Eligibility under scrutiny

DBI – a legal requirement for all building projects in Victoria valued over $16,000

Obtaining domestic building insurance (DBI) is a legal requirement for all building projects in Victoria over $16,000. As a builder, your ability to obtain and maintain domestic building insurance (DBI) eligibility relies on several financial, regulatory and operational factors. A crucial element of this is managing accounting risks, which directly impact financial stability and compliance with insurance requirements.

1. Financial stability

You must demonstrate financial stability by providing financial statements that meet insurers’ requirements. Key financial indicators include the following:

• Liquidity: You must have sufficient cash reserves to pay suppliers, subcontractors and wages. Low liquidity increases the risk of insolvency, which may lead to eligibility being revoked.
• Profitability: Consistently low or negative profit margins may indicate financial instability. Insurers assess profitability to determine if a builder operates sustainably.
• Net tangible equity: You typically need to maintain 3–5% of their total construction limit in net tangible equity to meet insurer expectations.

2. Past performance

Your past performance may affect DBI eligibility. The insurer may look at the following indicators of past performance:

• DBI claims: If you have a history of DBI claims due to insolvency, disappearance or failure to comply with tribunal or court orders, their eligibility may be revoked. Key personnel associated with a failed company may struggle to regain eligibility.
• Build quality and compliance: Poor quality builds and ongoing disputes with homeowners may raise risk concerns, potentially leading to stricter conditions or eligibility being revoked.
• Going concern: If financial distress threatens your ability to complete projects, insurers may decline coverage.

3. Solvency and financial misreporting

Maintaining solvency and accurate financial reporting is crucial in maintaining eligibility.

• ASIC registration: You must keep your business registered with ASIC; deregistration or liquidation may result in your eligibility being revoked.
• Financial misreporting: Inaccurate or misleading financial data, whether intentional or unintentional, may lead to audits, penalties and DBI application denials or cancellations. ‍

4. Regulatory compliance and project capacity

You must adhere to legal obligations and manage your project exposure effectively.

• Domestic Building Contracts Act 1995 and Australian consumer law: Failure to rectify defects or comply with legal obligations can lead to penalties, loss of eligibility or legal action.
• Project capacity and exposure: Insurers evaluate whether a builder is taking on too many projects relative to their financial and operational capacity. Exceeding approved DBI limits may result in coverage denial.

By understanding and managing the key accounting risks that can influence DBI eligibility – such as financial stability, past performance, solvency and regulatory compliance, you can help to safeguard your ability to maintain your DBI eligibility. As the construction landscape continues to evolve, builders must remain vigilant in their financial practices and compliance efforts to ensure they can navigate the complexities of the insurance market effectively.

Next steps

To learn more about domestic building insurance, contact the BRIC team.