Approved Inspectors: risks, liabilities and the future

For many years, the courts of England and Wales have not had a chance to consider the role and responsibilities of Approved Inspectors. Following the judgment of the Court of Appeal in The Lessees and Management Company of Heron’s Court v NHBC Building Control Services Limited & Others [14.08.19], there is now helpful guidance that may help to reduce the prospective liabilities of a troubled sector of the construction industry.  

A tough time for Approved Inspectors

After the Grenfell Tower disaster, many Approved Inspectors face substantial risks arising from 'cladding claims' due to the installation and certification of combustible products, including flammable rain screen panels and insulation. To some extent, Approved Inspectors have become the 'whipping boys' on many commercial and domestic projects, and the absence of judicial guidance has been problematic in terms of the defence of claims. This has disadvantaged Approved Inspectors relative to their competitors in Local Authority Building Control departments, who have protection from negligence actions thanks to the judgment of the House of Lords in Murphy v Brentwood District Council [1991].

The difficulties facing Approved Inspectors have received increasing publicity, with concern that disruption may slow economic development. On 17 June 2019, The Financial Times reported that many Approved Inspectors were struggling to obtain professional indemnity insurance, which would prevent them from practising. This issue crystallised in July 2019 as AEDIS, an Approved Inspector employing over 100 people in the North East of England, entered voluntary liquidation citing problems obtaining insurance. 

Facts

Heron’s Court was a block of flats in Hertfordshire, which had been certified as compliant with Building Regulations by an Approved Inspector, NHBC Building Control Services Limited (BCS). The flats, which had been leased or purchased by the claimants, were allegedly defective. The claimants (via their management company) brought a claim against the developer, the main contractor, the NHBC’s insurance arm, and BCS. 

In the absence of any privity of contract with BCS, the claimants relied on section 1 of the Defective Premises Act 1972 (the DPA). Section 1 of the DPA provides that a person “taking on work” in connection with the construction of a dwelling must ensure that it is done in a professional manner and with proper materials, so that it is fit for habitation. The DPA allows homeowners to bring claims for purely economic loss in the absence of a direct contractual relationship, including against contractors and architects.     

Judgment

The Courts had to decide whether an Approved Inspector fell within the auspices of the DPA. At first instance, BCS successfully struck out the claimants’ claim. His Honour Mr Justice Waksman held that BCS was not “taking on work” for the purposes of the DPA. On this basis, a distinction was drawn between architects and contractors - who design and construct works – and Approved Inspectors, who perform a statutory function as a checker and certifier.

The claimants appealed. In delivering the leading judgment, Lord Justice Hamblen agreed with Waksman J and concluded that:

  1. Approved Inspectors do not take on work for the purposes of section 1 of the DPA, which confirms the distinction between architects, contractors and Approved Inspectors
  2. As a matter of public policy, and applying the judgment of the House of Lords in Murphy, Approved Inspectors perform the same functions as Local Authority Building Control departments and they should be construed as having similar duties to ensure fair competition.

Comment

The judgment of the Court of Appeal will be welcome news for Approved Inspectors. It helpfully closes down a potential vulnerability for Approved Inspectors under the DPA. The reluctance of the claimants to plead a purely tortious claim against BCS is also telling – clearly, the claimants did not fancy their chancing of distinguishing Murphy, which would mean imposing a higher duty on those acting in the private sector. Without the option to pursue a claim under the DPA, the remaining source of liability may be contractual obligations, which can be limited and capped during negotiations.

Carl Evans from Griffiths & Armour, the broker which manages the only current insurance-backed scheme for Approved Inspectors, remains confident that a significant proportion of Approved Inspectors will obtain insurance cover. Carl notes, however, that “the current market practice is to review each AI practice on its individual merits, meaning that there is a requirement for more detailed information on risk management, project profile and past claims experience.”

Approved Inspectors have an important function, and arguably underestimate their powerful bargaining position. Local Authority Building Control departments, who have limited civil liability, are the only other “game in town”. Insurers and Approved Inspectors would be well advised to push for more favourable contractual terms, including liability caps and net contribution clauses. This may lead to a cultural change where Approved Inspectors are no longer regarded by lawyers, developers, home owners and contractors as viable targets for claims, which would be good news for the insurance market in terms of managing risks.

Read other items in Professions and Financial Lines Brief - September 2019