How decennial liability insurance has the potential to change the future of the construction industry

To boost consumer confidence in building work in NSW, the government has recently introduced significant changes in regulation and legislation in the construction industry. These changes can cause increased risk and cost for builders and developers faced with carrying out building work in NSW. In this article we take a look at one of these changes, the new decennial liability insurance, and outline the risk for builders and developers.

With increasing interest rates and the worsening housing crisis, apartments are becoming the preferred option for consumers. Many who purchase apartments within these buildings however, may be faced with substantial strata or special levies associated with defect rectification. This is particularly the case where the builder or developer of the apartment no longer exists or is not in a position to, or simply will not undertake the defect rectification work.

To increase consumer confidence in these class 2 buildings, the NSW Government in 2021, appointed a panel to advise on how to introduce and implement a decennial liability insurance scheme to address these defect rectification costs.

The findings of the panel culminated in the introduction of the Building and Other Fair Trading Legislation Amendment Bill 2022 (NSW) (Bill), which proposes to insert a new section 211AA to the Strata Schemes Management Act 2015 (NSW) (SSMA).

The new section 211AA introduces a decennial liability insurance scheme which is taken out by the developer of the strata scheme, for the benefit of the owner’s corporation.

What is the decennial liability insurance scheme?

Decennial liability insurance (DLI) operates as an insurance product which provides building owners with protection for a period of 10 years against certain types of defects.

DLI is designed to operate as an alternative to the usual building bond provided to the Secretary of a strata scheme under the SSMA and will protect owners from delays and costs arising from defect rectification in their respective class 2 buildings. The DLI is taken out by the developer or builder of the class 2 building, and should the builder fail or refuse to undertake the remediation of the defects, the owners can lodge a claim with the respective insurer as insurance of first resort.

The insurance policy is therefore taken out by the developer or builder of the strata scheme, for the benefit of the subsequent owners’ corporation and operates as an alternative to the strata building bond, which would normally compel a developer to lodge a bond that is 2% of the relevant contract price, to pay for rectification costs.

What kind of defects are protected under the policy?

Under the new section 211AA of the SSMA, DLI is intended to protect against ‘serious defects in the building elements of the common property’. The term ‘serious defects’ is defined broadly as being a noncompliance with the Building Code of Australia and one which is attributable to defective design, workmanship or materials, particularly if it affects a critical building element (e.g a structural element).

In light of the many high profile defect court actions in the last few years, both in Australia and abroad, DLI is slowly becoming an appealing alternative to the currently mandated strata building bond which is lodged with NSW Fair Trading. Of course, each decennial liability insurance product will have different coverage, which is outlined in its product disclosure statement. Broadly speaking however, DLI is intended to protect against the following:

• cladding and fire safety protections

• waterproofing

• structural/load-bearing components of buildings.

Is the DLI mandatory or voluntary?

Under the Bill, DLI is completely voluntary.

However, it is expected that the NSW Government will liaise directly with industry stakeholders to determine how the DLI can be implemented as a long-term protection for consumers.

Developers should be aware that the Secretary of the strata scheme has considerable discretion in determining whether the DLI obtained is satisfactory. If it is unacceptable, the developer must still comply with the usual strata building bond requirements.

Despite being voluntary, the NSW Government’s discussion paper indicates that its preferred strategy to implement DLI is to introduce the product as a voluntary opt-in for a transitional period to replace the strata building bond, with it thereafter becoming a mandatory requirement.

What are the risks for builders/developers?

Developers should be aware that the trigger for liability under the DLI policy is not legislated. In other words, the new section 211AA of the SSMA does not state when the 10-year time period is triggered, leaving each insurer to specify this trigger within its product disclosure statement.

In the NSW Discussion Paper, the panel’s preferred option was for the trigger for liability to manifest upon the ‘manifestation and discovery of a defect’.

In our experience, the issue of when a defect manifests and when a defect is discovered can be very contentious. Accordingly, there may be disputes that arise under the DLI policy regarding when and how a defect became known to the strata scheme (or the developer), so that the trigger for a claim under the DLI policy is clear.

Generally however, a DLI policy is taken out for a period of 10 years from the date of the certificate of occupancy. It is critical that administrative processes are followed to ensure that this certificate is obtained and issued in a timely fashion to minimise the risk of any additional issues. 

Takeaway

As a product, the DLI is still in its infancy and we anticipate that it will continue to be a highly topical area of building law, given the degree of consumer confidence it offers and the NSW Government’s long-term intentions to make this product mandatory.   

The team at Bartier Perry have extensive experience in the construction space and will be well equipped to provide developers and strata managers alike with tailored advice to suit their individual circumstances. 

Authors: Mario Rashid-Ring, Nicholas Kallipolitis & Breitil Sulaiman