Updates to the Design and Building Practitioners Act 2020 (DBP Act) 1 in New South Wales and the landmark court decision in the Pafburn2 strata building defects case have far-reaching implications for Australian construction sector — and the professional indemnity insurance required across entire projects.
A key focus for the industry is the statutory duty of care which came into effect on 1 July 2025, which is non-delegable, retrospective, applies to all buildings and participants in their construction, including individual employees and directors.
The significance of the Pafburn appeal court decision, which overturned a previous ruling, is that it removed the proportionate liability defence previously relied on by developers and head contractors to limit their legal responsibility for building defects.
Primarily aimed at protecting property buyers, these legislative changes shift risk back onto developers and head contractors, as well as increasing the exposure of project participants such as subcontractors and employees.
Implications of Pafburn decision
In view of these changes it's advisable for building and construction companies and professionals to reassess their professional indemnity (PI) insurance and assess their cover meet to their increased risks.
This also highlights the need to be prepared to strategically manage complex multi-party litigation through actions like cross-claims, where remediation costs are allocated to the contractors and subcontractors responsible for the defects involved.
Major changes to construction professionals' liability under the DBP Act
In response to a compliance crisis in the construction sector, evidenced by serious building defects, the DBP Act introduces a statutory duty of care aimed at protecting property buyers. This legal duty fundamentally changes who is liable, for what and for how long.
Here's how the scope of construction liability has changed:
- Scope of those with duty of care broadened: Duty of care is not limited to business entities but extends to the entire supply chain, including individual employees, directors and others who have substantive control. This means the duty applies to builders, designers, sub-contractors (like electricians and plumbers), project managers, supervisors and developers.
- Increased exposure to claims: The duty is owed to both current and future building owners and is attached to the building itself, meaning claims are no longer limited to contracting parties or traditional categories of duty of care.
- Universal application: Unlike other parts of the DBP Act (such as compliance declarations) which may be limited to specific classes of buildings, statutory duty of care applies to all building classes and any aspect of construction work (building, designing, supervising, project managing, including supplying and manufacturing products).
- Retrospective application: The duty applies retrospectively, covering construction work done up to 10 years prior to the commencement of the DBP Act (work done after 11 June 2010), provided the damage is discovered after the Act commenced in 2020.
How the Pafburn decision has changed construction risk allocation in NSW
- Non-delegable duty: The High Court ruled that the statutory duty of care under the DBP Act is non-delegable. This means developers and head contractors cannot delegate this responsibility to others; they remain fully liable for any breaches, regardless of subcontracting arrangements.
- Inapplicability of proportionate liability: The key finding in the Pafburn decision was that the proportionate liability provisions of the Civil Liability Act 2002 (NSW) do not apply to breaches of the DBP Act's statutory duty. This means developers and contractors can no longer rely on proportionate liability legislation and are liable for the full amount of the risk.
- Vicarious liability: The decision clarified that developers and head contractors are legally liable for the actions of subcontractors they engage and for the entire economic loss caused by defects. This holds them accountable for all building work and prevents them from deflecting blame.
- Need for cross-claims to apportion responsibility: Since proportionate liability is no longer a legal defence, developers and contractors must bring cross-claims against subcontractors and consultants for their share of damages awards. This is likely to result in more prolonged legal proceedings and increased legal expenses for all parties including professional indemnity insurers.
- Increased mandatory insurance: It is not widely understood in the construction sector in NSW that the DBP Act mandates that all contractors, subcontractors and consultants must hold professional indemnity (PI) insurance that provides adequate cover for any liability that could be incurred during their work. This section of the DBP Act has been deferred (suspended) annually since 2020, up until 1 July 2026, and it is unclear if the deferment will be extended again.
- Insurance market response: The cost of claims is expected to increase due to the heightened complexity of bringing claims and insurers have adapted their underwriting criteria for liability coverage accordingly, especially for developers and head contractors.
Key risk management considerations for construction professionals
For developers and head contractors
The changes to the DBP Act and the implications of the Pafburn decision mean that developers, builders, contractors and subcontractors need to re-assess their exposures and adjust their risk management approach and insurance cover accordingly.
This is likely to require changes to contractual agreements, broadening liability, making statutory duty non-delegable and allowing for the inability to rely on a proportionate liability defence, by:
- Maintaining tight control of the agreed scope of works.
- Reassessing contracts and considering requiring all subcontractors to contract out of the proportionate liability scheme and hold minimum levels of insurance instead.
- Scrutinising their own insurance programs, particularly professional indemnity insurance, by investigating policy limits and excesses, ensuring broad. professional services are included and reviewing who is covered ─ especially with regard to employees and the inclusion of policy coverage for the DBP Act.
- Individual employees of developers and contractors need to be aware of their personal exposure under the DBT Act as well as the potential for legal actions and costs.
- Placing a tighter focus on subcontractor and consultant selection processes.
For subcontractors, consultants and employees
The DBP Act imposes liability across the entire construction supply chain, including subcontractors, consultants, suppliers and individual employees. It's advisable to review:
- Insurance coverage in terms of DBP Act, with a focus on policy limits and excesses, and ensure they include broad professional services in their coverage.
- Consider requiring all sub-contractors to contract out of the proportionate liability scheme and to have minimum levels of insurance.
- Individual employees of subcontractors, consultants and suppliers, even if working as part of a team, need to be aware of personal exposure and potential of legal actions and costs.
- Insurers are likely to review their definition of employees under their policies so it's important to review professional indemnity coverage.
- Due to the retroactive provisions this legislation could also apply to company directors who have recently retired or exited the business.
Benefit from insurance broker construction specialists
While NSW is the first state to implement legislation under the DBP Act, other states are expected to follow. It is understood that Victoria will be making changes to replicate a version of the Act, with the other states and territories undertaking similar reviews.
It's recommended that all construction sector business organisations and owners access the support of an industry specialist broker who can help navigate the increased professional indemnity liability exposures and ensure you have the right protections for your business and employees for your projects.
Gallagher has thousands of construction clients, from major works to smaller projects, and experienced construction insurance specialists to advise on key coverage solutions.
