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

INTRODUCTION

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 blockchain and industry ratings to provide assurances about the trustworthiness of developers, builders and designers and the buildings that they 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 said that the introduction of the Design Liability Insurance 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 Report [2] which includes the commencement of the:

  • Residential Apartment Buildings (Compliance and Enforcement) Act 2019 (NSW) [3];
  • the Design and Building Practitioners Act 2019 (NSW) [4];
  • implementation of the Developer Bond Scheme under the Strata Schemes Management Act 2015 [5]; and
  • 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 Decennial Liability Insurance (DLI) that would provide consumers with a ‘first resort’ insurance policy a period of up to 10 years post-completion. [7]

According to Mr Anderson, DLI is expected to 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 Government expects further recommendations on the implementation of DLI early next year.

DLI 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 (NSW).

 

BUILDING ASSURANCE SOLUTION

Separately, on 9 July 2021, Mr Anderson also announced the collaboration of the NSW Government with KPMG, to develop a Building Assurance Solution (BAS) which will use 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.(refer to note [8])

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

According to KPMG, the BAS is a global-first platform that will create a clear distinction between compliant, resilient buildings and non-compliant problematic buildings…[9]

By using blockchain technology 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.

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

KPMG expects 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 separately on 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

On 30 July 2021 Mr Anderson explained [10] that:

 

the ratings tool 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 also 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 expects [11] 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;
  • the ratings initiative will restore public confidence in the multi-storey apartment market by lifting standards and increasing accountability.

ENDNOTES

[1] Australian Financial Review “NSW plans defects insurance for apartment buildings” 25 August 2021

[2Kreisson Insight: NSW Proposed Reforms To The Building Industry

 Kreisson Insight: Next Steps in Building Regulation Reforms

[3]  Kreisson Insight: Game Changer for Developers the Residential Apartment Buildings Act 2020

[4] See previous articles by Kreisson

[5] Proposed Changes to the Developer Bond Scheme

[6] Reforms Improve Fire Safety Certification Commenced 10 October 2017

[7] NSW Government: Construction Data and Research

[8] NSW Plans Defects Insurance for Apartment Buildings

[9] KPMG Creates Revolutionary New Building Assurance Solution Based On Blockchain 25 June 2021

[10] First Fifty Developers to be Risk Rated Using New Tool

[11] First Fifty Developers to be Risk Rated Using New Tool

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