Ten year defect insurance for apartment buildings
Ten year (decennial) liability insurance is a new insurance product in Australia that enables owners corporations to have a serious defect fixed up to ten years after an apartment building is first occupied.
- Decennial (ten year) liability insurance (DLI) is being proposed as a type of insurance to cover any potential costs to fix serious defects of critical building elements for up to 10 years.
- This insurance is intended to provide an insurance of first resort allowing building owners to make a claim as soon as a defect is identified.
- A DLI policy would cover critical parts of a building’s common property, including the building's structure, fire safety systems and waterproofing for up to 10 years.
- If adopted in New South Wales, DLI would be taken out by the developer or builder before a building is occupied. The policy attaches to the building which means the policy will protect successive owners to make claims over that ten-year period.
- A Ministerial Advisory Committee completed a report in August 2022 into the viability of a decennial liability insurance in New South Wales. We will consult widely about the proposals in the report while continuing to work with industry to support a DLI market.
What you need to know
The NSW Government is currently working with the insurance and construction industry to identify ways to support a competitive and affordable decennial liability insurance market. There is already one provider in the market, and we are supporting efforts for new entrants to the market.
A regulatory impact statement is being prepared for consultation on the proposal to mandate decennial liability insurance instead of the strata building bond after a transitional period.
Developers can seek approval from the Secretary of the NSW Department of Customer Service to take out decennial liability insurance instead of paying the Strata Building Bond and Inspections Scheme (SBBIS).
Currently, existing apartment owners are covered by the Strata Building Bond and Inspections Scheme (SBBIS). Under the proposed DLI scheme, a developer would take out decennial liability insurance, which provides those living in residential apartment buildings with comprehensive consumer protection for building defects caused by substandard design and building work. It ensures that building owners can remediate those defects without delay. This is because the costs of remediating such defects would be covered by the insurance policy if a builder or developer is unable or unwilling to fix the defects, including if the developer becomes insolvent.
Decennial liability insurance industry advisory panel
In August 2022, the Decennial Liability Insurance Ministerial Advisory Panel reported on its research into the feasibility of introducing a decennial liability insurance scheme in New South Wales. The panel provided a report to the NSW Government.
Key recommendations of the advisory panel
The panel made four findings and three recommendations:
The four findings are:
- The Independent Construction Industry Ratings Tool (iCIRT) should remain voluntary.
- The Construct NSW reform agenda is turning the corner in restoring confidence in the NSW construction sector.
- It is unclear whether a mature decennial liability insurance market can be created unless DLI is made mandatory after a transition period.
- Once there is a mature market, DLI will not place an undue burden on project costs, housing supply or housing affordability.
The three recommendations are:
- The NSW Government must maintain its investment in reforms of the NSW building laws and the capability of the regulator.
- The developer/builder should be required to remediate building defects in the first instance. If that fails, the insurer will then step in with their DLI product.
- Build-to-rent class 2 buildings with certain conditions should not require a strata building bond or DLI.
Two proposed models
The advisory panel proposed two models for the government's consideration.
- Option 1: Mandatory DLI: The panel's preferred model is a mandatory DLI introduced after a transition period which replaces the strata building bond.
- Option 2: Voluntary DLI: A voluntary DLI as an alternative to the strata building bond.
The panel's preferred model is a mandatory DLI introduced after a transition period which replaces the strata building bond.
- Replace the strata building bond with a mandatory decennial liability insurance for all developers of new class 2 buildings (and buildings with a class 2 part), after a transition period.
- Developer’s mandatory DLI insurance covers the full construction cost value for serious defects on all building elements contained in the common property of a building.
- A DLI insurance policy must be an insurance product of first resort and allow claims by building owners on a strict (no fault) liability.
- The DLI insurance policy should be taken out between DA approval and before the first construction certificate is issued, paid at the first occupation certificate, and be in force from the issue of the final occupation certificate.
- It is recommended that necessary amendments are made to the relevant legislation to ensure the insurer’s right to recover costs from at-fault parties is not lost because they run out of time.
- During the transition period a developer/builder who secures an eligible decennial liability insurance policy is:
- not required to pay the strata building bond scheme, and
- not required to take out coverage under the Home Building Compensation scheme.
- The design of the proposed mandatory DLI scheme should include the ability to defer the commencement of the mandatory obligation to hold DLI in case the market is not sufficiently mature. The mechanism should be based on a clear evaluation matrix set at the commencement of the transition period.
- Government should establish an industry consultative group to support the design of any legislative changes required, and to inform industry and community of the rollout of DLI in New South Wales.
The NSW Government support the development of a viable market for decennial liability insurance by increasing the current strata building bond scheme to 5% (from the current 2%) and bond duration to six years (from current two years) during the transition period.
The higher cost and extended liability of the bond will ensure that a more effective protection is made available to residential apartment building owners.
Where a developer of a new class 2 building secures DLI for all building elements, they are not required to take out a strata building bond or coverage under the Home Building Compensation scheme.
Decennial liability insurance industry advisory panel membership
The chair of the panel is former Insurance Council of Australia president Gary Dransfield.
The panel was made up of representatives from across government as well as:
- Michael Bennett - General Manager, Property & Construction Finance, Commonwealth Bank of Australia
- Albert Chan - Executive Director, Meriton Group
- Michael Corcoran - Co-founder and Executive Director, Solido Development Finance
- Chris Duggan – President, Strata Communities Association (NSW)
- Stefan Hicks – Founding Director, SHC Insurance Brokers
- Chris Kelly - Construction Manager, Billbergia
- Darren Maher - Chief Underwriting Officer, IAG
- Steve Mann – Chief Executive Officer, Urban Development Institute of Australia NSW
- Corey Nugent - Senior Operations Manager, Insurance Council of Australia
- Fabrizio Pirelli - Chief Executive Officer, TOGA Development
- Jessica Rippon - Principal Solicitor, Construction Legal, representing the Owners Corporation Network
- Nicholle Sparks - General Manager, Frasers Property Australia
- David Tanevski - Managing Director, KWC Capital Partners, and Founding Director, Urban Taskforce