The Ministerial Orders for Domestic Building Insurance made under section 135 of the Building Act 1993 (Vic) (‘the Act’) require a builder who carries out or manages or arranges the carrying out of domestic building work under a domestic building contract in which the contract price is more than $16,000 (an “insurable domestic building contract”) is required to be covered by domestic building insurance.[1] It is an offence to carry out work as a building practitioner without the required insurance or claim to be insured when uninsured.[2]

The required insurance

Before entering into an insurable domestic building contract, a builder must ensure that a policy is issued that complies with the relevant ministerial order and the policy covers the building work to be carried out under the contract.

Insurance must be provided by a designated insurer within the meaning of the Insurance Act 1973 (Cth) or the ‘Victorian Managed Insurance Authority’ or an insurer specified by the Minister by notice under section 137AA of the Act. The builder is responsible to the insurer for the payment of the premium.

Can a builder enter into an insurable domestic building contract before a policy is issued?

A builder may enter into an insurable domestic building contract before a policy is issued, if the contract contains a written condition stating that:

• a policy that complies with the relevant Order is required and covers the building work carried out under the contract to be issued before the builder may enforce any provision of the contract;
• requires the policy to be issued before any domestic building work is carried out under the contract;
• no money (including deposit money) is payable under the contract before that policy is issued; and
• requires the builder to ensure that a copy of the policy is provided to the building owner within 7 days after it is issued.

What does the policy indemnify the building owner for?

Note: the policy applies if the builder dies, becomes insolvent or disappears –

The policy indemnifies the building owner in respect of loss or damage resulting from non-completion of the domestic building work, as well as all or any of the following events:

• domestic building work that is defective;
• a breach of any warranty implied into the domestic building contract by section 8 of the Domestic Building Contracts Act 1995 (Vic);
• a failure to maintain a standard or quality of building work specified in the domestic building contract;
• conduct by the builder in connection with the domestic building contract that contravenes a trade practices provision.

Additionally, the policy may also indemnify the building owner in respect of loss of the deposit or loss of any progress payment under the insurable domestic building contract, as well as the costs of alternative accommodation and removal and storage costs that are reasonably and necessarily incurred subsequent to and as a result of the non-completion of the domestic building work or any of the events mentioned above.

Does the indemnity extend to acts or omissions of others?

The indemnity extends to acts or omissions of others who were contracted by the builder to perform the domestic building work under the insurable domestic building contract resulting in loss or damage of the kind referred to above.

To whom does the cover extend?

The required insurance cover extends to each person who becomes entitled to the benefit of any of the warranties referred to above and to the owner for the time being of the building or land in respect of which the domestic building work is or was being carried out.

Period of insurance

For non-structural defects, the insurance cover must span a period of 2 years after the earlier of either: the completion date of the domestic building work or the date of termination of the relevant domestic building work.  For structural defects the insurance cover period is 6 years from the earlier of either: the completion date of the domestic building work or the date of termination of the relevant domestic building work.

The 6-year period of insurance is not to be confused with the 10-year general limitation period under section 134 of the Act.

Some people confuse the 6-year period of insurance with the 10 year liability period.[3] Even though the period insurance will expire after above mentioned two or six years, plaintiffs and those intent on joining other parties can still issue legal proceedings for a building action for a period of 10 years after an occupancy permit or certificate of final inspection has been issued by the relevant building surveyor. However, between the 6 year and 10-year period said insurance will no longer be in play.

This means, for example, that if a building company winds up in insolvency between the 6th year and 10th year, despite a successful claim being potentially made out, the plaintiff may be unable to obtain compensation, unless there is some way to pierce the corporate veil.

Policy may impose limitations on total amount payable

The policy may limit the liability of the insurer to not less than the aggregate amount of $300,000 for all claims in respect of any one home, including reasonable legal costs and expenses incurred by the insured (not being the builder or owner builder) associated with the successful claim against the insurer, however a provision in a policy may provide a greater or additional insurance cover. where multiple dwellings have been constructed by a principal in a development, each of those individual dwellings has separate domestic building insurance cover. This means that if a developer constructs 5 townhouses, each suffering from defects, the maximum payout to the developer may be $1.5 million, rather than $300,000 overall.

Notice of defect, limitation periods for making claims and time for determination of claim

The insurer may refuse to accept a claim that is not made within 180 days after the date on which the claimant first became aware, or might reasonably be expected to have become aware, of the death, disappearance or insolvency of the insured.

If a person gives the insurer notice of a defect, that person is to be taken to have given notice of every defect to which the defect notified is directly or indirectly related, whether or not the claim in respect of the defect that was actually notified is settled.

The insurer must determine a written claim as to liability within 90 days of receipt of the claim, otherwise the insurer is to be deemed to have accepted liability for the claim, unless the insurer obtains an extension of time from the insured or the Tribunal.

Some cautions concerning insurance gazettes

As the insurance system has been operational in Victoria for well in excess of 20 years there have over the years there have been certain amendments to the ministerial insurance orders that not only cover residential cover but also professional indemnity cover for Victorian building partitioners. It is critical to have careful regard to the date upon which a claim is lodged with the view to identifying the correct ministerial order.

Disclaimer

This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact a construction law firm. The experienced team at Lovegrove & Cotton can help property owners and building practitioners resolve any type of building dispute.

References:

[1] Victoria, Victoria Government Gazette, No G 22, 29 May 2014; and Victoria Government Gazette, No S 98, 23 May 2003.

[2] Building Act 1993 (Vic) ss 136, 137.

[3] Ibid s 134.