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The new domestic building insurance regime

Feature Articles

Cite as: (2003) 77(3) LIJ, p.34

Last year, when private insurance policies replaced the guarantee scheme, saw the biggest changes in the domestic building warranty market in Victoria since May 1996.

By Suzanne Kirton

Last year, when private insurance policies replaced the guarantee scheme, saw the biggest changes in the domestic building warrantymarket in Victoria since May 1996. BY SUZANNE KIRTON

Since 1996 all domestic building work in Victoria with a value exceeding $5000 has had to be covered by warranty insurance. At the beginning of this scheme, a number of insurers entered the market to offer such insurance.

However, since last year, the government has found it difficult to attract or retain insurers into the market. The Building Commission puts it as follows:

“The collapse of major insurers such as HIH, the events of September 11, and current issues surrounding public liability claims have led to dramatic changes in the insurance scene in Australia. One consequence in Victoria has been the threatened withdrawal of insurers from the builders warranty insurance market, potentially leaving domestic builders with no insurance cover for their work.”1

In an attempt to persuade major insurers to remain in the market and to attract new players, the government has now taken the following steps:

  1. Compulsory builders warranty insurance is now only required for domestic building work contracts over $12,000 (the current threshold is $5000).
  2. Consumers will only be able to claim under the policy in the case of the death, disappearance or insolvency of the builder.
  3. Cover for non-structural defects is limited to two years.
  4. The government has established a new dispute resolution system.
  5. No insurance will be required for multi-storey developments over three floors.

Similar steps have also been taken in New South Wales, with the result that the domestic building warranty insurance participants can look to a national market, rather than a state-based one.

The Building Commission has attempted to persuade us that these steps are a positive move: “On the positive side it has spurred governments in Victoria and New South Wales (who were faced with a similar dilemma) to develop a package of new insurance measures that will benefit both consumers and builders. And besides meeting everyday needs in the domestic building sector, these measures have the power to boost the image of the building industry as a whole.”2

In the writer’s view, it is hard to see how home owners will benefit from the cut back in insurance cover. The level of consumer protection is much less than was available to home owners in the past.

THE NEW MINISTERIAL ORDER

Some of these amendments to the warranty scheme take effect through the new Ministerial Order (MO) on Domestic Building Insurance gazetted on 20 May 2002 (no S82). The MO commenced on 1 July 2002 and revokes the two MOs of 1998.

A copy of the MO is available at www.buildingcommission. com.au/publications/ministersguidelines/mg8201.pdf.

Policies of domestic building warranty insurance are required to comply with the provisions of the relevant MO.

The important parts of the 2002 MO provide as follows:

  1. Insurance is required for domestic building work contracts where the value of the work is more than $12,000 (previously $5000).
  2. The liability of the insurer may not be less than an aggregate amount of $200,000. This sum includes reasonable legal costs and expenses incurred by the insured associated with the successful claim against the insurer. Previously, the indemnity was allowed to be capped at $100,000 plus reasonable legal costs and expenses.
  3. As before, the policy must indemnify the owner in respect of loss and damage resulting from the following matters: – non-completion of the work; – defects in the work; – breach of any of the warranties contained in s8 of the Domestic Building Contracts Act 1995; – a failure to maintain a standard of work set out in the contract; and – conduct by the builder that contravenes a trade practices provision.
  4. The difference to the previous MO is that an insurer may provide that the above indemnities only apply if the builder dies, becomes insolvent or disappears.
  5. Loss and damage includes loss of deposit, alternative accommodation and removal and storage costs, up to 60 days (as before).
  6. There is a cap of 20 per cent of the original building contract amount on claims for non-completion (as before).
  7. The policy may exclude claims by developers for completion costs (as before).
  8. A builder may carry out domestic building work under the contract even if it is insolvent, provided that the insurer, builder and Building Practitioners Board agree.
  9. Coverage for non-structural defects finishes two years from date of completion or termination of the contract (previously six and a half years).
  10. Coverage for structural defects finishes six years after completion or termination of the contract (previously six and a half years). “Structural defect” is defined in the MO.
  11. Owner-builders are required to have insurance when they sell (as before), but with the following differences: – insurance is required for works over $12,000 rather than $5000; – the insurer may provide that the indemnity only applies if the owner-builder dies, becomes insolvent or disappears; – coverage for non-structural defects finishes two years from date of completion or termination of the contract (previously six and a half years). – coverage for structural defects finishes six years after completion or termination of the contract (previously six and a half years).

Building practitioners must still be registered with the Building Practitioners Board if they undertake domestic building work with a contract price of more than $5000. In order to be registered, a builder must show eligibility to obtain insurance. However, a builder will never have to actually obtain insurance if he only carries out work worth less than $12,000.

BUILDING ADVICE AND CONCILIATION VICTORIA Since 1 July 2002, the Building Commission and Consumer Affairs have offered a dispute resolution process for domestic building disputes. This service is through a building permit levy.

This scheme, called Building Advice & Conciliation Victoria (BACV), can be contacted on 1300 557 559 or www.consumer.vic.gov.au or at www.buildingcommission. com.au.

It will only apply to disputes where the building contract date is after 1 July 2002.

The Building Commission explains the system as follows: “A key feature of the package is a new dispute resolution process. This is expected to come into force in Victoria in July 2002, and will be jointly operated by the Building Commission and Consumer Affairs.

“We expect that the new process will either resolve or clarify more than 90 per cent of the 35,000 or so disputes between owners and builders that arise each year,’ Commissioner of the Building Commission Tony Arnel said. ‘It will yield faster and better results by providing a single point of entry for information and advice on domestic building issues for both builders and consumers, and by enabling earlier intervention by a third party who can make an objective finding on a dispute’ . . .

“If the government hadn’t acted swiftly to bring these new measures into place we could have been faced with a crisis.

“‘We either crafted this deal or there could have been no builders warranty insurance at all,’ said John Gaffney, Victorian executive director of HIA, one of the stakeholders consulted in the development of the new measures.”3

BACV expects to receive 35,000 inquiries and requests for information and advice per annum. Of these, up to 15 per cent are expected to be translated into complaints. Up to 50 per cent of the cases which become complaints are likely to be technical and will be referred to the Building Commission for investigation. Most of the remaining 50 per cent of cases are likely to be complex legal cases and will be referred to the Victorian Civil and Administrative Tribunal (VCAT) for resolution.4

The legislation implementing this process, the Domestic Building Contracts (Conciliation & Dispute Resolution) Act 2002, was assented to on 18 June 2002. The process will operate as follows:

(i) a complaint (either by an owner or a builder) is made to Consumer Affairs;

(ii) if the dispute involves contractual issues, BACV will advise the complainant to go to VCAT;

(iii) if the dispute is simple and involves technical questions, then it is referred to the Building Commission;

(iv) a Building Commission inspector will arrange to visit the site of the complaint within seven days;

(v) a ruling will then be made by the inspector and the builder may be instructed to rectify the works or face deregistration;

(vi) the inspector will attempt to mediate on site between the owner and builder to reach a settlement of the dispute;

(vii) the inspector will make a written report on his findings and the attempted mediation to be used by either party at VCAT if the matter proceeds; and

(viii)at any time, any party may take the dispute to VCAT.

In the past, consumers who were unwilling or unable to afford legal proceedings against their builder would use their insurer as the first port of call in resolving disputes with their builder. The insurer would send out an inspector (if the disputed issues were covered under the policy). An owner would then either be satisfied with the insurer’s decision or would commence an appeal of the decision to VCAT.

The BACV system aims to replace the insurer’s claims handling. The aim is that insurers will now only become involved once a builder is deceased or insolvent and so unable to rectify or to meet any judgment obtained against him.

The system has only just commenced and so it is too early to comment on how it is working. As at mid-October 2002 it had not even received a formal claim. However, the writer can foresee the following potential problems to be addressed if the scheme is to be effective:

  1. Staff at Consumer Affairs are the first port of call for claimants. They will be asked to provide what amounts to legal advice over the telephone, without hearing both sides or seeing documentary evidence. They must be cautious not to inflame a dispute or to create unrealistic expectations in one party.
  2. The Building Commission inspector is instructed to both issue a direction to a builder and to mediate the dispute between the owner and the builder. The two functions are mutually exclusive. Further, as the inspector must provide a written report of the mediation, the process is not confidential.
  3. In the writer’s experience, many disputes arise because builders feel they are owed money or are being hindered by an owner. They therefore stop work. If the owner makes a claim to BACV, the builder will raise these issues as a contractual dispute and BACV will not deal with the claim. The owner or builder will then need to commence proceedings at VCAT to resolve the dispute.
  4. In practice, lawyers will advise their builder clients to have VCAT deal with the dispute. It is the only forum which will provide a fair hearing based on tested evidence, including expert opinion, from both sides.
  5. The power to deregister builders has been available to the various builders’ registration bodies for the past 20 years. However, it has rarely been used, due to issues of natural justice and procedural fairness. The Housing Guarantee Fund Ltd (HGF) tried when it was the registrar, only to be faced with the prospect of a builder opening all issues involved in the dispute. The HGF was not equipped to act as a judicial body to hear evidence from owners and builders and to make determinations. The Building Commission has had similar powers since 1996 but for similar reasons has rarely exercised them to deregister a builder who disputes this. It is likely that if a builder is threatened with deregistration under the BACV scheme, he will (and in the writer’s view, is entitled to) commence legal proceedings to safeguard his livelihood.
  6. Insurers may become involved in the process, despite their intentions to the contrary. If a builder is deregistered following a BACV claim and can no longer trade, the insurer becomes potentially liable to all the owners covered by that builder’s insurance. Insurers facing massive claim payments may choose to assist the builder in disputing the claim before the BACV.

MULTI-STOREY DEVELOPMENTS

By the Building (Multi-Storey Residential Building Exemption) Regulations 2002, insurance is no longer required (since 10 April 2002) for the construction of buildings with a rise in storeys of more than three, that contain two or more separate dwellings.

The government’s media release was as follows: “With the changes to insurance products offered, builders of high-rise residential developments were in an impossible situation.

“They could not have their building permit approved unless they had warranty insurance.

“The exemption has been made because the bulk of the insurance industry has indicated it will no longer provide warranty insurance for residential buildings of more than three storeys.

“The government has acted quickly to ensure that Victoria’s building and construction industry was not adversely affected by the insurers’ decision.”5

Some insurers will offer insurance for multi-storey developments as an option. However, as it is not compulsory it is hard to see many developers offering it.

CONCLUSION

Any practitioner advising on a domestic building dispute must first check which guarantee or insurance scheme is applicable. This will affect the rights and options available to your client. If the building contract is dated between May 1996 and June 2002, an owner’s first port of call is their builder. If this contact fails, an owner may contact their insurer (or the HGF in the event of an HIH or FAI policy). However, if the building contract is dated after 1 July 2002, and the builder is not insolvent or deceased, the insurer will decline to assist. An owner may then contact the BACV service. They should bear in mind that VCAT is likely to be the ultimate decision-maker. If that occurs, they will have to take a proactive role in the prosecution of their dispute, including engaging and paying for legal and technical expertise.


SUZANNE KIRTON is a barrister who practises in building and construction law, civil and commercial disputes. Before joining the Bar, she was company solicitor of Housing Guarantee Fund Ltd. She is a member of the Building Dispute Practitioners Society and a qualified mediator.

1. Building Commission Inform newsletter, May 2002.
2. Note 1 above.
3. Note 1 above.
4. Statistics from Building Commission Inform newsletter, May 2002, p6.
5. Media release from the Minister for Finance and the Minister for Planning, 10 April 2002.

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