Builders in Victoria have slammed the latest hike in home-building insurance premiums, claiming that the hike will add thousands of dollars to the cost of new home delivery.

But the agency responsible for managing the insurance scheme says that the higher premiums are necessary in light of a surge in claims that has arisen out of a spike in builder insolvencies.

The Victorian Managed Insurance Agency (VMIA) has unveiled the second consecutive steep hike in annual premiums for Domestic Building Insurance (DBI), which builders who perform residential work are required to take out in order to protect consumers from incomplete or defective work.

As a result, from August 6, premiums across all domestic building insurance policies will increase by 53 percent.

This follows a further 43 percent across the board increase that was instituted last September.

In particular from August 6:

• premiums will increase by 65 percent for new single dwellings and new multi-unit dwellings
• premiums will increase by 20 percent for structural renovations, non-structural renovations and swimming pools; and
• premiums will increase by 65 percent for owner builders.

The increase was explained to builders yesterday via communications from DBI distributors. These include Bovill Risk & Insurance Consultants, CCM Insurance Group, HIA Insurance Services, Insurance House and Master Builders Insurance Brokers.

Also commonly known as builders warranty insurance, Domestic Building Insurance is a compulsory insurance product which aims to protect residential consumers against defective or incomplete building work on building projects relating to their property.

Property owners are able to claim against the insurance in cases where their building project is unable to be completed or has defective works that cannot be rectified in cases where their builder has died, disappeared, become insolvent or failed to comply with a Court or Tribunal order.

Under the Domestic Building Contracts Act, the insurance is mandatory for projects worth more than $16,000 (DBI is not required for multi-storey buildings containing more than three storeys of accommodation).

The latest rise comes amid a surge in builder insolvencies which have been driven by rising interest rates and higher construction costs.

As recently as 2021/22, the number of construction companies entering external administration for the first time in Victoria stood at 356 – admittedly an artificially low number on account of COVID related support.

In 2022/23, the number of Victorian construction external administrations surged to 621.

In the fist 11 months of the current financial year, that number has risen further to reach 677.

In a written response to questions from Sourceable, a VMIA indicated that the rise in premiums is being driven by a surge in the number of claims for which payouts have been made.

The surge in claims is attributable to builder insolvencies along with higher build costs on account of higher levels of inflation and skilled worker shortages.

The increases are necessary in order to deliver ongoing consumer protection, the spokesperson said.

The spokesperson added that premiums are lower compared with comparative offerings in New South Wales.

Following the premium increase, the spokesperson indicated that DBI will still only represent less than 1 percent of the contract value of a new single dwelling or renovation and just over 2 per cent of the contract value of a new multi-unit construction.

“Domestic Building Insurance plays a critical role in bringing peace of mind to customers of builders at a time of industry uncertainty,” the spokesperson said.

“A record number of Victorians have received DBI settlements over the past 12 months to finish their new homes. Since 1 July 2023, VMIA has resolved over 4,000 Domestic Building Insurance (DBI) claims.

“We have made record claims payments due to the compounding factors of builder insolvencies, high inflation, and skilled worker shortages, all of which impact build costs.

“This means VMIA has to increase DBI premiums to ensure that homeowners continue to be protected when builders are unable to complete or rectify homes.”

Nevertheless, Master Builders Association of Victoria CEO Michaela Lihou said that the Association is ‘frustrated and disappointed’ about the extent of premium increase.

According to Master Builders, the new premiums will add thousands of dollars to new building costs.

For example, a standard Category C new single dwelling build with a current DBI (domestic building insurance) cost of $4562.91 (including stamp duty and GST) will now jump to around $7,528.76 (including stamp duty and GST).

“While we applaud the Government’s vision for (new housing) growth and remain keen to work with the Government to achieve this much needed housing increase, it’s obvious that major escalations in costs like this for both the building industry and consumers will not help build confidence in the industry,” Lihou said.

“We acknowledge how important it is for the industry to have a sustainably funded underwriter, but we are very concerned that this significant cost increase this will create yet another significant barrier to securing projects and put builders under even more financial pressure than ever.

“And it’s worth noting that this just announced VMIA increase is the second our industry has had to deal with from the agency in less than a year, after a 43 per cent increase just 11 months ago.

“It is enormously frustrating to say the least.

“We understand why the VMIA wants to justify these increases as necessary cost recovery measures given the financial pressure it has been under.

“But many of our members feel like all too often it’s one step forward and then literally two financial steps backwards for them and their clients. It’s not hard to see why many of them are finding it difficult to see things getting any easier at all in the short term.”

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