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Domestic Building Insurance and builders liability
In this article
What is warranty insurance?
Home warranty or indemnity insurance is called Domestic Building Insurance (DBI) in Victoria.
DBI is provided solely as a consumer protection measure.
The DBI provisions are contained within the Domestic Building Insurance Ministerial Order. The order specifies the insurance that a builder must hold to carry out, manage or arrange domestic building work under a domestic building contract of a specified kind.
The policy must indemnify the building owner in respect of loss or damage resulting from:
- non-completion of the domestic building work
- domestic building work that is defective
- a breach of any warranty implied into the domestic building contract by section 8 of the Domestic Building Contracts Act 1995
- a failure to maintain a standard or quality of building work specified in the domestic building contract
- conduct by the builder in connection with the domestic building contract that contravenes a trade practices provision.
The policy must also indemnify the building owner in respect of loss of the deposit (or any part of the deposit) or loss of any progress payment under the insurable domestic building contract.
What is an insurable domestic building contract?
A ‘domestic building contract’ is defined in the Domestic Building Contracts Act 1995. It is a contract to carry out, arrange or manage domestic building work that is not a contract between a builder and a sub-contractor.
A contract price which exceeds $16,000 will require DBI to indemnify the building owner.
The policy protects building owners for six years from the certificate of occupancy or certificate of final inspection for structural defects. It protects owners for 24 months for non-structural defects within the six-year period.
When is DBI required?
The confusion for the industry and consumers generally relates to when DBI can be accessed and the extent of the builder’s liability.
Consumers may misinterpret that the policy can be accessed at any time to rectify defects, but this is not the case. DBI is only triggered if the builder dies, becomes insolvent or disappears.
In these circumstances the insurance provider may indemnify the building owner in relation to the rectification of defects or loss resulting from non-completion of domestic building work.
If the defect is in relation to a non-structural item, the policy will only indemnify the owner for the first 24 months of the warranty period.
Builders’ liability
The Domestic Building Contracts Act 1995 requires the builder to warrant that the domestic building work will be:
- carried out in a workmanlike manner in accordance with plans and specifications; and
- all materials supplied will be suitable and fit for the purpose they are intended to serve.
To determine if building work is defective, an assessment is made against acceptable standards including relevant Building Code of Australia provisions, Australian Standards or the Guide to Standards and Tolerances.
The Building Act 1993 states action cannot be brought against a builder for building work more than 10 years from the date of issue of the certificate of occupancy or certificate of final inspection.
If one or more of the implied warranties in the Domestic Building Contracts Act is breached, a builder can be liable for up to 10 years.
Structural and non-structural defects
There is generally no consideration of what constitutes a structural or non-structural defect as part of a builder’s 10-year liability period.
A matter would be judged on its merits and measured against codes and standards requirements, the standards and tolerances guide, and consideration of fair wear and tear.
In the event of a claim
A pragmatic approach by builders where a claim of either non-completion or defective builder work is made by a building owner is to review the contract documents to determine if work has been carried out and completed as per the contract documents.
It is important to refer to relevant codes and standards and standards and tolerances to determine if the work breaches implied warranties.
A measured approach may avoid the situation escalating.
Frequently asked questions
Domestic Building Insurance and builders liability
In Victoria, all registered builders must purchase a DBI policy on behalf of the owners for all major domestic building projects $16,000 or more.
The purpose of a DBI policy is to provide the owner with a monetary sum to ensure that they are covered for loss in relation to non-completed building work or defective building work. This policy can be obtained from a designated insurance broker.
The owner can make a claim under their DBI policy if one or more of the following scenarios occurs:
- The builder dies
- The builder disappears
- The builder becomes insolvent; or
- The builder fails to adhere to a tribunal or court order.
The policy will indemnify the owner in respect of loss or damage resulting from:
- Non-completion of the domestic building work;
- Domestic building work that is defective and one of the triggers listed above applies;
- A breach of any implied warranties as listed under Section 8 of the Domestic Building Contracts Act 1995 (Vic) (DBCA);
- A failure to maintain a standard or quality of building work specified in the domestic building contract; and or
- The builder's conduct in connection with the domestic building contract when it contravenes a trade practices provision.
A DBI claim is only valid if one of the above triggers take place. Therefore, if the builder remains alive, is contactable, and remains trading, the builder is expected to return to site, inspect the supposed defective works and determine whether the owner's claims are within the builder's scope of works.
Should the defective works be within the builder's scope of works, the builder is expected to remedy these works. Otherwise, the owner has 10 years to commence a legal proceeding against the builder for failing to uphold their statutory warranties under Section 8 of the DBCA.
Section 8 of the DBCA expects the builder to warrant:
- the building works will be carried out in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract.
- the materials supplied by the builder are good and suitable for the purpose which they are to be used, and unless otherwise stated in the contract, the materials will be new.
- the building works will be carried out in accordance with, and comply with, all laws and legal requirements including, without limiting the generality of this warranty, the Building Act 1993 (Vic) and the Building Regulations 2018 (Vic).
- the building works will be carried out with reasonable care and skill and will be completed by the date (or within the period) specified by the contract.
- that, if the work consists of the erection or construction of a home, or the work is intended to renovate, alter, extend, improve or repair a home to a stage suitable for occupation, the home will be suitable for occupation at the time the work is completed.
- that, if the contract states the purpose for the work required, or the result which the building owner wishes the work to achieve demonstrates that the building owner relies on the builder's skill and judgement:
- the builder warrants that the work and any material used in carrying out the work will be reasonably fit for that purpose; or
- will be of a nature and quality that they might reasonably be expected to achieve that result.
Under a DBI claim, structural defects are limited to a six-year limitation period, and two years for non-structural defects.
Otherwise, the general 10-year period applies if the builder remains in business, unless the defect is subject to a timeframe noted in the Victorian Guide to Standards and Tolerances.
Generally, determining whether a defect is structural or non-structural is dependent on the merits and is measured against codes and standard requirements.
To find out more, contact HIA's Contracts and Compliance team
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