As with other states around Australia, arrangements regarding domestic building insurance (DBI) in Victoria have been the subject of considerable debate in recent times.
In May of last year, the Victorian Auditor General’s Office (VAGO) reported that DBI is widely misunderstood, offers little in the way of genuine protection to consumers and is far more costly than it should be. A February article by Daniel Graham in Choice magazine, meanwhile, described protections under DBI not just in Victoria but across most states as being ‘only marginally better than a warranty that comes with a blender.’
Begun early last decade following the collapse of HIH, DBI is a mandatory product which applies in all states except for Tasmania and protects homeowners against incomplete or unsatisfactory building works in the event that the builder dies, disappears or becomes insolvent (or, in Victoria’s case as provided for in a recent amendment, fails to comply with a VCAT or court order).
In the case of Victoria, the protection applies to works of greater than $16,000 in value and is limited to a maximum claim payment of $300,000 or, in the case of non-completion of building work the lesser of this and 20 percent of the original contract amount. Following the withdrawal of five private insurers from the market in 2009 and 2010, the Victorian Managed Insurance Authority is now the sole agency offering DBI in Victoria through its agent, QBE.
So is the product failing? A look at the most recent data from the Emergency Services Commission last year paints a mixed picture.
On one hand, the amount being paid by builders through premiums relative to that eventually being paid to consumers through subsequent claims does not appear to be unreasonable. Over the six-year period between 2002 and 2007, between 40 and 67 per cent of the value of money paid by builders to VMIA through premiums each year (excluding stamp duty, GST and brokerage) has subsequently been paid out (usually in later years) in claims relating to building work performed under project certificates issued in each of the years in question.
Subsequent data is available but potentially misleading as the time lag between project certificates being issued and claims relating to the work in question being finalised means that further payments relating to certificates issued from 2008 onward were likely at the time the ESC report was produced. On this basis, the ESC concluded, the amount of premiums being charged by VIMA were not unreasonable relative to its costs associated with servicing the product.
In addition, out of 5,598 claims made between the period spanning January 2002 until June 2014, 3,943 had been accepted, 324 were pending and liability had been denied with respect to 1,331 claims – implying a respectable acceptance rate of greater than 70 per cent.
Yet the data also reveals that average premiums paid by builders have blown out from $546 at the time of withdrawal of private insurers from the market 2009 to $987 in the first half of 2014, whilst average wait times for claims to be finalised are sitting at almost a year.
From a consumer perspective, however, the biggest problem revolves around the the last resort nature of the scheme itself, which allows them to claim only if and when the builder dies, disappears, becomes insolvent or fails to follow VCAT or court orders. Where builders simply refuse to rectify defects, Choice points out, the homeowner must chase them through an often labyrinthine process of mediation, tribunal and court hearings before they can get any remedy.
Critics such as Builders Collective of Australia president Phil Dwyer and consumer advocate Anne Paten talk about cases where consumers have spent hundreds of thousands of dollars in legal costs and disputes. With average payouts for all accepted claims between January 2002 and June 2014 averaging $38,398, this means some are spending many more times what they receive in payouts on legal and associated costs.
So is it failing? According to Master Builders Association of Victoria chief executive officer Radley de Silva, the answer by and large is no. Whilst Master Builders recently listed DBI as one of its eight priority areas for action and reform in 2016/17, de Silva says his organisation is not actually calling for a large overhaul but rather responding to matters raised in the VAGO report such as the financial viability of the system, the cost of insurance and the level of consumer protection and awareness.
“Having gone through the HIH crisis and the turmoil that was created, I don’t think anyone wants to change the system significantly because it was turmoil then and we don’t go back,” he said.
“You always hear about specific customer complaints and we empathise with all of that. When you consider that there were 65,000 new dwellings constructed in Victoria last year, when you consider that there were seven billion dollars’ worth of renovations and additions undertaken in Victoria last year, there are relatively low levels of consumer complaints. I’m not sure that the system is broken.”
Nevertheless, de Silva says there areas where costs could be minimised and improvements made. First, he said, it is important to address fundamental issues surrounding underlying cause of defects and consumer complaints. Whilst progress in terms of builder registration and dispute resolution have been made, more could be done in this area by expanding the numbers of tradespeople in Victoria who require registration, he said.
In terms of insurance, a completions based model in which the turnover limits of individual builders with regard to eligibility requirements for insurance could be based not so much on an annual turnover value which is set and fixed but one which instead ‘resets’ upon completion of projects. This would prove less restrictive for builders and would help VMIA understand how builders are progressing, their potential level of risk and how buildings are trending, thus providing much greater insight for the insurer in terms of risk assessment and pricing. Under this arrangement, a builder with an annual turnover limit of $1 million who completed a job worth $200,000, for example, would then be able to take on another job of up to the same amount without impacting their eligibility for DBI.
In addition, costs could be minimised by having VMIA continuing to assess all builders initially but then subsequently assessing smaller builders with turnovers beneath a set threshold (say $3 million) who represent lower levels of financial risk to the insurer only periodically as opposed to every year, de Silva says. Furthermore, he suggests, consideration could be given to replacing the current compulsory option and instead allowing consumers to choose between a standard option which is less expensive compared with the current option but would have slightly lower indemnity periods (say, four years instead of six) or an alternative to purchase extended cover options for those who wish to increase the length of their coverage.
de Silva also takes issue with VAGO’s questioning of the ongoing role of brokers in the system – with MBAV and the Housing Industry Association standing as the two largest. In its report, VAGO questioned the ongoing need for brokers in a product with standard cover which is sourced from a single provider. de Silva says brokers provide important advice not just to builders but to the underwriter (QBE) in terms of risk management, and abolishing them would require VMIA to recruit and train a customer service team of approximately 60 FTEs as opposed to using existing advisors who are already well- trained.
Other commentators want more radical action. Dwyer refers to DBI as ‘the worst insurance product in Australia.’ Apart from the last resort nature of the scheme and what he says are inadequate maximum payout claims, he says further problems arise where builders who are nearing insolvency attempt to overcharge consumers. This leads to a situation in which claims could fail on the basis that the consumer in question had overpaid on what they owed, he said. Finally, assessment processes associated with the insurance were supposed to have sorted out good builders from bad ones, he says, but have failed to do so.
Dwyer says the system needs a fundamental overhaul in order to address deficiencies in front-end issues such as builder registration processes and dispute resolution mechanisms. In terms of insurance, he would like to see the entire product done away with in favour of statutory warranties, which under the Domestic Building Contracts Act require builders to provide warranties that work will be carried out in a workmanlike manner with reasonable care and skills. These exist now, but Dwyer says consumers must first try to claim DBI before relying on them.
Failing that, he says brokers are unnecessary given the mandatory nature of what is a single product provided by a single monopoly supplier. He would also like to see the whole system run through a statutory fund.
“The whole system was brought in to manage the industry and provide an insurance product for consumer protection,” Dwyer said. “What it doesn’t do is manage the industry and it doesn't provide consumer protection.
“We need the whole regime to be thrown out altogether in place of a proper system with proper registration, proper compliance and assessment at the registration stage as to whether the builder is financially solvent and should be a registered builder.
“If we had that in the first instance, and then we had a product which was there when it was needed as a statutory fund (there would be better consumer protection and it would work better for everybody).”
Paten says the last resort nature of the claim makes the insurance almost ineffectual for many home owners. She says property owners spend years and hundreds of thousands of dollars fighting disputes in VCAT and through the courts, and that the emotional toll on many has led to family breakups and suicides/attempted suicides.
Using her own example as a case in point, Paten said consumers were being forced to pay the insurance yet had extreme difficulty in making claims because of the last resort nature of the system.
“My builder never went broke, he never died, he never disappeared, so I can’t do anything,” she said.
Choice, meanwhile, would like not just Victoria but Australia to go the way of England, where ‘first resort’ policies allow home owners to claim without having to drag builders through courts and warranty periods for structural defects extend for up to a decade.
Like elsewhere in Australia, domestic building insurance remains an issue of strong contention in Victoria.
Opinions vary, however, as to whether minor improvements or a major overhaul is needed.