This article explains the historical context that shaped DBI and dispels some misconceptions. DBI is mandatory in most states and territories, although the specifics vary in each region (whilst Tasmania has passed a bill to make DBI mandatory, it is not yet live in the market). This article focuses on DBI in Victoria.
DBI is consumer protection insurance designed for those constructing a new home, renovating, or developing buildings of up to three residential levels. It safeguards the property owner in the event of incomplete or defective work, serving as a last-resort protection in case the builder dies, disappears, or becomes insolvent. VMIA’s domestic building insurance also applies if a builder fails to satisfy a tribunal or court order.
All builders in Victoria are legally required to purchase DBI on behalf of consumers for any domestic building project valued over $16,000. While the Victorian Managed Insurance Authority (VMIA) is the primary provider of this insurance in Victoria, it’s not the sole provider.
In Victoria, DBI typically covers the client and future owners against loss or damage resulting from incomplete construction work and any defects that may appear during the warranty period (six years from the completion date in the case of structural defects). Homeowners are protected against various risks, including incomplete work, defects, and specific out-of-pocket expenses such as lost deposits, legal costs associated with claims, accommodation, and storage costs, subject to time limitations.
For incomplete construction claims, where work has commenced but hasn’t been completed, DBI covers non-completion loss up to 20 percent of the building’s original contract price, with a maximum limit of $300,000 for policies issued after July 1, 2014. For example, if a consumer signs a building contract worth $1,000,000, the DBI policy covers up to $200,000 for non-completion loss claims (20 percent of the original contract price). This cap reflects the expectation that homeowners have made progress payments to the builder as per industry practice. If the builder fails to complete the work, the loss covered by DBI (subject to the 20 percent cap) is the additional cost to complete the work above what the owner would have had to pay the insured builder if it had completed the work.
DBI provides peace of mind for homebuyers, knowing they are financially protected in the event of construction or renovation issues if the builder dies, disappears, or becomes insolvent. It’s a safety net, shielding homeowners from potential financial loss and legal disputes, offering rights and recourse if problems arise.
When there’s an issue between a homeowner and builder, it can and usually is resolved between the parties. An example is when a builder fails to complete works to the required building standard. If the owner and builder fail to reach agreement, owners can go to a regulatory body such as the Victorian Civil and Administrative Tribunal (VCAT) to resolve any dispute. DBI coverage only becomes an option when no other avenue for recovery or rectification is available. In addition, VMIA’s Domestic Building Insurance covers a homeowner if their builder has failed to comply with a tribunal or court order. This is why DBI is referred to as a “last resort” insurance.
"First resort" insurance, on the other hand, involves owners reporting claims to the insurer, who would then manage the claim, ensure the builder completes or repairs the work, or pay for another builder to complete the necessary work and seek recovery from the original builder.
To understand why DBI is designed as a last resort, it’s helpful to look back in time.
In the 1990s, Victoria had first resort DBI coverage provided by the private insurance market, but it became unsustainable due to high loss ratios (with premium collections lower than claims paid). Challenging economic times in the 2000s, including the collapse of HIH and the global financial crisis, prompted insurers to reevaluate their operations. DBI became increasingly unprofitable, leading private insurers to exit the market. State governments then stepped in, introducing "last resort" policies in 2002, ensuring a level of coverage was available, assuming that by narrowing the coverage, insurers could achieve profitability, and there would be sustainable coverage for consumers.
DBI has shielded tens of thousands of people from financial hardship and, in some cases, ruin, over the years. In Victoria alone, VMIA paid out thousands of claims in FY22, amounting to $77.1 million. Claims payouts in FY23 are expected to be significantly higher due to several large builder insolvencies.
The recent Porter Davis insolvency, one of the largest in Australia's history, attracted criticism of DBI, particularly regarding the timeframes for claims resolution. However, without DBI, many families would be experiencing much greater financial hardship.
Becoming eligible to purchase DBI requires some work on the part of builders. Builders must prepare paperwork for an insurance policy that protects the homeowner, rather than the builder. However, all businesses in Australia are required to provide consumers with guarantees for the products or services they sell and the work they undertake.
At the end of the day, homeowners pay for DBI, as builders include the cost of the DBI policy in the overall build budget. From a homeowner’s perspective, insurance may be an unwelcome additional expense, especially when they are already spending a substantial amount on a new home or renovation. However, the average cost of a certificate of insurance is less than 0.2% of the overall average cost to purchase a single dwelling.
Although VMIA's claims system is designed to keep homeowners informed about the status of their claims, the time it takes to fully assess a claim and deliver a quantum decision may be frustrating for the homeowner. Understanding the lengthy process that VMIA must go through does not necessarily make it easier for homeowners, but it does at least explain the timeframes. The VMIA must meticulously assess and ensure the correct amounts are paid for each claim, which involves an independent building consultant inspecting the site and often other building experts, depending on the defects.
These claims are not like a car insurance claim or a house and contents insurance claim. Assessing a DBI claim is often more involved. For example, a DBI claim requires technical expertise (building inspection, engineering, architectural expertise, etc.) to evaluate whether a defect is a result of poor workmanship, faulty materials, or a design flaw and determining the cause of the defect and whether it falls under the builder's responsibility. This can take some time to resolve. The building process can involve multiple parties, including the builder, subcontractors, architects, and engineers so identifying the responsible party and their level of liability can be complex.
Liability decisions are the initial decision to accept, accept in part, or reject the claim, and it is worth noting that most liability decisions are made much faster than the 90 days permitted to issue a liability decision under the DBI Ministerial Order.
DBI is a critical but often misunderstood form of consumer protection. It plays a vital role in safeguarding homeowners' investments and offering recourse in case of unforeseen issues. While it may come with certain challenges, it is a crucial safety net in the realm of home construction and renovation.
To learn more about DBI, feel free to contact the BRIC team. BRIC is an insurance brokerage specialising in builders' warranty insurance. We are committed to providing expert advice and tailored solutions to help clients safeguard their investments.
Simon Johnson
Head of BRIC
Chitra Sharma
Team Leader - BRIC Builders
