Some reports suggest that latent defects insurance (LDI) for apartment buildings, also known as decennial (10-year) liability insurance (DLI), is slowly gathering traction across Australia, particularly in NSW.
DLI was launched by the NSW government in October and a regulatory impact statement was prepared proposing that it be made compulsory.
The coverage allows an owners corporation to have a serious defect fixed up to 10 years after the first occupation of the building. The aim, according to the government, is to restore confidence in the construction sector after years of serious defects issues with high rise buildings.
“It’s an Australian first,” said Stefan Hicks (pictured above).
In 2022, Hicks, was on an NSW government advisory panel that recommended the introduction of mandatory DLI after a transition period to replace the strata building bond.
Hicks is founding director of SHC Insurance Brokers and also managing director of the underwriting agency, Resilience Insurance. His firm is currently the only provider of latent defects insurance or LDI. However, the government says it is “supporting efforts for new entrants to the market.”
“We spent more than 18 months educating the market about this product and we can look at it from so many different ways,” he said. “It creates a spiderweb in the way it goes out and touches certain elements and certain parts.”
In December, an apartment building project in Blacktown became one of the early adopters of the LDI coverage facilitated by Hick’s firm.
“For the Blacktown apartment project, which is a class two building, or high-rise residential building, LDI provides 10 years’ worth of cover for defects,” he said. “However, LDI is available for all classes of buildings, including classes from two to nine.”
Hicks said this means LDI can be used for buildings including hospitals and shopping malls.
“Generally speaking, it provides coverage for the structural elements and the envelope of the building,” he said. “It’s what’s called first resort method.”
Structural elements of a building include the foundations, floor, walls and roof. The envelope generally refers to the outer shell of the building.
“Anything outside of the building,” said Hicks. “It’s to do with the external structure, windows, window seals and everything to do with keeping the envelope intact.”
He said the waterproofing and fire systems are also part of the envelope. His firm’s LDI also covers elements for the structure of the façade of the building, but the façade itself has limitations on cover.
“These are nuances that form part of the envelope but it’s designed to keep the building sealed from the elements, while assuring building quality,” said Hicks.
He said, currently, there’s also coverage options for class 1, or single homes. This is called home warranty insurance, also known as home building compensation (HBC), which covers those class 1 buildings as well as class 10 and other buildings lower than four storeys.
“That is what’s called last resort,” he said. “Unfortunately the access to insurance under last resort programs is heavily restricted and therefore the security occupiers of those insurances on these classes are not as simple as they are with LDI.”
Builders have an obligation in NSW to provide a strata bond instead of LDI, said Hicks, but that’s getting expensive.
“Builders, particularly in New South Wales, are still required by regulation to provide strata bonds,” said Hicks. “But the strata bond is increasing to 3% in July 2024 and it has been proposed by government, the strata bond value will increase up to 5% by 2028.”
He said one advantage of LDI is that it doesn’t add to the cost of the building.
“In actual fact, in New South Wales, the 2% strata bond is higher than the premiums that we charge including the technical inspection reports that are required to accompany the LDI,” said Hicks. “Offsetting the cost of the insurance however, extensive analysis of consumer views by the NSW government found the majority of purchasers would pay up to 5% more if their purchase came with the security of LDI.”
Another important positive feature of LDI, said Hicks, is that unlike HBC it is a first resort policy.
Edward Burrell, partner with the law firm Wotton + Kearney (W + K), explained this in a recent Underwriting Agencies Council webinar.
“It’s taken out by developers of a 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.
Hicks agrees.
“We’re increasing the quality of the building and we’re increasing consumer protection to 10 years,” he said. “We’re also increasing the trustworthiness of the building and the industry.”
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