Tim the Tradie’s quest for PI insurance – Part 3

Government machinations and a new insurance proposal

It was Thursday, and Tim sat at a table for lunch with, as he insisted on being called, Sir Bowlam Hatt. Despite the day’s heat, Bowlam was dressed in full suit and bowler hat, as always.

Tim took a sip of water. “Thanks for making time at such short notice. How long have you been in New South Wales?”

“Not long. Took me a while to get in with border restrictions. But I had connections…”

Bowlam was the controller of the Northwestern Railway on the Island of Sodor back in the UK. But he was an engineer by trade.

“I came to visit my engineer friends in Australia, but when you mentioned your current predicament, it sounded surprisingly similar to what they’re going through in their construction work. I assume you already know about the issues with cladding and other building defects?”

Bowlam made sure to pronounce ‘issues’ with an ‘ss’ rather than a ‘sh’.

Bowlam continued. “Well, the issues were impacting both big owners and smaller individuals. Some buyers of off-the-plan units for the Imperial complex in Parramatta found that, thanks to the publicity surrounding the defects of their building, they could no longer get loans from the big banks to settle on their purchases.

“But let’s go back, to the early-2019 New South Wales state election. The Opal Tower incident had recently happened, so building regulation was a common speaking point among politicians. Some say the government were overly pressured to make changes. Others say that the change was long overdue. But either way, the government had to restore consumer confidence in the residential building industry.

“But then COVID-19 happened. On one hand, they wanted to tighten building regulation, as promised. But this involved setting aside millions for cladding rectification work, taking away funding from current planned projects.

“On the other hand, they wanted to fast-track construction to stimulate the economy. But this might’ve caused an accelerated building crisis if regulations weren’t tightened first. And this was after government had withdrawn their proposed building reforms in late-2019.”

Bowlam took an ever-so-loud sip of his black coffee.

“Acting under the New South Wales Building Commissioner that had only been appointed in late 2019, the government knew they had to make regulation changes. So, in mid-2020, they introduced two reforms.

“The first was the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020, which applied to developers of residential apartment buildings. This introduced more obligations to developers and more powers and penalties that could be used by the Department of Customer Service.

“But what you’re probably more interested in is the Design and Building Practitioners Act 2020, which applies a duty of care to all practitioners involved in residential building work and lasts for 10 years from completion of a building, new or existing. Plus, it had requirements for practitioners to be ‘adequately insured’. You know what that means for your insurance, don’t you?”

Tim joined the dots. “We need 10-year PI insurance, without any exclusions?”

Bowlam nodded. “It’s referred to as Decennial Liability Insurance, or DLI.”

Tim squinted in confusion. “These reforms were introduced in 2020? Why haven’t I heard of anyone having 10-year exclusion-free PI coverage?”

“Well, firstly because DLI and PI policies are technically different things. DLI is specifically meant to cover the decennial liability imposed by law. And secondly, because up until now, no one was offering 10-year exclusion-free coverage. So instead of it coming into effect on 1 July 2021 as planned, it was delayed until 1 July 2022. Until then, insurance isn’t required as a condition of registration.”

Tim squinted harder. “You mean, having PI insurance with the cladding exclusion was temporarily OK?”

Bowlam laughed. “No, I mean, to get your licence, PI insurance is completely optional. But look, I’m sure there are other parts of the job that require you to have some form of PI insurance. All I’m saying is that the DBP Act currently doesn’t. But on 23 October 2021, the New South Wales government announced a Ministerial Advisory Panel to work with and advise the government on how a DLI product will be introduced to Australia.

“All we know is that the DLI will offer coverage for 10 years after construction, and the owner won’t need to prove negligence or breach of duty of care, unlike normal PI insurance. On the bright side for practitioners, it’s likely that the insurance will be the first resort and not based on fault, meaning that it will be the first avenue for compensation rather than a backup, and will provide full coverage regardless of whether the practitioner is found to be negligent. Although these details are still a work-in-progress,”

Tim’s eyes widened. “So will insurers offer DLI or not?”

Bowlam touched the brim of his hat. “The Panel will be investigating into next year, so we’ll see…”

A bright destination, but a journey not yet finished

It was Friday, finally, and Tim was due for a call from Barbara the Broker any minute. It seemed that he’d get his PI insurance, even if it wasn’t straightforward.

But it seemed hope was on the horizon – a decennial liability insurance that would meet the new requirements and bolster confidence in the industry. And Australia wouldn’t be the first country to utilise DLI. France, Belgium, Spain, Egypt, the UAE, Qatar, Oman, Bahrain and Saudi Arabia already utilise DLI, or have a decennial liability concept, even if not compulsory.

There were still many questions that remained unanswered, the main one being who would offer DLI.

• Maybe insurers will find a way to make this work? But look at how willing insurers are to re-enter the builders’ warranty market after exiting over a decade ago.

• Maybe the government will step in to fund the insurance? It could be as the front line (like how the government-run QBCC fully manages builders’ warranty in Queensland) or the backline (partially or fully reinsuring insurers that write this coverage).

• Maybe capacity will be sought overseas? Lloyd’s of London has already offered exclusion-free PI insurance, and are willing to consider participating in new and different risks. But they may be more expensive than if offered more locally and may not be in for the long term.

• Maybe practitioners would have to fund it themselves? There are a number of alternative risk solutions that could be considered – forming a mutual, self-insuring, or setting up a captive. But who would be allowed to participate? Many builders go insolvent, many doing this multiple times just to rise up each time under a different entity – a trend called ‘phoenixing’. To tackle this, the Panel is also looking at procedures to force practitioners to demonstrate a long-term market presence and commitment.

Some were already trying to meet their decennial liability requirement. In July 2021, Toplace Group put up an $11 million financial bank-backed guarantee with a 10-year commitment to fix any future defects at Castle Hill towers. Whether that was sufficient was yet to be seen.

But was 10 years enough? Built in 2008, the defect with Mascot Towers technically took 11 years to emerge.

There were of course other ways of improving processes and monitoring in the industry, such as using blockchain to track the provenance (the history and ideally the origin) of buildings, including the quality and source of buildings materials and the services contributed by building practitioners that are part of the construction process.

From an insurance perspective, DLI was the next step in a journey still in progress. So, one question remained…

Would it be ready by 1 July 2022?

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