Insurance is for safeguarding people against what might go wrong in future.
- Third party car insurance is to cover other people and property against accidental damage caused by one’s car going out of control
- Comprehensive car insurance covers against damage to one’s own vehicle, virtually no matter what the cause, and the premium goes up according to the degree of liability of the owner
- Fire insurance covers against the damage caused when buildings catch fire, often including the replacement of the entire damaged house for a write-off
- House and contents insurance, life insurance and disability insurance, like those above, are basically all-encompassing policies against calamities that may occur.
Each insurance type has its own agreed value and a list of what is insured and exclusions.
In Victoria, it's a simple fact that Domestic Building Warranty Insurance (or DBI) is compulsory.
It's also a fact that building consumers want insurance that covers them for calamities which may occur during construction & soon after.
The Victorian Government provides the insurance policies for what is termed domestic building warranty insurance (DBI) for building consumers who build their homes or units, add onto their homes or buy such a home still under warranty after it is completed.
Domestic Building Warranty Insurance could cover what consumers want and would then cover against the following:
- The builder dying
- The builder disappearing
- The builder becoming insolvent
- The builder being deceptive about registration, registration currency, falsifying documents (including insurance policy, any permit documents, permits, other required insurances, breaches of the Domestic Building Contracts Act, breaches of the Building Act, or breaches of The Corporations Act
- Misdemeanours to do with any pertinent building or corporate regulations
- First Resort Insurance (pre-2002 type) where the insurer acts as policeman (pursuing the builders from Day One on behalf of home owners, unit owners, additions owners
- Defective or incomplete work (including incomplete work that owners could reasonably have missed) up to a value of at least $300,000.
This is the cover that building consumers want from their Domestic Building Warranty Insurance. And that is also basically what the ombudsman demanded in his 2012 Report…something that was reiterated by the auditor general in 2013.
Items 1, 2 and 3 are catered for at present, but items 4, 5 and 6 are not.
And it’s because the Bracks Government (in about July 2002), after the collapse of HIH (part of FAI), was pressured by the remaining oligopoly of privatized insurers of the time to lessen the perceived high risk factors to avoid more collapses. In effect, these insurers had them over a barrel.
But subsequent governments since then have also allowed this vastly reduced cover to remain as the status quo, and VIMA today still gives the same pathetic cover to building consumers.
Item 7 is about poor workmanship, but claims under this potential pay-out clause are fiercely fought fight by the insurer, making home owners spend tens of thousands of dollars after already having had to spend tens of thousands of dollars chasing the builder to bankruptcy just to qualify to make a claim.
So we have the insurer fighting until the cows come home, knowing that if they throw their unlimited coffers open to their negating legal and building consultant teams, the owners have less than a 30 per cent chance of getting through this second ordeal before they give up. The negating lawyers call this ‘commercial reality’ and it stinks, as does the "last resort" nature of the warranty insurance.
A proper definition of defect would make disputes so much smoother. And the savings in dispute costs might well outweigh the savings made by band-aiding.
In Victoria at least, our current building dispute situation generally is:
- Just 25 per cent of the actual defects are discovered by inept building consultants with their pathetic watered-down definitions of defect).
- When disagreement by the builders occurs, there is compulsory conciliation, where half of these defects are disallowed by the conciliators with their lack of definition of defect. The pressure is applied so that most home owners permit the builder to return to ‘fix’ the agreed ‘defect’ items.
- In most cases, the builders get their tradesmen to re-do the defect or in many case just the symptom of the defect (in the same manner that has already failed in a short period of time), basically band-aiding what should have been rectified, most of these agreed defects.
We are then left with houses where most (nearly all) defects still remain, simply left to fail and wreak havoc in their own time, when homeowner after homeowner (or those who buy their homes) have insufficient funds to rectify the defects properly in those homes and turn to band aid short-cuts where the overall long-term costs greatly exceed proper rectification.
Just take the costs associated with failing (too-thinly-applied) one-millimetre thick roof tile final pointing coats. This is often partly re-done more than once during the warranty period with an identical neat one-millimetre thick coating, which will last on average three to four years, depending on its location on the roof, and prevailing heat, wind, roof framing creep.
Re-doing the entire pointing will cost approximately $1,800 and will last approximately 20 years (though that's an estimate because the coating has seldom been applied at the required minimum thickness and the material has only been commonly used for about 30 years). But where band-aid repairs are carried out instead over the same 20 years (warranty +14 years), the cost of a 25 per cent re-do six times (every three to four years) is about $3,600, or double the amount to re-do it properly.
This is unsustainable wastage, and there are often more than half a dozen or so similar commonplace defects in almost every home built since 1996, where band-aiding is done because the rectification cost is more than the band-aiding that is carried out under what is incorrectly called maintenance.
This is why building consumers need to be shielded from all calamities listed above, including workmanship and chasing their builders. All they need to know is how much this proper insurance would cost, and we will have rid ourselves of a serious economic blight.
VMIA pays out a total of less than 1.5 per cent of the $90 million or so in premiums it receives each year, giving them just a two per cent risk. They could surely therefore afford to provide what building consumers want and actually need at no extra cost it seems.
If the insurer actually chased the builder (as was the go until 2002), then they could once again be placed back in charge of builder registration, regulation breaches and yearly audit checks that might very well avoid many builders going bankrupt. This would be of huge benefit to consumers and the industry as a whole. This would then be like third party car insurance…first resort.
We could quite possibly get rid of the recent reform that created the head-banging compulsory conciliation.
And if a proper definition of defect was also instituted, the Victorian government would still achieve its aim of expediting the dispute process, because the grey areas argued over at present would be removed altogether, with building consultants on both sides having to agree as to the status of each and every defect.
The results would be stupendous:
- There would no longer be a need for compulsory conciliation
- We would weed out the repeat builder offenders
- VCAT building cases would be vastly reduced
Governments seem hell-bent on not regulating business too much, even though it creates considerable cost and tragedy for so many home owners (and builder businesses when home owners are outraged sufficiently by the excuses for houses that some builders build that they go to VCAT).
Just in 2013-2104, something like $3 billion was spent by home owners, and therefore about $3 billion was also spent by builders fighting their clients in residential building disputes. The new compulsory conciliation will no doubt reduce these amounts somewhat, but band-aiding of defects will increase and the economy will pay dearly in the longer term.
As I see it, there will eventually be such a swell of dissatisfaction as a result of all this unfairness: that Aussies will eventually say enough is enough.
So the message to the Victorian government at least is that something had better be done about this very soon, or the grossly unfair DBI insurance scheme will be treated like the scum that it is. It will be removed along with the government of the day, no matter what the cost.