The NSW government is looking to introduce 10-year (decennial) liability insurance, or latent defects insurance (LDI). LDI would enable an apartment building’s owners corporation to have a serious defect fixed up to 10 years after the building is first occupied.
Wotton + Kearney (W + K), an insurance and risk law firm, has said that this insurance product could “transform the insurance framework for high rise residential buildings” and be a “game changer” impacting residential strata insurance and professional indemnity insurance.
The law firm explored the issues around LDI in a recent Underwriting Agencies Council (UAC) seminar. W + K provided IB with a copy of the session.
One feature of the insurance product, said W + K partner Edward Burrell (picture above), is its use of the government’s Independent Construction Industry Rating Tool (iCIRT).
Burrell compared iCIRT’s five star rating system to the health star ratings that appear on packaged food.
“So the more stars a building entity has, the more confidence you can have in it,” he said.
The legal expert even used an analogy involving one of Australia’s most famous biscuits: Tim Tams.
“So a key distinction is probably that you might treat yourself to a Tim Tam with a one star rating, but you’re unlikely to use or insure a builder who has a one star rating,” said Burrell.
He said the rating depends on a review process that assesses the construction firm’s capability, capacity and willingness “to deliver, safe compliant and durable building products.”
Burrell said the NSW government sees the iCIRT ratings system, together with recent regulatory reforms in the construction industry – detailed during the seminar by W + K partner Rob Finnigan – as creating an environment that will help LDI “evolve and mature as an insurance product” and be “quite an important method for insurers to use to assess the risk of whether to offer LDI cover and on what terms.”
Burrell explained that LDI is a first party cover.
“It’s taken out by developers of project and it’s for the benefit of those subsequent building owners,” he said. “One of the key differences is that it’s a first resort policy as opposed to the current environment where apartment owners or bodies corporates have to basically try and litigate and hold building professionals responsible and prove their liability.”
Burrell said this ability to “just claim on an insurance policy” makes this part of the system less adversarial.
The W + K expert also revealed the origin of the NSW government’s use of the term decennial liability insurance for LDI.
I think the genesis of that goes to France, the first country to implement decennial liability and then a following insurance product,” he said.
However, in the Australian context, Burrell said this was potentially confusing.
“When I delved into the policy wording that I’ve seen, it’s not a liability policy, it’s that first party cover,” he said. “I think it’s not the best description.”
Burrell said LDI is intended to operate for class two buildings.
“We’re talking about buildings with two or more sole occupancy units,” he said. “Basically you can just think of apartment blocks and in New South Wales - it’s intended that LDI covers certain minimum critical building elements.”
These elements, he said, would include fire sprinkler systems, waterproofing and load bearing components like slabs, footings, walls, structural columns and beams. Also covered, he said, were mechanical components like the electrics and plumbing in accordance with the National Construction Code.
“In terms of the gateway to cover, the trigger through the insuring clauses is relatively straightforward,” said Burrell. “The owners would have to show that there is a defect that manifests during the policy period that’s either caused physical damage or is an imminent threat, for example, if the building is going to collapse.”
Burrell said LDI is going to “try and dovetail in with some of the other insurance policies” and has a range of exclusions.
“It will exclude things like fire, lightning, earthquake, explosions - all of those typical perils that you’d expect your normal strata property to pick up and respond to,” he said. “Also, it doesn’t cover economic loss, or non-structural work and wear and tear maintenance.”
He said the focus is “really on fixing those major structural latent defects.”
Burrell also said the insurer would get the opportunity to assess the construction.
“That also presents a risk, potentially, for the developer because if they can’t get latent defects insurance and it’s mandatory then they won’t be able to get their occupation certificate and they won’t be able to sell their units to prospective homeowners,” he said.
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