According to the latest statistical figures, residential construction costs broke a yearly inflation record in 2022: CoreLogic’s Cordell Construction Cost Index (CCCI), a quarterly Australian index measurement that tracks the rate of change of residential construction costs, ended 2022 at a new high, climbing 11.9% from the previous year.¹ This has been a significant issue in property and construction claims in Australia.

Key Drivers of Excess Economic Claims Inflation in Australia

The disruption of supply chains, especially since 2020, has affected the cost of a range of core materials including steel, timber, glass, and others.

Steel experienced a dramatic price increase of around 50% from 2021 to the 2022‑2023 period, made worse by BlueScope Steel (one of Australia’s largest steel manufacturers) having a near-monopoly in the light gauge steel framing market.² Timber costs have risen by 40%, attributable in part to an undersupply in 2021. The costs of plastic pipes and fittings increased more than 26% in 2022.

Glass and joinery shortages continue. Rising fuel prices over the past few years have been a major issue due to the vast distances that need to be covered when transporting materials in Australia.

The low availability of alternative accommodation is another issue. With property prices incredibly high and rental vacancy rates at record lows, finding alternative accommodation has become more difficult and expensive.

Extreme weather events have contributed to excess claims inflation. The most significant events were the widespread and devastating flooding in Queensland and New South Wales during 2021 and 2022, with continued wet weather further delaying projects and increasing demand for materials. The loss of timber plantations due to extreme weather events has put further pressure on the availability and cost of timber. There has also been an increase in claims on road projects, which have experienced significant delays and weather-related damage.

Another factor is the rise in construction company insolvencies. Construction companies that entered into fixed-price contracts years ago have found themselves working at a loss, resulting in several well-publicised collapses, including Probuild in February 2022 and Condev in March 2023. Many industry experts believe that the worst is yet to come, with an increasing number of insolvencies in 2023‑2024.³

Key Drivers of Social Inflation in Australia

Several key drivers contributing to social inflation in Australia can be identified. Most notable among them are the five listed below.

Third-party litigation funding

The new litigation funding regulations in December 2022, the Corporations Amendment (Litigation Funding) Regulations 2022, reversed regulatory changes introduced by the previous Australian Federal Government, which required litigation funders in Australia to hold an Australian Financial Services Licence (AFSL) and comply with the managed investment scheme (MIS) regime and other financial services regulatory requirements.

Increases in collective or group actions

Following these new regulations, funded class actions are exempt from the MIS regime and litigation funders are exempt from holding an AFSL, leading to increases in collective or group actions such that Australia remains one of the most active jurisdictions in the world for class actions, or representative proceedings as they are called here. This increases the prospects of corporations being sued in Australia.

Different state class action regimes have led to a rise in forum shopping, such as the commencement of class action proceedings in New South Wales by overseas and interstate litigants to avail themselves of the NSW‑specific Civil Liability (Third Party Claims Against Insurers) Act 2017. This Act permits third-party claimants to pursue insurers directly in a court of NSW in certain instances.

Growth of claims management companies

In January 2022, a major reform of the insurance industry came into effect such that claims handling is now a financial service.⁴ This means that a growth of claims management companies is likely to further fuel claims inflation, particularly around the commencement of representative actions.⁵

Increase in climate-related claims

An example of this is an action brought in 2022 by the Australasian Centre for Corporate Responsibility (ACCR) against Santos, one of Australia’s largest suppliers of oil and gas, that was expanded to include alleged greenwashing in its 2020 Investor Day Briefing and 2021 Climate Change Report. In June 2023, the ACCR filed a Further Amended List Statement, which alleges “misleading and deceptive” claims about its carbon emissions reductions and its ”net zero” claims in contravention of the Australian Consumer Law.⁶

Disclosure obligations and compliance with ESG policies

Shareholders of the Commonwealth Bank of Australia (CBA) alleged that the company had failed to disclose climate change risks in its 2016 annual report, in breach of its disclosure obligations under the Corporations Act, only to be discontinued after CBA released an annual report acknowledging the risks of climate change and pledging to undertake analysis of climate risks.⁷

Design and Building Practitioners Act 2022 (NSW)

Reforms to the Design and Building Practitioners Act are likely to increase the incidence and value of third-party claims. The reforms focus on creating clear lines of accountability for defective building work and include the introduction of a statutory duty of care owed by “persons” who carry out “construction work” to take reasonable care to avoid economic loss caused by defects.⁸

The duty extends beyond designers, engineers, and builders to include those involved in the management of a company to ensure compliance with the legislative changes. This can expose directors and others to personal liability in certain instances. However, it usually arises in cases where the company is in liquidation.

Australian vs. Global Drivers

While there have been global factors driving excess claims inflation, it is a combination of universally applicable drivers combined with regional differentials. The following table gives a global snapshot:

Outlook

Despite these drivers of inflation, it is expected that the global demands for goods will continue to ease into 2024. This should mean a softening of material prices and a relaxation of pressure points in supply chains. Australia’s borders are open once more and the government has boosted its permanent migration program, which is assisting with the availability of skilled workers.

Inflation is still expected to rise, but not at the rates we have seen to date. Although inflation recently increased from 4.9% annually in July 2023 to 5.5% in August 2023, once volatile measures such as fuel and energy prices were stripped out, annual growth in the monthly CPI did continue to ease to 5.3% (down from 5.6%).

Construction cost inflation is expected to halve this year across the major cities, dropping from around 8% in 2022 to 4% this year. Shipping costs, which more than doubled in 2021 and were predicted to spiral in 2022, are easing more quickly than expected. Inflation will still affect the costs of claims, but it is not expected to be as dire as was previously feared.

This article represents a summary of the core issues following reference to various sources, in particular a lengthy article prepared by the law firm Kennedys Law, which is hereby acknowledged. The article is available on request.