Domestic Building Insurance and builders liability

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.

To find out more, contact HIA's Contracts and Compliance team

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The above is intended to provide general information in summary form. The content does not constitute specific advice and should not be relied upon as such. Formal advice should be sought by members and customers with respect to particular matters before taking action.