The Great High Rise Insurance Gap

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Thursday, February 6th, 2014
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For some years now, builders in Australia have not been required by law to carry home warranty cover when constructing multi-residential apartment complexes of more than three storeys in height where each storey has separate abodes.

As a ‘last resort’ form of insurance, this type of cover can only be accessed by owners in cases where the builder dies, disappears or becomes insolvent. The first port of call in the lawsuit is thus the builder and other building practitioners who may have contributed to the defect malaise.

To many, the lack of cover with regard to this type of insurance for multi-unit developments north of three storeys is perplexing, as it means owners of free-standing houses are afforded the cover whereas those of apartments in large towers are not, raising interesting questions about whether owners of low-density housing should be afforded special treatment over their high-rise apartment owning counterparts.

Such questions are becoming more important given the increasing numbers of Australians who own multi-unit dwellings (which now make up more than one fifth of all new homes built throughout the country), a phenomenon which will see a growing proportion of building disputes migrate into this domain.

Absent home warranty cover, unit purchases will be left exposed with regard to the cost of any defects if the builder disappears or becomes insolvent. This means those buying a unit will need to exercise considerable diligence in ensuring the builder has sufficient financial capacity to continue in businesses for many years, especially as one has 10 years after the building is complete in which to issue legal proceedings and claims typically take around three years to resolve.

A further hole in the equation is that although builders don’t have to carry cover for north of three storey abodes, building surveyors, engineers, draftspersons and architects are still under the gun. Moreover, given that a requirement for all principal contractors to be insured as a prerequisite for registration applies in Victoria and the Northern Territory but nowhere else, unit-holders in other states such as New South Wales (where only building surveyors and residential builders are required to be insured) face a complicated task when trying to bring about a multi-party lawsuit.

This creates an awful problem for building surveyors who, as the only ones needing to be insured by law for multi-residential construction and as a tiny pool in respect of premiums, are forced to shoulder an unreasonable level of burden.

Still, extending mandatory home warranty cover to builders of multi-residential builders would be a big step involving costs which should not be underestimated. In France, for example, occasional forays into mandatory insurance for high rises were quickly followed by rapid retreats, so the French representative of the international Construction Defects and Insurance Liability defects committee of which I was a member several years ago told me. Whenever a tower had one claim, French experts recounted, a proliferation of claims generally ensured, making the whole arrangement costly to underwrite.

Moreover, there is no easy fix, nor a singular ‘right’ answer. Insurance as it relates to the building industry is a complex issue requiring careful consideration to ensure a sensible balance between consumer protection, practitioner accountability and affordability, and any attempt at reform should involve extensive consultation with experts and micro-economic law reformers.

Still, with increasing numbers of Australians living in apartments, questions surrounding the gap in cover given to owners of regular houses compared with apartment owners and what can feasibly be done to redress the situation must now be asked.

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