Warranty Insurance vs Professional Indemnity

Warranty Insurance vs Professional Indemnity – Not to Be Confused

30 Sep 2025

Why the Distinction Matters

Anecdotally there has arisen much confusion about home warranty cover for residential builders versus professional indemnity (PI) insurance for architects, engineers, and building surveyors. Having practised construction law in Australia for more than two decades and being admitted to practice as a lawyer in New Zealand, I will try to demystify this area.

The focus here is on how the systems operate in NSW and particularly Victoria, noting that the insurance settings under the Building Act 2004 are under review considering the proportionate liability reforms, which have been informed by the operation of Australian regimes.

They are very different types of insurance policy.

Warranty is solely a consumer safety net. PI is a professional shield for insured building practitioners, which also protects consumers as claimants. Confusing the two leads to false expectations.

What Warranty Insurance Actually Covers

Victoria – Domestic Building Insurance (DBI):

Compulsory for residential building contracts over $16,000.
Cover limits: up to $300,000 per dwelling (for certificates issued after 1 July 2014).
Duration: 2 years for non-structural defects, 6 years for structural defects.
Triggers: Applies only if the builder dies, disappears, or becomes insolvent.
Scope: Covers the cost of fixing defective workmanship and/or completing the build. Completion costs for incomplete work are capped at 20% of the contract price.

NSW – Home Building Compensation Fund (HBCF):

Compulsory for residential projects over $20,000.
Maximum cover: $340,000 (or $300,000 if issued before 1 February 2012).
Sub-limit: up to 20% of the contract price for incomplete work.
Duration: 2 years from completion of works for non-major defects, 6 years from completion of the works for major defects.

Facilitator role of builders:

Residential builders can best be described as in a sense, insurance cover facilitators. They cannot lawfully commence building a home without a building permit, entering into a major domestic building works contract or first arranging warranty cover for the consumer.

However, insurers commonly require counter-indemnities or personal guarantees from directors of building companies.

This means that if the insurer pays out, the amount can be clawed back from the registered builder individual. Warranty insurance therefore does not indemnify the builder themselves.

New Zealand:

Warranty-style products are available through private providers and associations. They are not compulsory, their terms vary, and the scope of coverage differs. This stands in sharp contrast to Victoria and NSW, where warranty insurance is mandated by statute and its terms of coverage prescribed by law.

What PI Insurance Covers

PI operates differently:

Who must carry it (Victoria): Architects, engineers, building surveyors, quantity surveyors, and design practitioners/inspectors — it is compulsory in order to gain / renew registration.
Scope: Responds to claims that professional advice, design, or certification was negligent and caused financial loss or defects.
Who benefits: The professional is indemnified directly by the insurer, and the consumer claimant benefits when negligence is proved.
Key distinction: With PI, there is no clawback. The insurer indemnifies the professional fully. However, there will be ramifications for a claim in terms of future premiums, excess etc.
Example: In Victoria, building surveyors must hold not less than $5 million in PI cover under Ministerial Orders.

New Zealand: While not mandated in the same way as Victoria’s legislative regime, PI is nonetheless operationally universal. The majority of professionals carry it.

Case Study – Victoria

A homeowner signs a $400,000 contract for a new home:

If the builder collapses halfway, DBI responds. The homeowner may claim up to $300,000 for completion or rectification, within 2 years (non-structural) or 6 years (structural) from completion or termination of contract.
Separately, if the structural engineer under specifies the steel beams and the house cracks, the recourse is a PI claim against the engineer. The engineer’s insurer indemnifies them, up to at least $5 million.

Same context. Two different products. One protects the consumer if the builder fails. The other protects the professional (and in turn the consumer) if negligence occurs.

Key Differences

Feature	Warranty Insurance (DBI / HBCF / NZ private)	Professional Indemnity (PI)
Arranged by	Residential builder (insurance cover facilitator).	Professionals – architects, engineers, building surveyors, inspectors, QSs, designers.
Beneficiary	Homeowner / consumer.	The professional insured (and indirectly the consumer).
Trigger	Builder insolvency, disappearance, or death.	Negligent design, advice, or certification.
Duration	2 years non-major defects; 6 years major defects.	Continuous, while policy is current and in force.
Cover limits	$300,000 (Vic); $340,000 (NSW).	Multi-million dollar limits (e.g. $5m in Victoria).
Clawback	Yes – insurers can recover payouts from builders.	No – insurer indemnifies the professional directly.

Takeaways

Warranty insurance in Victoria is a limited consumer safety net: capped cover, 6 year duration, activated only if the builder fails, is not required by law from residential apartments blocks that exceed 3 stories where there are different abodes on each story, with clawback exposure for builders.
PI is a broad professional shield: multi-million dollar cover, continuous duration as long as insurance and registration are current, protects both practitioner and claimant, and no clawback against the professional person or company.
In New Zealand, warranty cover is voluntary and variable, as is PI although by all accounts the majority of building professionals such as architects and engineers elect to carry it regardless.

Written by Justin Cotton, principal of Lovegrove & Cotton (Australia and New Zealand), with more than two decades’ experience in construction law, and part of the law reform team engaged by MBIE to advise on proportionate liability reforms to the Building Act 2004.

Some other on point articles recently published by members of the Lovegrove and Cotton team.

Disclaimer
This article is for general informational purposes only and does not constitute legal advice. For advice specific to Owners Corporations, building defects, or dispute resolution, please contact Lovegrove & Cotton at enquiries@lclawyers.com.au or call (03) 9600 4077.

Image Acknowledgements:

The digital renders used in this article were developed collaboratively by Lovegrove & Cotton and ChatGPT. The photo images that are not the digital renders are stock images sourced from Shutterstock.

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