Decennial liability insurance

Decennial liability insurance for new apartments

It’s fair to say that the reputation of new residential apartments has taken a battering in recent years.

Restoring buyer confidence will be critical to solving the big issue of housing affordability and availability.  Through the work of NSW Fair Trading and the offices of the Property Commissioner and Building Commissioner, clear progress is being made. But more needs to be done.

One interesting innovation is the emergence of a new type of warranty called decennial liability insurance (DLI) – an insurance product that enables owners corporations to have serious defects fixed on critical building elements up to ten years after an apartment building is first occupied. While this type of insurance is available in many markets worldwide, it has yet to be offered in Australia, until now.

NSW has become the first jurisdiction to path the way for the introduction of DLI policies, with an amendment to the Strata Schemes Management Act 2015 late last year, exempting any developer with a complying DLI policy from having to lodge a strata bond with NSW Fair Trading.

The advantages of Decennial liability insurance

A key advantage of DLI is that it works on a strict liability basis – meaning that fault does not need to be established before a claim is accepted.  Decennial liability gives power to the purchasers and owners corporations who will no longer need to prove liability and will only have to demonstrate the damage for assessment.

For owners corporations, this avoids what can be lengthy and expensive litigation or chasing development companies that have folded.

The developer or builder would take out DLI before a building is occupied. The policy attaches to the building and transfers to the owners corporation upon completion, which means the policy protects both current and successive owners over the ten-year period.

DLI offers an attractive alternative to the ‘strata bond’ worth 2 per cent of a building’s construction cost that developers are currently obliged to lodge with NSW Fair Trading, which has been criticised as being inadequate to rectify major defects.

When will DLI come into effect?

An industry advisory panel to the Government recommended a voluntary scheme initially where DLI is optional for developers, transitioning over time to a mandatory scheme that would replace the bond scheme altogether.

The Panel also emphasised that the first step to any defect rectification process should still be for the developer or builder to attempt to rectify the defect first, with DLI only triggered if a solution fails to materialise.

How long it will take for a DLI product to pick up pace depend on the capacity of the insurance market – currently, only one insurer offers DLI in NSW – and the willingness of developers to embrace DLI as an alternative to the bond scheme.

Ultimately, both will depend on market forces. If potential buyers start demanding a credible 10-year warranty, then developers and insurers will find ways to respond and a mandatory scheme will soon follow.

In this evolving market and legislative environment, your professional Strata+ manager is keeping abreast of new developments and should be your first port of call about any defect issues or rectification processes.

 

Relevant legislation: Building and Other Fair Trading Legislation Amendment Act 2022

February 2023

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