Building Cladding Products and Their Impact on Australian Commercial Insurance

Introduction: The Evolving Landscape of Building Cladding and Insurance

Over the last decade, the way Australian insurers assess external wall systems has changed dramatically. What was once primarily an aesthetic choice is now a core underwriting risk, directly influencing the availability and cost of commercial property insurance. We understand these technical distinctions rarely come up in conversation—but for a commercial property owner, they directly affect what you pay and whether your claim will be paid.

The Insurance Council of Australia (ICA) has been instrumental in developing industry protocols to create a more consistent approach to risk assessment. This guide explains in plain terms the differences between materials like Aluminium Composite Panels and Expanded Polystyrene, and why they matter to your insurer. The presence of certain building products may impact the availability of essential covers like Business Package Insurance.

The Historical Context of Cladding Risks

A series of high-profile international and local building fires fundamentally altered Australian underwriting standards. These events provided insurers with critical data on how rapidly fire can spread via certain external cladding products. Consequently, materials previously seen as a standard risk are now subject to high scrutiny, with insurers using historical data to model potential fire spread and calculate risk for commercial assets.

Insurer Risk Appetite and Capacity

In the current ‘hard’ insurance market, insurers have a reduced appetite for risks they deem unpredictable or severe. Buildings with high-risk cladding profiles fall squarely into this category, leading some insurers to decline cover altogether. For property owners, transparency during the application and renewal process is the most effective tool. A clear and detailed presentation of your building’s materials and safety features allows underwriters to make a fair and accurate assessment.

Explanation of Concept: Identifying High-Risk Cladding Products

From an insurer’s perspective, not all cladding is the same. The primary concern is combustibility, particularly the material used in the core of panelled systems. This guide focuses on the two most common types that attract underwriter attention. It is crucial that commercial property owners understand how to identify these materials on their assets.

Aluminium Composite Panels (ACP) Explained

Aluminium Composite Panels (ACP) consist of two thin aluminium sheets bonded to a core material. The risk level is determined entirely by this core.

• PE (Polyethylene) Cores: These are highly combustible and represent the highest risk to insurers.
• Fire-Retardant (FR) Mineral Cores: These contain a higher percentage of non-combustible minerals, making them a lower risk, though still subject to assessment.

Insurers often refer to the ICA’s protocol, which classifies ACP based on the percentage of combustible material in its core. A panel with a 100% PE core is viewed very differently from one with a 70% mineral-filled core.

Expanded Polystyrene (EPS) and Other Materials

Expanded Polystyrene (EPS) is a lightweight, flammable plastic foam commonly used in commercial and industrial construction, particularly in cold storage, food processing facilities, and insulated wall systems. Due to its high combustibility and the potential for rapid, intense fires, fire underwriters often view properties with significant amounts of EPS as a potential ‘total loss’ risk. Other materials that may attract scrutiny include certain bi-modular panels and decorative timber veneers that have not been adequately fire-treated.

Practical Considerations: Impact on Policy Terms and Disclosure

The discovery or presence of high-risk cladding has direct consequences for your insurance policy, starting with your legal obligations.

The Duty of Disclosure and Section 54

Under the Insurance Contracts Act 1984 (Cth), s. 21, you have a Duty of Disclosure. This requires you to tell the insurer every matter that you know is relevant to their decision to accept the risk, and on what terms. The type of cladding on your building is a critical material fact. Non-disclosure could lead to a reduced claim payment or, in some cases, the insurer avoiding the policy. While Section 54 of the Act may offer some protection in specific circumstances, it should not be relied upon as a substitute for upfront disclosure. Regular building audits are essential to ensure your disclosure remains accurate.

Policy Exclusions and Higher Deductibles

Insurers are increasingly managing their exposure to cladding risks through specific policy terms.

• Cladding Exclusions: It is now common to see exclusions added to property, liability, and even Professional Indemnity policies. Subject to policy wording and insurer, these may limit or entirely remove cover for loss or damage arising from or contributed to by combustible cladding. This can also impact Construction and Trades Insurance for contractors working on such buildings.
• Higher Premiums and Deductibles: Where an insurer is willing to offer cover, they may apply a significant premium loading. These are indicative figures and vary significantly by insurer, building type, and market conditions. Furthermore, the policy may include a much higher deductible (or excess) for fire-related claims. For example, a fire claim involving non-compliant cladding could carry a deductible of $50,000 or more—figures vary by insurer and policy.

The Broker’s Role: Navigating the Market for Cladding Risks

For properties with complex risk factors like cladding, the role of an insurance broker becomes crucial. A broker acts as a professional intermediary, leveraging their market knowledge and insurer relationships to find a workable solution for the property owner.

Risk Presentation and Underwriting Submissions

A broker’s primary value is in presenting the risk comprehensively and professionally. A detailed submission that goes beyond a simple proposal form can make a significant difference. This involves highlighting risk mitigation factors—such as automatic sprinkler systems, advanced fire alarms, and strict hot work management protocols—to help offset the underwriter’s concerns about the external cladding. The broker can also negotiate policy wordings to minimise the impact of broad, generic exclusions.

Claims Support and Communication

In the event of a claim, the broker’s role is to facilitate clear communication and ensure the insurer has all the necessary technical information to assess the loss fairly. Many business owners rely on their broker to navigate these complexities. An experienced broker provides ongoing advice as building regulations and insurer appetites continue to evolve, helping you stay ahead of potential issues at renewal time.

Key Considerations: Managing Your Property’s Insurance Profile

Proactive management is key to securing the best possible insurance outcome for a property with cladding.

• Conduct a professional cladding audit: Engage a qualified fire engineer or building surveyor to conduct an assessment. This may involve referencing AS 5113, the Australian Standard for testing the fire-spread characteristics of external wall systems. A professional report is the best source of information for your broker and insurer.
• Maintain comprehensive documentation: Keep a detailed file including Material Safety Data Sheets (MSDS), technical specifications, installation certificates, and any core sample test results for your building’s external wall system.
• Communicate early: Contact your broker well in advance of your renewal date to discuss any cladding-related concerns. This provides ample time to gather information and approach the market.

Essential Documentation for Renewals

When preparing for renewal, your broker will likely request:

• Technical specifications and data sheets for the cladding products.
• Evidence of compliance with the Building Code of Australia (BCA) at the time of installation.
• Recent photographic evidence and any reports from building surveyors or fire engineers.

Risk Mitigation Strategies

While full replacement of cladding is the most effective solution, it is not always feasible. Insurers may look favourably on other mitigation strategies, including:

• Improving internal fire protection by installing or upgrading fire sprinkler systems to meet AS 2118.1, the Australian Standard for automatic fire sprinkler systems.
• Partial removal or replacement of high-risk cladding, particularly in areas near ignition sources or escape routes.
• Implementing and enforcing a strict hot work permit system and other high-risk activity management protocols.
  For property owners and builders looking to add value during these essential safety upgrades, you can explore Custom Flat Pack Cabinets for tailored joinery that combines ease of installation with a professional finish.

Frequently Asked Questions

Does every type of building cladding increase my insurance premium?
Not necessarily. Insurers are primarily concerned with combustible cladding, specifically ACP with a high percentage of polyethylene (PE) in its core and Expanded Polystyrene (EPS). Cladding made from non-combustible materials like solid aluminium, fibre cement, or brickwork does not typically attract the same underwriting scrutiny.

What happens if I discover my building has combustible cladding after I’ve taken out a policy?
You must inform your insurer or broker immediately. This is a material change to the risk they agreed to cover and falls under your ongoing Duty of Disclosure as per the Insurance Contracts Act 1984 (Cth), s. 21. The insurer may then choose to alter the policy terms, apply a new excess or exclusion, charge an additional premium, or in some cases, cancel the policy.

Can an insurer refuse to renew my policy because of the cladding?
Yes. Insurance policies are annual contracts, and an insurer is not obligated to offer renewal terms. If your building’s cladding falls outside their current risk appetite, they may issue a notice of non-renewal, giving you time to seek alternative cover.

Will my public liability insurance cover me if a fire spreads via the cladding?
This is a complex area. Increasingly, public liability policies may contain specific cladding exclusions, subject to policy wording and insurer. If a fire starts on your property and spreads to a neighbouring property via the cladding, you could face a significant liability claim. It is vital to have your policy wording reviewed by a broker to understand the extent of your cover.

What is the difference between compliant cladding and ‘fire-safe’ cladding for insurance?
‘Compliant’ cladding means the material met the Building Code of Australia (BCA) at the time of installation. However, the code has changed, and what was compliant then may not be considered ‘fire-safe’ by today’s standards or by an insurer. Insurers assess risk based on the material’s actual combustibility, not just its historical compliance status.

How do I find out what type of cladding is on my commercial building?
The most reliable way is to engage a qualified professional, such as a building surveyor or fire engineer, to conduct a physical inspection and assessment. They can review original building plans, take samples for laboratory testing if necessary, and provide a formal report detailing the material composition of your external walls.