What proportional liability may mean for builders

The Government’s plan to shift the construction sector to a proportional liability regime is set to ease pressure on councils – but may leave the main building contractor exposed to greater compliance burdens and legal responsibility for subcontractor mistakes. In this opinion piece, Builtin construction insurance expert Ben Rickard explores the implications 

The Government has announced that it intends to switch the construction industry from a traditional joint and several liability regime to a proportional one. A draft Bill covering liability setting changes and measures to enable BCA voluntary consolidation will be introduced to Parliament in early 2026. Until the Bill is passed, the current liability and BCA settings remain in place. 

Under a proportional liability arrangement, each party is only responsible for their share of the problem. There is no ‘last man standing’ to pick up the whole bill if the other parties have gone bust or done a runner. Currently, it is left to councils to pick up that bill when the developers and builders aren’t around to share the burden of their failures. 

Who benefits from proportional liability 

The current joint and several liability system is great for homeowners, as they are assured their loss will be compensated fully, even if only one party is left to pick up the tab – especially when that party is the council, who will always be able to pay. But it’s not that great for councils, who end up paying way more than they should. The Government’s argument is that this causes councils to be much more risk averse, increasing the time, cost and complexity of the consenting process, because they know they may ultimately have to carry the full cost of mistakes made by anybody on the project. 

A shift to proportional liability is much fairer for councils, since they will only ever have to pay their share. However, it significantly increases the risk that homeowners will lose out if the other responsible parties are no longer around to meet their share of the cost. This is why the Government has suggested that builders’ warranties or guarantees need to be made mandatory alongside this change, so that insurers fill the gap left by insolvent builders. 

Lessons from Australia 

The recent Pafburn decision in Australia raises questions about what proportion of the liability the main contractor will end up bearing, if losses are caused by their subcontractors or other parties to the build. 

In the Pafburn decision, the Australian High Court ruled that a developer and the head building contractor cannot reduce their liability by pointing the finger at their subcontractors. This decision highlighted the interaction between the law that allows a proportionate liability regime to operate and another one that says builders can’t delegate their duty of care when carrying out construction work. 

In New Zealand, the Implied Warranties in Section 362 of the Building Act which apply to residential contracts similarly establish that building contractors are responsible for fixing work their subcontractors perform, and this responsibility can’t be delegated. So, even in a proportional liability environment, the builder would still be held responsible for negligent work conducted by their subcontractors. In essence, the council will be able to limit their liability to the loss they were responsible for, but the building contractor would not, as they are deemed to be responsible for fixing all defective work, including that undertaken by their subcontractors. 

The Pafburn decision conflicted somewhat with another court case – Omaya Holdings – in New South Wales, which also related to whether a main contractor is liable for negligent actions by their subcontractors. In the Omaya Holdings case, the Court held that the statutory duty of care imposed on the builder under legislation did not make them liable for the actions of subcontractors. This was in circumstances in which the builder did not have substantive control over the undertaking of the work, and the subcontractors were wholly relied upon as professionals with the expertise to perform their works or services. 

Implications for insurance claims 

In an insurance claim context, I’ve experienced a situation in which an insurer attempted to decline a claim on the basis that the builder was only contractually liable for their subcontractor’s work; not legally liable.  

Under liability insurance, you are not insured for liability you take on in a contract, unless that same liability exists in law. In this claim, the builder was being held liable for damage caused by a leaking fitting installed by their plumber. The insurer suggested there was no cover since the builder was not legally liable for their subbie’s actions. I pointed out that,  under the Building Act, builders have a non-delegable duty of care for the works performed by their subbies – which means that, despite delegating the performance of a task to a subbie, the main contractor remains legally responsible for ensuring that the task is carried out properly. 

In that case, it was a good thing that the builder was legally responsible for the actions of their subbies, as it meant their liability insurance covered the claim. However, if it was a legal dispute rather than an insurance dispute (or if they had no insurance), the Courts would likely have found the builder liable for the damage caused by their subbie and required them to cover the cost to the homeowners and chase the subbie for costs in a separate action. 

Fast and cheaper home builds? 

While there are probably good things that will come from a move to proportional liability, the benefit is likely to mostly go to councils in the form of reduced exposure to defective building claims. I’m sceptical as to whether we’ll see a reduction in the cost and time involved in the consenting process, simply because councils will still have a duty of care to their ratepayers when issuing consents and conducting inspections. 

The introduction of compulsory builders’ guarantees can also have benefits, as the process for a homeowner to make a claim under their guarantee is likely to be significantly easier and cheaper than having to take the responsible parties to court. Of course, that’s assuming the providers of those guarantees don’t put too many hurdles in the way. 

Regardless of how these changes eventually shake out, it’s hard to see where builders will benefit. In fact, it seems likely that more admin and compliance obligations will be piled on them – yet again! 

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Builtin is New Zealand’s Construction Risk Management Expert. For more information visit builtininsurance.co.nz, email Ben Rickard at ben@builtin.co.nz or call the team on 0800 BUILTIN.