Apartment buyers in New South Wales are a step closer to enjoying protection for major defects for up to ten-years after the building’s completion as the government in that state moves closer to introducing a new insurance product.

NSW Minister for Better Regulation and Innovation Kevin Anderson has announced the establishment of a thirteen-member Ministerial Advisory Panel to advise on the introduction of what is expected to be Australia’s first regime of decennial liability insurance (DLI).

Compulsory in some countries such as France and Egypt, DLI is purchased by developers and covers the cost of defects which either compromise the integrity of building structures or cause them to become unsuited for their intended purposes.

Whilst detailed arrangements will be considered by the panel, a spokesperson for the Minister told Sourceable that it is expected that:

• DLI will cover key common property building elements. These include structure, waterproofing, building enclosures and fire systems. Coverage will be for ten years.
• The insurance will be taken out by developers prior to the commencement of projects and will become active on completion.
• Where defects occur, owners corporations will make claims directly against the DLI insurer. It will be the insurer rather than the developer who has prime responsibility for defect rectification. This is important as it means that consumers will still enjoy protection even if the developer becomes insolvent or ceases to exist.
• It is envisaged that financers will require developers to hold the insurance as a condition of funding projects. This means that developers will need to hold DLI in order to get their projects off the ground.

Part of a broader range of reforms which are being undertaken by the NSW Government to improve the quality and safety of apartment buildings and to increase consumer protection, the new insurance product will aim to achieve several objectives.

First, the reforms aim to address a situation which currently sees consumers potentially left to cover rectification costs in the event of serious defects.

As things stand, builders in New South Wales are required to provide statutory warranties to cover major and minor defects for six and two years after completion respectively.

Since 2018, meanwhile, developers have needed to put aside a two percent defect bond to cover defects which are identified during an inspection that occurs fifteen to eighteen months after completion.

For consumers, however, these mechanisms are limited in the protection which they deliver.

Enforcing the statutory warranty is not possible in cases where builders die or become insolvent.

The developer bond, meanwhile, leaves consumers exposed where either rectification costs exceed the two percent of the construction cost which is covered in the bond or where defects do not manifest themselves in time to be identified in the fifteen-to-eighteen-month inspection.

Under DLI, however, consumers will be covered for defects which are identified during a ten-year period.

Since the insurer rather than the developer will be responsible for rectification, consumers will still be protected even where the developer becomes insolvent.

Second, the reforms aim to eradicate phoenixing activity and fly-by-night developers.

As mentioned above, it is envisaged that financiers will require developers to obtain DLI as a condition of providing funding for projects.

Since developers will be likely to obtain this only where they demonstrate a commitment to long-term market presence, those without a strong track record are unlikely to be able to obtain DLI and thus obtain funding for their project.

It should be noted that much of the data and intelligence upon which insurers will base underwriting decisions will be drawn from a new tool which is being developed by the Office of the Building Commissioner and KPMG.

Known as the Building Assurance Solution, this will bring together product and design certificated in regard to compliance for buildings to create a rating of the trustworthiness for each individual project and facilitate assessment of risk on a like-for-like basis.

NSW Minister for Better Regulation Kevin Anderson said the importance DLI should not be underestimated.

“A DLI policy would cover potential serious defects which arise up to 10 years after a project’s completion giving confidence to consumers to buy into multi-unit residential construction in NSW,” Anderson said.

“The introduction of DLI would also tackle the illegal practice of phoenixing as only developers who demonstrate a commitment to a long-term market presence will be able to acquire an insurance policy.

“Insurers will be assessing developers’ ratings score, their corporate governance and balance sheets. While good quality work will be underwritten, poor quality developers will find themselves out of the market.

“Establishing a market for DLI will mean untrustworthy developers are weeded out, creating a stronger, more competitive market where consumers can purchase with confidence.”

The panel includes representatives from strata bodies, construction industry bodies, insurers, and the NSW Government.

It is expected the Panel will report back to Government with options stemming from its investigations next year.

Panel members include:

• Panel members include Gary Dransfield – Past President, Insurance Council of Australia
• Michael Bennett – General Manager, Property & Construction Finance, Commonwealth Bank of Australia
• Albert Chan – Executive Director, Meriton Group
• Michael Corcoran – Co-founder and Executive Director, Solido Development Finance
• Chris Duggan – President, Strata Communities Association (NSW)
• Stefan Hicks – Founding Director, SHC Insurance Brokers
• Chris Kelly – Construction Manager, Billbergia; Darren Maher – Chief Underwriting Officer, IAG
• Steve Mann – Chief Executive Officer, Urban Development Institute of Australia NSW
• Corey Nugent – Senior Operations Manager, Insurance Council of Australia
• Fabrizio Pirelli – Chief Executive Officer, TOGA Development
• Jessica Rippon – Principal Solicitor, Construction Legal, representing the Owners Corporation Network
• Nicholle Sparks – General Manager, Frasers Property Australia; and
• David Tanevski – Managing Director, KWC Capital Partners, and Founding Director, Urban Taskforce.