The recent collapse of Melbourne-based Porter Davis, a major player in Australia's domestic construction industry, is the latest in a string of domestic builder insolvencies. The residential construction industry is facing a challenging environment of rising costs and fixed-price contracts, along with a lack of credit and working capital. The fastest increase in interest rates in decades has further compounded industry challenges.
Whilst the situation is unnerving for consumers who are building or renovating their homes, understanding what protections are available when engaging a builder and how to navigate Australia’s domestic construction landscape can provide some peace of mind. Here are a number of steps you can take to do this.
The primary cover that protects consumers in the event of a builder's insolvency, disappearance, or passing away is Domestic Builders' Insurance (DBI), also known as Home Warranty Insurance. Each state and territory have a different DBI program, but they are all designed to protect the consumer in case of an insolvency event.
In Victoria, builders are required by law to take out DBI on behalf of the consumer for all domestic building projects valued at more than $16,000. The Victorian Managed Insurance Authority (VMIA) is one of the DBI insurance providers in Victoria, however, the VMIA is not the sole provider of this insurance in this State.
In Victoria, DBI covers the homeowner for a range of exposures ranging from incomplete works and structural building defects to specific out-of-pocket expenses such as temporary fencing and loss of deposit, with various time-frame limitations.
For non-completion claims, where a build has not been started or completed, the VMIA’s insurance covers up to 20 percent of the building contract price, up to a maximum of $300,000 for policies issued after July 1, 2014. For instance, if a consumer has signed a building contract with a price of $1,000,000, the DBI policy covers up to a maximum of $200,000 for exposures that trigger a claim (20 percent of the contract price). The 20 percent is in addition to the sum of money remaining on the builder contract which the consumer is still required to pay (albeit to a new builder). The idea is the DBI policy should be sufficient to cover such things as additional costs for a new builder to rectify any defects and complete the unfinished work.
Insurance cover on a DBI policy starts on the date of the building contract or the date of the building permit, whichever is earlier. Confirming that a DBI policy is in place before paying any monies or deposit to a builder will avoid the situation of the deposit being uninsured.
There are cases where builders have taken deposits from consumers before a building contract is signed. Consumers can be tempted by the opportunity to lock in a fixed price. The downside is that without a contract or building permit, there cannot be any DBI policy in place to cover the loss of deposit. In the event of a builder's insolvency, if a consumer has paid a deposit in this fashion, they are considered an unsecured creditor. Typically, in Australia, the majority of unsecured creditors
receive little to nothing back in insolvencies. Conversely, if a consumer has a DBI policy in place before paying their deposit, they are insured for the loss of the deposit up to the policy limit. In Victoria, consumers can confirm if their builder has DBI in place for their build or renovation via this link.
Contract works insurance is a common requirement in building contracts and is usually taken out by the builder to cover against accidental physical loss or damage to the build project during the construction period. This provides cover in the event of fire damage, theft, malicious damage, storms, hail, cyclones, floods, and accidental damage. If a builder has become insolvent, there may be a need for the consumer to take out contract works insurance until another builder is appointed to complete the build, and the new builder has confirmed they have a Contract Works policy in place for the build. As insolvency situations often differ, engage a qualified insurance professional such as a broker to discuss your options.
This is one example of the importance of regularly reviewing and updating insurance coverage to reflect changes in circumstance.
Building a home can be a complex and intimidating undertaking, even in stable economic times. It is useful to engage with both an experienced insurance broker and also a construction lawyer or building contract specialist right from the beginning to provide expert guidance and support.
The construction industry is facing numerous challenges and uncertainty at present. However, by following the above steps, consumers can have greater confidence that they will be taking appropriate measures to protect themselves and their investments.
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, particularly during these challenging times.
Head of BRIC
Team Leader - BRIC Builders
BRIC, as a company of Honan Insurance Group Pty Ltd is now fully owned by Marsh Pty Ltd. To find out more, speak to your broker or read the announcement