Australia: Decennial liability insurance: further reforms to enhance confidence in NSW apartment buildings

The NSW Minister for Better Regulation and Regulation Kevin Andersen has indicated in an interview with the Australian Financial Review that the NSW Government is proposing to introduce a new mandatory defects insurance scheme (decennial liability insurance) designed to provide insurance coverage to residential apartment building owners (owners) for up to 10 years after the completion of construction.                                                                 

The plan is the latest announcement from the NSW Government which has, over the last few years, introduced various regulatory reforms to address issues in the residential apartment building sector which have been hit with problems such as Mascot and Opal towers. 

These reforms included the introduction of the Residential Apartment Buildings (Compliance and Enforcement) Act 2019  (NSW) and the Design and Building Practitioners Act 2019  (NSW) and development of a ratings tool system to enable owners to identify trusted developers when purchasing new apartments. These various regulatory changes are designed to give consumers more confidence when investing in residential apartment buildings. 

Current protections

Under the current legislative framework, there are various insurance requirements and statutory protections designed to protect owners. They include:

• statutory warranties provided under the Home Building Act 1989  (NSW) (HBA) which are limited to six years for major defects, and two years for minor defects. Insurance requirements are also not afforded for multi-storey dwellings under the HBA.
  
  
• provision of strata building bonds under the Strata Schemes Management Act. The Strata Building Bond and Inspection Scheme (SBBIS) requires developers of new residential strata buildings which are four storeys or higher to provide (or procure the provision of) a building bond to the NSW Department of Fair Trading for an amount equal to 2% of the contract price for the residential building component. The building bond will be used to pay for any defects identified by the owners' corporation following inspections (including a final inspection to be carried out before the expiration of two years following completion) if the developer fails to rectify them. Any remaining proceeds of the building bond will be released after that final inspection. 

What is decennial liability insurance?  

Decennial liability insurance is generally taken out by the developer or builder (depending on the jurisdiction), and to provide that owners of residential apartment buildings are covered in the event that the apartment building suffers from collapse or the appearance of latent structural defects which impact the integrity of the building up to 10 years after construction has completed. 

Most importantly, liability under this form of insurance is not fault based and is provided on a strict liability basis. This means the developer or builder (depending on the jurisdiction) is responsible for defects which manifest in the first 10 years. Owners are not required to prove negligence or a breach of obligations by developers or builders (depending on the jurisdiction) in order to access the coverage provided by this insurance.  This contrasts with statutory warranties and professional indemnity insurance, where the negligence or fault needs to be proven before insurance coverage can be accessed. 

Implications 

The NSW Better Regulation Minister, Kevin Anderson, has said the NSW Government expects to receive further recommendations on the implementation of decennial liability insurance early next year.

At this stage, the details of the new scheme have not been announced but jurisdictions overseas may indicate the likely type of scheme government may implement. 

Decennial liability insurance has been primarily used in civil law jurisdictions, and is currently in place in many countries such as France, Belgium, Spain, the UAE and Qatar. 

The French regime is very broad and holds architects, technicians and any persons engaged under a contract of work strictly liable for damage related to the strength of the building and renders the building unfit for purpose. In the UAE, architects, engineers and contractors are jointly liable for compensation in the event of a building collapsing or serious defects arising in the 10 years following construction.

In most jurisdictions, decennial liability insurance includes provisions for claims in respect of actual loss suffered and may also include damages for a loss of profit or loss of use. 

Defences to a decennial liability claim are generally very narrow in most civil jurisdictions, and include only when the building was not intended to last for more than 10 years or was involved a natural catastrophe or force majeure event (such as an earthquake).

Regardless of the schemes' design, any scheme which facilitates 10 years of insurance coverage will greatly enhance the protection offered to owners. The proposed scheme would provide much longer protection than the six year statutory warranties provided under the HBA. 

The cost of the decennial liability insurance is likely to be competitive for the trustworthy-rated players in the market.  As current changes are pushing for developers and builders to be rated, those rated trustworthy will mostly likely enjoy the benefits of paying lower premiums for any insurances or bonding scheme as compared to the current arrangements. There is also consideration that those developers and builders who are most likely to deliver suboptimal apartments, which have more defects than those delivered by trustworthy rated players, may have already priced their development cost in anticipation that the SBBIS bonds will be used up. 

The NSW Government has not announced whether decennial liability insurance will replace the SBBIS bonds. However, if the requirement for the SBBIS bond is replaced by decennial liability insurance, this may be a more cost-efficient and affordable protection for owners overall.