NSW Government takes next steps to bring decennial liability insurance to residential apartment buildings

The proposed introduction of a decennial liability insurance scheme in NSW follows the enactment of the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) and the Design and Buildings Practitioners Act 2020 (NSW), as well as the development of the building assurance solution tool and industry risk ratings tool. The NSW Minister for Better Regulation and Innovation, Kevin Anderson, describes the proposed introduction of the decennial liability insurance scheme as the "end game" of the NSW Government in providing owners of residential apartment buildings with greater consumer protections and confidence in the construction industry.

The establishment of the Ministerial Advisory Panel

On 23 October 2021, the NSW Government announced the establishment of a Ministerial Advisory Panel tasked with advising on the proposed introduction of a decennial liability insurance scheme for residential apartment buildings in NSW. The NSW Government intends that the scheme will result in insurers and developers providing consumers with an insurance safety net that is currently lacking in residential apartment buildings.

The Ministerial Advisory Panel is chaired by former Insurance Council of Australia president Gary Dransfield and consists of various industry leaders from the construction, development, finance and insurance sectors. The Ministerial Advisory Panel is expected to report back to the NSW Government with options and recommendations of the proposed decennial liability insurance scheme in early 2022.

What is decennial liability insurance?

Decennial liability insurance is a form of insurance taken out by a developer or builder, for a period of ten years following the completion of a building, in favour of future owners of the building. Decennial liability insurance is effected and maintained to cover any potential costs incurred by an owner in the event the building totally or partially collapses, or the building contains structural defects that affect the building's stability or safety.

Decennial liability insurance is currently available in more than thirty countries and is primarily used in civil law jurisdictions, but is yet to be introduced in Australia. It is proposed that decennial liability insurance will be introduced to guarantee against major defects for Class 2 residential buildings (apartments) in NSW.

A key feature of decennial liability insurance is that it insures liability that is determined on a strict liability basis. As a result, owners of buildings are not required to prove any negligence or fault by the developer or builder to trigger a decennial liability insurance claim. Typically, the compensation provided to owners under decennial liability insurance is for actual loss suffered, and may also include loss of profits and loss of use.

The defences available to a developer or builder in relation to a decennial liability claim are limited. Possible defences may include if the building was not intended to last more than ten years, a third party contributed to the major defect of the building, or if the claim arose due to the occurrence of a force majeure event.

Effect of decennial liability insurance

The introduction of decennial liability insurance in NSW will provide owners of residential apartment buildings with greater consumer protections in the event of major defects. Given the nature of the costs associated with remedying such defects, policy limits under a decennial liability insurance scheme are likely to be considerably higher than existing policy limits in the NSW construction industry.

The requirement for a developer or builder to effect decennial liability insurance will result in an additional project cost being incurred in undertaking residential apartment building projects. Decennial liability insurance premiums are likely to be more expensive than insurance premiums for other traditional insurance covers due to significantly higher policy limits and the strict liability nature of the insurance.

Established and well regarded developers and builders may incur less costs in taking out decennial liability insurance compared to those who have a history of constructing residential apartment buildings with defects. The NSW Minister for Better Regulation and Innovation, Kevin Anderson, is of the view that "establishing a market for decennial liability insurance will mean untrustworthy developers are weeded out" and "poor quality developers will find themselves out of the market", ensuring that customers can purchase apartments in NSW with confidence.

It is intended that the requirement of developers to maintain decennial liability insurance will result in tackling illegal phoenix activity. The effect of the policy being required to be held for ten years is that developers who cannot demonstrate an intention to maintain a long-term market presence in NSW will be unable to obtain a decennial liability insurance policy.

The introduction of decennial liability insurance may also lead to greater involvement by insurers during the design and construction of projects. Insurers may take a more active role in monitoring projects, by conducting their own site investigations or due diligence.

Making decennial liability insurance a reality

In a market where insurers have suffered significant losses on building and infrastructure projects and the availability of professional indemnity insurance is tighter than it has been for many years, the NSW Government will need to work closely with the insurance industry to encourage it to underwrite the risks associated with a decennial liability insurance product.

While insurers in the Australian market have historically been reluctant to underwrite the risks of building defects, the NSW Government hopes that its strong new regulatory framework underpinned by the Design and Buildings Practitioners Act 2020 (NSW), combined with the market-led building assurance solution and ratings tools, will give the insurance industry the confidence it requires to provide this product.

We await the options and recommendations of the Ministerial Advisory Panel to the NSW Government in early 2022 and will provide you with any updates as they arise.