Facts About Builders Warranty Insurance in Victoria

We thought it would be a good idea to bring to you some "facts" regarding the operation of the Domestic Builders Warranty insurance in Victoria.

Unfortunately the general media are seemingly unable to provide these facts, preferring instead to seek out controversial headlines and high profile opponents of the system.

In November 2012 the Essential Services Commission of Victoria published an update to their various papers on the performance of the Builders Warranty system that were first published in 2009.

We extract from that report the following facts:-

Project certificates for new dwellings account for more than 60 per cent of certificates issued, but there has been considerable variation in the number of certificates issued for other types of projects, such as swimming pools and renovations.

It is difficult to calculate the length of the liability period on a project certificate given that the construction period varies and notifications can be re-opened. The Commission considers 7 years to be a reasonable assumption for analysis, while accepting insurers comments that the liability period could extend to 10 years or even longer. To date, only about 5 per cent of claims have been lodged more than 7 years beyond the certificate issue date.

The report provides us with some interesting insights to the claims incurred and we summarise their key findings below:-

In the 2008 year, insurers have incurred a Simple Loss ratio of 62%. This means that from every $10 of premium paid to the insurer, they have paid out $6.20 in claims, leaving $3.80. From this $3.80 they must cover their distribution costs of around $2.00 leaving $1.80 to cover their administration costs and leave something for future unknown claims and profit. There still remains approximately 3 years of liability on those insurances so additional claims are expected to occur.

The actual figures from the report for 2008 are:-

Number of certificates issued: 

Amount of premium (excl tax):     

Number of claims accepted:

 Amount paid in claims:

Number of years remaining:

53,113

$27,650,000

391

$17,091,000

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The reason 2008 is analysed is due to it being the most recent year where the majority of the insurers liability has matured.

The report finds that:-

The average cost of an accepted and finalised registered builder claim has increased since the Commissions 2010-11 report from $33,310 to around $37,700.

Insolvency is by far the most common reason that claims on DBI are made for registered builders and almost half the claims received have related to a structural defect. However, claims for non-completion are, on average, the most costly.

Since the introduction of the [current] DBI scheme in 2002, insurers have received 3,387 claims."

The following table is included in the report:-

 TABLE 6.1

  Registered Builder - January 2002 to June 2012  

 Claims Open Closed/finalised Total
 Accepted A 592 1677 2269
 Pending B 215   215
 Total Accepted or Pending              807 1677 2484
 Liability Denied 19 884 903
 Total Claims 826 2561 3387
 Note: Excludes notification only claims. 
 A. Includes deemed, full, and partially accepted claims.
 B. Includes claims being assessed and claims in dispute.

 

“…on average, the majority (89 per cent) of successful registered builder claims are received within 5 years of the issue of project certificate and then taper off to almost nothing after 7 years. Over the life of the scheme more than 95 per cent of accepted registered builder claims were received and finalised within 7 years.

In respect to the assessment process by insurers of a buildes eligibility for the insurance the report found that:-

Insurers apply pre-conditions for eligibility in the form of bank guarantees, securities and indemnities to approximately 10 per cent of eligible builders.

The exit of the private insurers (in 2010) does not appear to have had a significant impact on the ability of builders to access DBI, as the overall number of eligibilities exceeds the total number of registered builders.


The report also looks at the issue of Owner Builders and states:-

The number of owner-builder policies has been declining steadily since 2006, but has remained a stable proportion of total annual owner-builder building permits in the last few years, at around 10 per cent.

Owner-builders have a higher rate of claims than registered builders even though the number of claims is very small. The most common reason for claims against owner-builders is disappearance.

In summary…

The full report for 2012 is available on our website just click here.

We are constantly asked by builders, Why is this insurance necessary? Of course, for those builders who are financially solvent and who “do the right thing this insurance is not necessary. However as is clear from the above statistics the reality is unfortunately differe

Despite contrary allegations by certain people and the media, claims do happen under the Domestic Builders Warranty insurance product. The long liability insurance has up to 10 years from the date of commencement of a project means it is extremely difficult for insurers to get their pricing correct.

The claims experience of policies issued in 2008 which in December 2012 were four years old demonstrates that significant costs have been and continue to be incurred by insurers with 3-4 years still left to run!

We believe the lack of consumer education by home owners is often a major cause of many of the problems that ultimately lead to a Domestic Builders Warranty claim and perhaps more emphasis is needed in this area by the government?

In April 2012 the Victorian Government released a discussion paper on suggested reforms to the Domestic Builders Warranty system in Victoria. Many submissions have been made to them in response including one from BRIC. The closing date for these was July 2012 and to date we have not heard anything more of that review. Stay tuned!! If you want to examine these submissions click here.

 

Author: Chris Bovill. This article is based upon information contained within:-
Essential Services Commission 2012, Performance of Victorias Domestic Building Insurance Scheme 2011-2012, November.
Where italics are used in this article they refer to direct quotations of the report material.

 
 

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