Descending into Decennial Liability Insurance for Strata Building Defects
Is this a French fantasy or, another step into Dante's Inferno ...
New South Wales strata buildings [along with other Australian strata buildings] have been going through a long and slow descent into building defect hell. But, hot on the heels of the NSW Building Commissioner and other changes comes the announcement of salvation in the form of Decennial Liability Insurance. So, will this be the solution we’ve all been waiting for, or, just a step into another level in Dante’s Inferno …
[7:75 minutes estimated reading time, 1534 words]
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Introduction
You don’t have to stay long in Strataland to know that building defects is a very big problem that plagues all stakeholders without easy solutions as a result of decades of government miss-steps over construction regulation and consumer protection, developer and builder exploitation of legal gaps and loopholes, and, weak action/s by affected strata buildings, strata owners and their managers and advisors.
The position has deteriorated progressively over many stages as I recounted in relation to New South Wales in my article ‘The Saga of NSW Strata Defect Claims: Or, is this the real tragedy of the common[s] property …” and has been documented in recent research highlighted in my articles ‘Revisiting ABC News’ ‘A Legacy of Defects: Has much changed for strata building defect since the 2019 exposé …’’ and ‘How Big is the Australian Strata Defect Problem?’
However, since 2020 New South Wales has been implementing new strategies to address the strata building defect problem including:
introducing a NSW Building Commissioner who can inspect, issue orders about, and to publicise issues about defectively constructed new strata buildings [see ‘The NSW Building Commissioner’s Hard Hat Brigade in Action: How does this help fix strata defects in new NSW buildings?’,
Project Remediate to try to address the 212 worst instances of combustible cladding in NSW strata buildings [see ‘Cladding Matters: What’s Project Remediate in NSW all About?’,
new laws varying and extending strata owner rights to sue for building defects in the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 and the Design and Building Practitioners Act 2020, and
the Strata Hub [which I’ll write more about in a future article] to make limited information relating to strata building defects more public.
And, just last week, a specialist Ministerial Advisory Panel has been established by NSW Fair Trading to advise the government on the introduction of decennial liability insurance for strata building defects with the grandiose statement about the plan that says:
‘Our nation-leading reforms will explore the potential for insurers and developers to provide an insurance safety net for consumers that is currently lacking in the multi-unit high rise sector.’
But, is this new fangled idea going to be a fantasy in the Parisian style [given its French origins], or, more like another level of hell from Dante’s Inferno, for these long suffering strata buildings and strata owners?
What’s Decennial Liability Insurance in a nutshell?
Decennial liability is an older legal construct for imposing liability and obligations for adverse consequences over a 10 year period. In fact, it derives from the French (Napoleonic) Civil Code developed in the early 1800s.
When applied to building construction, it is a ten-year strict legal liability for faults imposed jointly on those responsible for the design and construction of buildings and other fixed installations or structures.
If you add insurance to the concept of decennial [10 year] liability, the responsible parties’ liability is underwritten or covered by an insurance policy in favour of the future owners of the buildings, installations or structures.
So, applied in its purest form to strata buildings, decennial liability insurance, would provide future strata owners with access to insurance for 10 years to cover the cost of rectifying faults in their buildings.
Of course, such purity of concept rarely occurs in real life.
So, in practice and where decennial liability insurance has been implemented overseas, strata owners have the benefit of better insurance protections for building defects for 10 years after completion with varying qualifications and limits on the:
types of building defects that are covered,
causes of those building defects,
insurance coverage amounts,
permitted rectification works, and
notification periods for claims.
So, whilst it’s a novel idea in Australia that’s based on a completely different legal system and doctrines, the idea of decennial liability insurance is very attractive compared to the patently inadequate protections strata apartment buyers have today.
So, who’s developing the plan and how will it work in NSW?
Whilst the plan to introduce decennial liability insurance is being pursued by NSW Fair Trading, initially, it will be guided by the new Ministerial Panel.
The Members of the NSW Decennial Liability Insurance Ministerial Panel comprise the following people.
Gary Dransfield: Past President, Insurance Council of Australia
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
Every member has deep expertise in their area and a commitment to getting good outcomes in their roles. But, when you analyse this group of 14 to see who they represent you quickly see that there are:
5 developer representatives [35%],
4 insurance sector representatives [29%],
3 finance sector representatives [22%],
1 strata manager industry group representative [7 %], and
1 lawyer representing the OCN [7%].
There’s no real or effective representation of the key consumer group affected by strata building defects, namely the latest owners and future buyers of new strata apartments. And, even if the strata manager and lawyer on the Panel try their hardest, they can be outvoted by any and every other interest group.
So, it looks [to me at least] like a developer-insurer-banking fest that’s likely to create a scheme that suits their development interests and their perceptions of strata apartment owners’ needs. And, they’re [arguably] the group that caused the current problems, they might not be so well suited to fix them.
Plus, there’s no information available yet or at all about when and how often the Ministerial Panel will meet, what public consultation will occur, and, what transparency there will be about their work.
The future for strata building defects decennial liability insurance
It’s not clear what happens next with the NSW Decennial Liability Insurance Ministerial Panel. But, I’ll be watching with keen interest and reporting as the [good] news rolls out.
Plus, I’ll be publishing an article or two about decennial liability insurance, where it came from, how it has developed here and elsewhere, international experiences with it for building defects, and, academic and other commentaries on it.
At least in that way, we can all be better educated to judge what, if anything, gets introduced as the new NSW decennial liability insurance programme and how effective it might be.
Conclusions
I’m cynical by nature and [sadly] jaded by my experiences over the last 25 plus years with government and private sector actions relating to strata building defects.
So, please forgive my lack of excitement over a plan for a completely new kind of building defects insurance cover by insurers who walked away from the last insurances schemes in the state, issued to developers who have never insured strata buildings for defects [or been held liable for them], created by a committee that is developer, finance and construction sector heavy, and, for a government that has continually implemented lower consumer protections for newly constructed strata apartment buyers based on its own reports that supported those changes.
Nevertheless, it is possible that the new decennial liability insurance regime will incorporate the following features that are needed to address the key failings of the current system.
1. Insurance that covers all new strata buildings regardless of size, type, use, or builder identity.
2. Insurance that covers all defects in strata buildings including the lots and common property.
3. Insurance that covers the actions of all parties that potentially caused the building defects like the developer, builders, subcontractors, designers, engineers, supervisors, certifiers, etc.
4. Insurance that has realistic time limits for notifying and making claims given the latency of many strata building defects and the disaggregated and incorporeal nature of strata corporation awareness.
5. Insurance that allows strata corporations and lot owners to make claims [jointly and/or independently].
6. Insurance that pays strata buildings on claim approval [first resort cover] and not as backup indemnity after successful legal action/s and the insolvency of the liable parties [last resort insurance].
7. Insurance that covers more than just defect rectification costs to include consequential damage and financial losses suffered by strata corporations, strata owners, and others arising from the building defects.
So, let’s see what strata building future this plan for decennial liability insurance brings.
November 10, 2021
Francesco ….