DECENNIAL LIABILITY INSURANCE; BLOCKCHAIN AND INDUSTRY RATINGS – PROPOSED REFORMS TO ADDRESS BUILDING DEFECTS

David Glinatsis

As part of a series of reforms to the residential building sector; the NSW Government is considering the introduction of a Decennial Liability Insurance defects scheme to protect apartment owners ten years after the completion of buildings.

This is in addition to other data-based initiatives by the NSW government utilising block chain and industry ratings to provide assurances about the trustworthiness of Developers, builders and designers and buildings that have designed and constructed.

Decennial Liability Insurance Scheme

In a recent interview with the Australian Financial Review reported on 25 August 2021; the NSW Minster for Better Regulation Kevin Anderson says that the introduction of the scheme will be the “end game” in “efforts to reform the state’s highly problematic construction sector.”¹

The introduction of a Decennial Liability Insurance scheme would follow the commencement of other major reforms in response by the government to the Shergold Weir Report²which includes the commencement of the Residential Apartment Buildings (Compliance and Enforcement) Act 2019 (NSW)³ and the Design and Building Practitioners Act 2019 (NSW)⁴ and the implementation of the Developer Bond Scheme under the Strata Schemes Management Act 2015⁵and the Environmental Planning and Assessment (Fire Safety and Building Certification) Regulation 2017.⁶

Research is being undertaken by the NSW Building Commissioner into the necessary market conditions that would need to be established in NSW for insurers to offer this Decennial Liability Insurance (DLI) that would provide consumers with a ‘first resort’ insurance policy a period of up to 10 years post-completion.⁷

Mr Anderson told the AFR that it would be expected that DLI will be “a 10-year product ……. which
basically says a building is of sound quality, high quality, will stand the test of time over a 10-year period, and if there are defects … they will be covered,”⁸

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

Decennial liability insurance is not new and is already being used in countries overseas including France, Spain, British Columbia Canada and the UAE.

One of the key features of DLI is that liability is strict and is not fault based.

This means that owners would not be required to prove negligence or a breach of obligations by
developers or builders in order to access coverage under the insurance.

A 10-year insurance coverage under the scheme will also provide much longer protection than the six year statutory warranties currently available under the Home Building Act 1989.

Building Assurance Solution

In addition, in a press release dated 9 July 2021 by Mr Anderson also announced the collaboration of the NSW Government with KPMG, to develop a Building Assurance Solution (BAS) which will used multiple data points to “help measure the quality and insurability of buildings by identifying which buildings are trustworthy, from measuring compliance with design and construction standards to traceability of materials all the way back to the manufacturer.”

The government expects that the BAS will:

help homeowners to make better purchase decisions;
allow the regulator to easily identify and respond to defective products by using a digital
fingerprint that attaches to projects;
allow insurers, to easily compare buildings so they can better price insurance for buildings and
the practitioners who design and construct them
create a single source of truth for replacement of façade systems as part of the NSW Project
Remediate program

In a press release dated 24 June 2021; KPMG explained that the BAS is “a global-first platform that will create a clear distinction between compliant, resilient buildings and non-compliant problematic
buildings…”

Using advanced technologies such as block chain KPMG state that the BAS “will provide a trusted and immutable source about a building from inception throughout its life cycle. It will store detailed records throughout the development and construction process, including materials and methods used, certifications achieved, and contractor details.⁸

According to KPMG the end goal is to provide a transparent Trustworthy Index for buildings investors and buyers, insurers and regulators.

KPMG expect that the first working model will be built within the next six months and will be piloted on existing buildings that are undergoing cladding rectification and a new Mirvac construction project.

New Industry Rating Tool

Progress has also been made on the development of a rating tool by the NSW Building Commissioner David Chandler and data company Equifax to rate Developers.

In a press release dated 30 July 2021 by the Minister for Better Regulation Mr Anderson explained⁸that:

“…the ratings tool created by created by Equifax and known as iCIRT
(“Independent Construction Industry Rating Tool, pulls together key data endorsed by
NSW Fair Trading to demonstrate the character, capability and capital of each
developer. It considers credit ratings, the relationships between development
counterparties, the entity’s history in corporate dealings and nominated directors…”

Housing projects in NSW will then be rated from one to five stars to help consumers in their decision about who to buy from.

As further explained by Mr Anderson; the Government expects¹¹ that:

the ratings will give each development a clear risk rating that the buyer can weigh up before
committing to a purchase
the first fifty developers will be voluntarily rated before the end of the year.
Developers will be encouraged to publicly display the rating for the specific entity responsible for
each project on their websites and consumer facing materials
the financial sector will use the ratings to determine which projects they will lend to, and those
that may qualify for new insurance products such as decennial liability insurance,
developers with “a chequered past or a history of disappearing after the sale” – will have “no –
where to hide”
the ratings initiative will restore public confidence in the multi-storey apartment market by lifting
standards and increasing accountability

CONTACT US

Please contact us on (02) 8239 6500 or at excellence@kreisson.com.au if you have any queries or
need any assistance regarding how these proposed reforms and initiatives may impact hour business.

[ Decennial Liability Insurance: Blockchain & Industry Ratings – Proposed Reforms To Address Building Defects ]