Bartier Perry Lawyers Liability Insurance

To enhance consumer trust in building projects in New South Wales (NSW), the government has recently implemented significant regulatory and legislative changes in the construction industry. These changes introduce higher risks and costs for builders and developers involved in building work in NSW. This article focuses on one of these changes, namely the new decennial liability insurance, and discusses the associated risks for builders and developers.

With rising interest rates and a worsening housing crisis, apartments are increasingly becoming the preferred choice for consumers. However, buyers of apartments in these buildings often face substantial strata or special levies related to defect rectification. This is especially problematic when the original builder or developer is no longer available or unwilling to undertake the necessary rectification work.

To instill confidence in class 2 buildings, the NSW Government appointed a panel in 2021 to advise on the implementation of a decennial liability insurance scheme that addresses these defect rectification costs.

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Based on the panel’s findings, the Building and Other Fair Trading Legislation Amendment Bill 2022 (NSW) (Bill) was introduced. The Bill proposes the addition of a new section 211AA to the Strata Schemes Management Act 2015 (NSW) (SSMA).

The new section 211AA establishes a decennial liability insurance scheme to be obtained 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) is an insurance product that provides building owners with protection against specific types of defects for a period of 10 years.

DLI serves as an alternative to the standard building bond required by the Secretary of a strata scheme under the SSMA. It safeguards owners from delays and costs associated with defect rectification in their respective class 2 buildings. The DLI is obtained by the developer or builder of the class 2 building, and if the builder fails or refuses to rectify the defects, owners can file a claim with the insurer as the primary insurance option.

The insurance policy is procured by the developer or builder of the strata scheme, for the benefit of the subsequent owners’ corporation. It replaces the strata building bond, which typically requires the developer to lodge a bond equivalent to 2% of the contract price to cover rectification costs.

Which defects are covered by the policy? According to 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” encompasses noncompliance with the Building Code of Australia resulting from defective design, workmanship, or materials, particularly if it affects critical building elements such as structural components.

Considering the numerous high-profile defect-related legal actions both in Australia and internationally in recent years, DLI is becoming an increasingly appealing alternative to the currently mandated strata building bond lodged with NSW Fair Trading. However, it’s important to note that each decennial liability insurance product may offer different coverage, as specified in its product disclosure statement. In general, DLI is intended to protect against the following:

  • Cladding and fire safety issues
  • Waterproofing problems
  • Structural and load-bearing elements of buildings

Is DLI mandatory or voluntary? Under the Bill, DLI is currently voluntary.

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

Developers should be aware that the Secretary of the strata scheme has significant discretion in determining the acceptability of the obtained DLI. If the DLI is deemed unacceptable, the developer must still comply with the standard strata building bond requirements.

Although voluntary, the NSW Government’s discussion paper indicates a preference for implementing DLI as a transitional voluntary opt-in measure, replacing