In New Zealand’s construction industry, many problems are not caused by a single individual or company. However, in practice, the party that remains “available to be held accountable” often ends up bearing the majority of the liability. This situation is largely driven by the current Joint & Several Liability regime.
The good news is that the government is planning to introduce Proportionate Liability within the construction sector. Before the legal framework changes, builders and developers can still reduce potential exposure through more proactive risk management.
Rick Hao, Director of Prestige Insurance Brokers, explains how the proposed reform may impact the insurance landscape.
Understanding Joint & Several Liability
Joint & Several Liability largely determines how construction claims unfold in practice, and it is precisely this mechanism that makes situations where “multiple parties are responsible, but one party carries the burden” so common.
Many building defects only emerge years after project completion. Their causes are often linked to multiple stages of the project, including design, construction, and project management. However, once a claim is initiated by the property owner, liability is frequently concentrated on the party that remains financially solvent — most commonly the Builder, and sometimes even the Council. Even where that party’s actual responsibility is only partial, it may still end up bearing the full cost of repairing the entire property.
For example, the well-known Spencer on Byron apartment project in Auckland was later found to have serious building defects involving multiple areas, including design, construction, and approval processes. The court ultimately ruled that the Council (then North Shore City Council) was responsible for only approximately 25% of the liability. However, because several major responsible parties were unable to meet their obligations, the Council ultimately paid far more than its allocated share.
Under the Joint & Several Liability regime, once multiple parties are found responsible for the same loss, the property owner may pursue any one of those parties for the full amount of the damages, rather than claiming separately according to each party’s share of responsibility.
Under such a system, if a builder remains one of the few active and financially capable parties within a project, it can easily become the party expected to respond first. Even where its actual fault is only partial, it may still need to pay the entire claim upfront and later attempt recovery from other responsible parties.
From a policy perspective, the original purpose of Joint & Several Liability is to improve claim efficiency and maximise the likelihood that property owners receive full compensation. However, in practical operation, once some responsible parties disappear or become insolvent, liability often shifts from being “shared proportionally” to being concentrated on whoever still has the ability to pay.
Across many construction-related claims, what ultimately determines the outcome is often not simply “who was more responsible,” but rather “who is still financially capable of responding.”
A System Transition Is Underway
Against this backdrop, the government has proposed introducing Proportionate Liability into the construction sector. The core concept is that each party should only be responsible for its own share of liability, creating a clearer and more predictable allocation of risk.
In practical terms, this would mean:
- The court would still determine each party’s proportion of responsibility for the same loss
- Each party would only be required to pay compensation corresponding to its allocated share
- If one responsible party cannot meet its obligations, the shortfall would no longer automatically be absorbed by the remaining parties
Based on the current policy direction, the reform is expected to complete legislation in 2026, followed by an approximately one-year transition period before gradual implementation, with the overall timeline pointing toward around 2027. Until then, Joint & Several Liability remains the applicable legal framework.
It is important to note that the detailed implementation rules for Proportionate Liability are still being developed. While the overall direction is becoming clearer, several key issues remain under discussion, including how responsibility percentages will be assessed, whether minimum liability thresholds will apply, and whether supporting mechanisms will be introduced to address potential compensation gaps.
As a result, there is still a degree of uncertainty at the operational level before the system is formally implemented. For builders and developers, the priority today is not simply waiting for policy certainty, but fully understanding the risks that exist under the current system and preparing proactively.
The Impact on Insurance
From a risk perspective, the difference between Joint & Several Liability and Proportionate Liability is not merely a legal distinction — it directly affects who ultimately bears the financial consequences of risk.
Under the current Joint & Several Liability framework, even where multiple parties are involved in a project, if some parties fail to meet their obligations, the remaining financially capable parties often face amplified exposure. For builders, this means that even where their actual responsibility is limited, they may still face compensation obligations far exceeding their true share of fault.
Within this structure, insurance often acts as a form of “buffer” — covering not only the insured party’s own liability, but also indirectly absorbing the risks created by the failure of other responsible parties.
If the industry transitions toward Proportionate Liability, this logic changes significantly. Each party would only be responsible for its own allocated share and would no longer need to effectively “backstop” others. As a result, risks previously absorbed by insurers or other parties may become more directly reflected at the project or property owner level.
At the same time, one often overlooked issue is Professional Indemnity insurance. This type of insurance generally operates on a “claims made” basis, meaning coverage depends on whether the policy is active at the time the claim is made — not when the project work occurred. Because construction defects may only emerge many years later, if a responsible party has ceased trading or allowed its insurance to lapse, effective protection may no longer exist, even if insurance was once in place.
From an industry perspective, as the system evolves, liability insurance is likely to return more closely to its core purpose — reflecting each participant’s own risk exposure, rather than functioning as a systemic “safety net” for the failures of others.
Builders Need to Manage Risk Proactively
Before the legal framework changes, builders can still reduce potential exposure through more proactive risk management.
- 01 Contract Management
Use clearer contractual arrangements to define the scope of responsibility, including clearly distinguishing construction responsibilities from design responsibilities. This helps avoid unintentionally assuming liability for design or other obligations outside the builder’s intended role.
- 02 Documentation and Record Keeping
Maintain complete project records throughout the construction process, including site conditions, as well as important communications and decision confirmations involving designers, owners, and subcontractors. In actual disputes, clear and complete documentation is often one of the most important tools for reducing liability exposure.
- 03 Subcontractor Management
Subcontractor management should extend beyond construction scheduling alone. Prioritising subcontractors with stable qualifications and sustainable business operations, while clearly defining responsibilities contractually, can help reduce risks caused by breaks within the responsibility chain.
- 04 Insurance Arrangements
Builders should not only understand the scope and limits of their own insurance coverage, but also consider whether policies adequately respond to potentially amplified exposures arising from multi-party liability situations. Where possible, maintaining regular communication with insurance advisers regarding project types and changing risk profiles is also an important part of risk management.
Conclusion
Overall, Joint & Several Liability tends to concentrate risk onto a small number of financially capable parties in practice, while the introduction of Proportionate Liability would result in risk being allocated more directly according to each party’s responsibility.
For builders and developers, although future reforms may reduce the need to effectively “carry” the liabilities of others, overall risk will not disappear — it will simply emerge in different forms. Before the system formally transitions, understanding the current legal framework and proactively managing risk remains the key to navigating uncertainty.
Disclaimer
The content of this article is provided for general informational purposes and industry commentary only, and does not constitute legal, insurance, or other professional advice of any kind. Individual projects and circumstances may differ, and readers should seek appropriate professional advice based on their specific situation before making any related decisions.
If you would like to further discuss relevant risks or specific project circumstances, please feel free to contact us at info@prestigeinsurance.co.nz or call 09-2755888.
