing.
When Construction Timing Poses the Risk
Fire tests conducted by manufacturer Arconic in 2004 revealed that the fire performance was significantly worse when panels were folded into cassette shapes. While the riveted system achieved a ‘B’ grade under the European system, the cassettes burnt so fiercely they couldn’t even be classified.
The manufacturer was aware, but the knowledge never translated into actionable intelligence within the project framework.
There’s another factor: gaps had been deliberately left between the new cladding wall and the old concrete wall to allow ventilation and water drainage. On the night of the fire, this cavity allowed flames to reach the materials that fuelled the spread. It took approximately 20 minutes from first observations of fire spread to the cladding until the fire reached the top of the building.
This raises a question I hadn’t thought of before: Is the highest-risk period for these systems during installation, when the building is partially clad and occupied at the same time?
If you were handling Grenfell again, would you seal the window surrounds as you go? That prevents the funnel effect but traps water from above, leading to mould and staining. Do you finish the cladding from top to bottom and remove scaffolding progressively? These steps aren’t usually specified in consultant agreements or insurance policies. However, based on what happened, they might be as important as selecting the right product.
Key insight: The construction sequence and incomplete installations create risk windows that nobody’s accounting for in contracts or insurance.
How Developers Structure Protection
As a property developer, you don’t cover design risk. Developers aren’t designers. So, you create protection through structure.
You engage designers through contracts that require them to be responsible for their designs and product specifications. You ensure these contracts do not include limitation of liability clauses. You specify minimum insurance limits. You obtain certificates of currency for each policy to verify they are current.
You need a 7-year run-on period, so if something occurs within that timeframe, there’s coverage.
You establish a Special Purpose Vehicle as the developer entity, which is wound up years after the project finishes. As long as profits are distributed legally and directors comply with corporation law requirements, there is nothing wrong with this setup. It is standard practice, and the industry does this.
Here’s what the combustible cladding case reveals: If damage is considered to have occurred at installation, not at the time of discovery, then the designer’s insurance policy in place during construction is what matters. Not the policy active when the issue appears years later.
That 7-year run-on period extends the claim window. But does it also extend the policy period backwards to cover damage that happened at installation? These are two very different matters.
Critical distinction: Run-on coverage applies when you make claims, not retroactively to when the damage legally happened.
Where the Protection Structure Fails
The designer’s professional indemnity insurance covers design and product selection. If it’s the original design and product choice, it’s covered.
When a property owner sues, they have a claim against the developer who sold the property to them. The developer then joins the designers responsible for the design or product selection. Sometimes this includes the building contractor under a design and construction contract. In such cases, the builder must also hold professional indemnity insurance.
Where the chain breaks: when the developer SPV has been deregistered, or the design consultant has become insolvent.
If the developer is aware of a potential liability and still winds up the SPV, courts can overturn it. The SPV directors then face serious trouble. That’s why board meeting minutes are so important. You need documentation where potential issues are discussed or noted as not existing.
Here’s the dilemma: How do you record that no potential issues exist when the entire point of cases like combustible cladding is that the issue wasn’t knowable at the time? You can’t write in the minutes: “We confirm there are no latent defects that will emerge from future regulatory changes we can’t predict.”
The vulnerability: Your protection setup assumes you understand what you’re defending against. Unknown risks can undermine the model.
Understanding Statutory Time Limits
In NSW, the Home Building Act holds the developer responsible for building work if the contractor goes into liquidation, dies, or disappears, as if the developer were the builder. There is a 2-year general defects period and a 6-year major defect period.
Knowing this, you need to decide when to wind up your SPV. Immediately after profits are distributed? After two years? After six years? The directors must make this decision and clearly record the reasoning.
Wind up after 6 years, and you’ve outlived the statutory liability period. But what happens when the defect isn’t discovered until year 8 or 10, and the court rules the damage occurred at installation in year 1?
The statutory limitation period might shield the SPV from legal action. But does it also cover the insurance that needs to respond?
Nobody could have reasonably assessed the catastrophic nature of the combustible cladding problem. If the SPV has been legally wound up, it’s gone. The SPV never had insurance anyway. It’s always the consultants’ policies that handle the work.
The real question is whether the property owner can take legal action against the design consultants directly after the SPV is deregistered.
What this means: Statutory time limits shield SPVs from legal action but do not cover the insurance required to settle claims.
Building Redundancy Into Your Projects
I prefer proven and reliable products over new technology. As someone with a background in the building industry before silicone products were around, I believe in having multiple layers of protection against issues like water and wind. I’m a big fan of concrete and steel.
Even tried and tested products can fail. Combustible cladding was tested during Grenfell; it was installed on many buildings without issues. There had been some small fires, but these never led to the catastrophic failure seen at Grenfell. So, how long does something need to be in use before you call it tested?
I don’t have a perfect answer. What I do know is this: You’re not relying on just one product to do one job flawlessly. You’re building redundancy into the system.
When I review consultant specifications today, I’m not asking “Has this been tested?” I’m asking, “What’s the failure mode if this doesn’t perform as expected, and do we have a backup system?”
I’m still comfortable having composite panels on my buildings, provided they’re self-extinguishing or non-flammable. The product itself isn’t the problem; the real risk is the single point of failure.
Design principle: Multiple layers of defence guard against unforeseen failure modes.
How to Create a Risk Register for Unknown Risks
I’m an advocate for risk management, especially for the unknown. That’s why structure is vital. No one designs a building expecting catastrophic failure. These incidents are rare. But if they happen, then what?
A risk register is a vital document, and you need to develop it with the full project team. However, even before bringing the team together, you must establish an entity responsible for the development. Everything you do must take into account the risks involved.
When you’re sitting in a room with consultants, contractors, and your team building the risk register, you’re trying to identify risks that haven’t existed yet. The combustible cladding risk wasn’t on anyone’s register before Grenfell. The asbestos health risk wasn’t on registers in the 1970s.
Bringing together people from different parts of a project to discuss risk fosters diverse perspectives. Their unique experiences spark broader conversations about potential risks beyond the usual ones.
Some people in the past might have had concerns about combustible cladding, but they were never asked to contribute to a risk workshop. Who knows? It certainly never came up in anything I was involved in.
All we do is our best. If that isn’t good enough, there’s nothing more we can do.
If courts decide we should have had crystal balls, good on them. I don’t own a crystal ball. I don’t even know where to buy one.
Practical approach: Cross-functional risk workshops reveal concerns that individual consultants working alone would not identify.
What to Do Differently on Your Next Project
Given all these factors, including the combustible cladding case, how courts interpret damage, and the gap between legal compliance and actual safety, what should you change now?
Document all your decisions more thoroughly. Implement risk identification, mitigation, and management procedures more rigorously. Increase the number of board meeting minutes. Prepare additional paperwork to safeguard yourself against potential issues.
As our society becomes more litigious, protecting yourself is essential. Having evidence that you’ve considered every potential issue helps. You’ll inevitably miss some things. But at least it shows you made an effort.
The combustible cladding case doesn’t impose new obligations. It exposes gaps in structures we believed to be solid.
The start contains the finish. Poor structure at the beginning becomes an irreversible cost later on. This has always been true.
What has changed is the court’s willingness to look back and say: “The damage occurred when you installed it, not when you discovered it.” That shifts the entire insurance coverage issue to a time when you believed everything was compliant, tested, and in order.
You can’t predict the next combustible cladding. But you organise your projects so that when it appears—and it will—you won’t bear the full liability.
Multiple layers of defence. System redundancy. Documentation that proves you asked the right questions, even if you didn’t have all the answers.
That’s not a crystal ball; it’s good structure.
Common Questions Regarding the Combustible Cladding Case
When does property damage count for insurance purposes?
The court decided that damage happens at installation, not when the defect is found years later. This means the insurance policy in place during construction is what matters, not the one active when issues arise.
Does a 7-year continuous period cover damage that occurred at installation?
No. Run-on coverage extends the timeframe to make claims, but it doesn’t stretch the policy period backwards to cover damage legally occurred during installation.
What happens if my SPV is deregistered when a defect emerges?
If the SPV has been legally wound up, it no longer exists. Property owners must then pursue design consultants directly. The SPV never carried insurance. Consultants’ professional indemnity policies provide the necessary coverage.
How do I document board decisions regarding winding up an SPV?
Board minutes should clearly record whether potential issues were discussed or noted as not existing. Write something like “To the best of our knowledge there are no potential claims” rather than asserting certainty about unknowable future risks.
When is the appropriate time to wind up an SPV in NSW?
Consider the Home Building Act’s 2-year general defects period and 6-year major defect period. Directors must decide whether to wind up immediately after profit distribution, after 2 years, or after 6 years. Clearly document the reasoning in the board minutes.
What is the difference between asbestos and combustible cladding as risks?
Asbestos was inert unless damaged, so you controlled when and how you handled it. Combustible cladding presents an active risk from installation. It’s an accident waiting to happen, not a contained hazard.
How do I create a risk register for problems I can’t foresee?
Conduct cross-functional workshops with consultants, contractors, and your team. Different lived experiences reveal concerns that individual consultants working alone would never notice. You won’t catch everything, but you’ll identify more risks than any single expert would.
What should I ask when reviewing product specifications?
Don’t just ask “Has this been tested?” Ask “What’s the failure mode if this doesn’t perform as expected, and do we have a backup system?” Build redundancy, not single points of failure.
Key Takeaways
- Courts now consider damage as existing at installation, not when it is discovered. Your insurance coverage period moves back to construction instead of forward to when issues emerge.
- Seven-year run-on periods extend claim timing but do not cover damage assessed retroactively. These are different protections.
- Your SPV protection structure relies on understanding what you’re safeguarding against. Unknowable risks undermine this model.
- Board meeting minutes require precise language. Record that you have considered potential issues without asserting certainty about unknowable future risks.
- Statutory limitation periods shield SPVs from legal action but do not safeguard the insurance coverage required to respond to claims.
- Build multiple layers of defence into your projects. The product itself isn’t the problem; single points of failure are.
- Cross-functional risk workshops reveal concerns that individual consultants working alone would never spot. Diverse lived experiences lead to better risk insight.
Conflict-of-Interest & Commercial Disclosure: LEFTA Corporation Pty Ltd advises clients across Australia and may seek future joint-venture opportunities at some of the sites discussed. Views expressed are personal and do not represent any current client mandate.
General Advice Disclaimer: This article is based upon the personal experiences of the Author. No portion of this article is intended to provide legal, financial or professional advice. The information contained herein is not a substitute or replacement for the services of qualified professionals, legal, financial and insurance experts. The Author, its publisher, agents, servants, contractors, employees and representatives will, under no circumstances, be liable for any special or consequential damages that result from the use of, or any attempt to use, the information contained herein. You are solely responsible and accountable for any actions, decisions and results by your use of the information contained herein. You agree not to attempt to hold the Author and LEFTA Corporation Pty Ltd liable for any such decisions, actions or results, at any time, under any circumstances.
