Part 10: Local authorities' exposure to liabilities from leaky home claims

Local government: Results of the 2006/07 audits.

The local government sector's exposure to liabilities from leaky home claims remains a significant issue. Early in 2007, there was widespread media coverage of the judgment in a leaky home case involving Waitakere City Council (the Dicks case).1

To date, there are six local authorities that have been the most significantly affected by the leaky homes' issue (see paragraph 10.5). Liabilities amounting to $117,153,000 have been included in the 2006/07 financial statements of these local authorities. These liabilities cover finalised claims, and claims that have been notified but not yet confirmed.2 The methods of quantifying the unconfirmed claims vary between each local authority.

In addition, $243,700,000 has been disclosed as contingent liabilities. This amount is made up of claims in the early stages of investigation where the amount and liable parties are yet to be confirmed (three local authorities), and the estimated future claims for one local authority. The estimate of future claims is not the complete future liability, as the five other significantly affected local authorities have not quantified an estimate for claims yet to be made. The extent of the liability recognised by these local authorities is already significant. The full extent of the liability to the local government sector is potentially substantially greater.


In response to the publicity surrounding the Dicks case, we considered the annual reporting requirements on local authorities. Therefore, we issued a guidance paper to our auditors to help them with assessing and appropriately recording leaky home liabilities for each stage of the claims process. The principles included in our guidance paper were passed on to local authorities by their appointed auditor.

The leaky homes' issue has significantly affected the following six local authorities:

  • Auckland City Council;
  • Christchurch City Council;
  • North Shore City Council;
  • Rodney District Council;
  • Waitakere City Council; and
  • Wellington City Council.

A number of other local authorities have some claims against them but the quantity and value of these claims is much lower. For the purposes of this Part, we reviewed the approach taken by the six local authorities listed above.

Summary of the categories of claims facing local authorities

We identified three categories of claims that local authorities need to consider when assessing their current and future exposure to liability for the leaky homes' issue. Each category represents a progressively increasing level of uncertainty about the extent of a local authority's financial obligations:

  • category one – claims notified to local authorities where investigation and review has taken place and the amount of the total claim and the local authority's share has been confirmed;
  • category two – claims that have been notified to local authorities where investigation and confirmation of validity is still in progress, which includes work to assess the other available parties to share liability and to assess the costs; and
  • category three – claims that will be made against local authorities between now and the end of the statutory limitation period but that have not yet been lodged, which includes issues that may not yet have been identified by the home owner.

Categories two and three are of greatest concern to local authorities because of the associated high level of uncertainty. These categories reflect the “tail” of the leaky homes liability issue facing the country.

Review of approach taken by local authorities

We reviewed the 30 June 2007 annual reports of the six local authorities most significantly affected by the leaky homes' issue. We assessed how well their disclosures were aligned with the guidance we had issued.

Five out of six of the local authorities included additional disclosure in their 2007 annual reports compared to the previous year. They did so in response to the guidance we had issued. These local authorities also noted that they had carried out additional work during 2006/07 to assess their future exposure to leaky home claims.

All six local authorities were appropriately providing for notified and confirmed claims (category one). This was unchanged from previous years.

The treatment of claims that had been notified but were yet to be investigated and confirmed (category two) continued to vary. However, the extent of disclosure had increased and consequently improved when compared to 2006. In previous years, most of these local authorities accounted for claims that had been notified but not yet confirmed as contingent liabilities. In the current year, most had accounted for an estimate of the future liability for these claims. Some local authorities had made more detailed disclosures or had more robustly quantified the contingent liability. Therefore, the disclosure of category two claims had improved.

However, in many cases it was not completely clear, based on the disclosures included in the annual reports, how local authorities had treated category two. Some of the local authorities appeared to have divided this category into two parts. They accounted for the element where they had obtained a higher degree of certainty as a provision and disclosed the remainder as a contingent liability. None of the disclosures explained the basis that the local authority had used to make such a distinction.

We expected that when an actuarial assessment of future claims was obtained by a local authority to estimate the amount of category two claims, it would provide sufficiently reliable information to bring the liability into the financial statements. In practice, local authorities did not, in all cases, obtain the expected level of reliability from actuarial assessments of this liability. Therefore, the amounts assessed often continued to be disclosed as contingent liabilities based on that uncertainty. However, contingent liabilities for this category were quantified more often than in previous years.

With the claims yet to be made towards the end of the statutory limitation period (category three), none of the local authorities was able to measure this obligation with enough reliability. Therefore, the local authorities could not disclose the liability in their financial statements. It is our understanding that these local authorities have obtained actuarial assessments, but the basis on which the actuarial assessment had been completed did not provide enough reliability to meet the accounting test for recognising a provision within the financial statements.

For future claims, five out of the six local authorities included some disclosure in their annual report acknowledging this issue as a contingent liability. Only one of these five local authorities included an estimated quantification of the liability. The remaining four local authorities acknowledged their exposure to such claims but stated that they were unable to quantify the extent of exposure at this time. The sixth local authority included disclosure of a significant contingent liability for claims received in writing or claims where investigation was still in progress (category two). However, this local authority did not include any disclosure for claims not yet lodged.

We had hoped that, after obtaining actuarial assessments, local authorities would have a greater level of understanding of the extent of future liability, and that this would enable clearer and more complete disclosure of this issue in their annual reports. It is disappointing that this has not been the case. However, we understand the difficulties facing local authorities in obtaining a reliable assessment of future liability for this complex issue. We are satisfied that, where local authorities have obtained information that is reliable enough to meet the requirements of accounting standards, this is now being reported to the public.


The extent of reporting by local authorities about leaky home liabilities has improved during the past year. The lack of reliability of actuarial assessments remains problematic, and means that it is not possible to fully quantify and disclose the extent of contingent liabilities. Leaky home liabilities remain a significant issue for these local authorities in particular, and for the local government sector as a whole.

1: In December 2006, the High Court found Waitakere City Council (the Council) liable to pay a homeowner damages for a leaky home. In Dicks v Hobson Swan Construction Limited (in liquidation) & Ors (2006) 7 NZCPR 881, the homeowner was awarded damages from the construction company, the builder, and the Council. The liability was allocated at 80% for the builder and construction company, and 20% for the Council. The construction company was in liquidation so the Council faced a higher liability. The Council was found to have breached its duty to exercise reasonable care and skill to ensure that the building work complied with the building code. In this case, the Council was required to have in place a system of inspections that checked for the presence of seals, and the Council should have made more inspections than it did.

2: Refer to paragraph 10.7 for an explanation of claims categories.

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