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Insurance is for safeguarding people against what might go wrong in future.

For instance:

  • 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:

  1. The builder dying
  2. The builder disappearing
  3. The builder becoming insolvent
  4. 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
  5. Misdemeanours to do with any pertinent building or corporate regulations
  6. 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
  7. 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:

  1. Just 25 per cent of the actual defects are discovered by inept building consultants with their pathetic watered-down definitions of defect).
  2. 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.
  3. 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.

 
  • This product seems almost useless from the viewpoint of consumers. It seems no one likes it.

    Why not do it like Queensland where they have first resort warranty insurance?

  • IT most certainly is useless Tom, with just 3 individual payouts out of over 3400 from memory in 2013.
    In fact I'll go further than that and say it is only 2% insurance and 98% rip-off. Plumbing insurance is first rate though… work that out. Subsequent to writing this article I also found out that Royal Sun Alliance came up with formula in consultation with the HIA and the MBA… the formula being responsible for tragedy for thousands of new home owners AND their very own builders who they thought it would protect… a total bungle all round, and so costly to Victorians at least.

  • As Mark Whitby said, governments are hell-bent on making things easier for business – at the expense of consumers.

  • Proper definition of a defect is essential. Without it merely leaves a huge gap for argument by experts and the legal fraternity, thus increasing costs to no real benefit for the end consumer.

    However, proper definition of a simple "non compliance", which may be a non compliance with some codes standard or other such document, is also essential.

    If only 25% of building defects are getting discovered, then perhaps the others were not considered defects by the building consultants. In my experience, many so called "building defects" included in expert reports are such only due to some non compliance with some obscure part of a code, and have no real impact upon building usage or quality, and are raised merely to increase the quantum of the plaintiff's claim.

    Often, the cost of remedying these minor non compliances is insignificant relative to the argument that is had by both parties in the claim, has no end benefit to either party save for the experts and the legal team, and leaves the consumer with a feeling of "being had" by the whole process.

    Not only do the insurance industry need to police the builders they are insuring, they need to police the building consultants briefed to provide advice and reports in these matters. The tribunals are reluctant to do so, and if the insurers were able to ensure that the consultants identified defects of substance, rather than "gilding the lily", they would more likely than not find that they saved enormous sums of money, resulting in a speedier claims process and ultimately, a better business for them, and a more satisified end client.

    Not the only or sole solution to a bad system but a reasonable step towards a more equitable system.

    Unfortunately, there seems to be no will from any direction to really change the status quo of this failing system.

  • Good article Mark. What you left out was that all the respective Governments have been flogged with the self regulation idea saying that the Consumers will enjoy the benefits of more competitive pricing. What has occurred is a "Catch me if you can mentality" with many shoddy Contractors who would have been exposed through the proper regulatory system that was scrapped. Ask the question, what does the local head of the Building department in Local Councils do other than steal wages from all of us Taxpayers in the guise of doing his job. They stamp a plan with someone else's name and number on it whilst escaping liability. However, can anyone give the statistics for how many Architects and Surveyors Insurance policies have been used to fix up faults. Also can anyone give statistics for how many Solicitors have profited from the system we currently have. These honorable professionals know full well that they are the only ones who win and build their businesses accordingly to the detriment of some honest ones in the profession. Why wont any Government return to the tried and proven system they scraped is the real question that needs to be asked. What is stopping them rolling it back. Saying this how many current Council Building department employees would pass a basic competency test. Then we have the issue of Fire protection. In the old days we had the MFB doing annual inspections of buildings. Does anyone remember in the Cain Government days when the failure rate on St Kilda Rd alone was over 90%. BOMA steps up to Cain and the MFB were told to bugga off. That was probably the last time the MFB actually did their job. Look at all of the residential building that has appeared on our skyline. Prue Digby, head of VBA publicly states that it is the buyers responsibility to do their due diligence and accept responsibility. It begs belief that this public servant and her band of merry men have been allowed to continue. Again we have a Minister who has no actual understanding of reality.
    Until one goes through the heartache of our current defunct last resort no one cares. Queensland, the state we grew up in Victoria rubbishing, has finally grown a backbone and is trying to reform their system. There is more Consumer protection than anywhere else. The Competency of the relative Trades should start to improve. Self-regulation is reversing. PUBLIC SERVANTS and REGULATORS are actually required to do their jobs and REGULATE. Here we need to start with getting rid of the Corrupt Insurance Companies who have and are profiteering from the current system. We have the expertise in Industry to advise the Government and guide reforms, we just need the Government Ministers to stand up and listen to the truth and get re-elected at the next election through their competency in handling their portfolios instead of other. Reform needs to start with the source of the problem and not get candied over interested profiteering parties that contribute to re-election campaigns. The challenge is, is there a Government Minister who has a backbone to make the decision for reform. I think not.

  • I think that this is a subject which needs further airing and hope Mark's article will stimulate further progressive debate and action. It is an Australia wide issue, as is the valid point about lack of building regulation by authorities.

    WA has last resort insurance and my understanding is that there was a real likelihood of no insurer remaining willing to take on these last resort risks. I also understood, rightly or wrongly, that first resort insurance was simply financially unfeasible.

    There is a good background article in Choice, although it contains figures considerably different to above:

    From memory, the policies do not allow for any legal fee recovery. Most clients, already financially and emotionally stressed if items 1, 2 or 3 occur, can ill afford to pay legal fees on top of the gap between their additional building costs and the insurance cap. In my experience, the client's bank has also usually been very narrow minded and inflexible where items 1, 2 or 3 occur, results in further hurdles being placed between a client and the completion of her/his/their house.

    Perhaps the banks and insurers could come up with a new product, a type of mortgage insurance, to cover the gaps between last resort insurance and customer expectations of what home building insurance should do?

  • Some pertinent points about the trifling defects alleged by so-called 'experts' Ross, but what I consider missed defects occur because of basic lack of consideration for components of the building being installed so that they can withstand the forces brought to bear on those components… items such as the incorrect diagnosis of 'normal conditions' by soil report writers, building surveyors and the subsequent ignoring of Appendix D of the code for footings AS 2870… and the lack of sufficient safeguards against future fierce storms and the wear and tear forces of time generally… where claddings and external components are insufficiently held down, inadequately fixed to the frame, and not in compliance with manufacturers' minimum requirements as to thickness of render, final roof tile pointing coat, lack oil-based primer and the like. These are being missed by VIRTUALLY ALL building consultants because they have not researched enough, specifications do not contain detailed workmanship requirements and they use a useless watered-down definition of defect, and have so many disclaimers that they do not get on or in the roof or under timber floors. PLUS there is inadequate knowledgeable supervision which on it own could largely remove the need for building consultants and disputes. If only the larger builders stopped over-working their supervisors and insisted on a knowledgeable eye overlooking the building works at critical stages where the defects are about to be built in by successive layers. We can only dream.

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