The Saga of NSW Strata Defect Claims
Or, is this the real tragedy of the common[s] property …
It’s an old [but true] platitude that you get better consumer protection buying a new $20,000 car than buying a new $600,000 2-bedroom apartment. Plus, you don’t have to go to the Supreme Court with a team of experts, lawyers, and others to get the car fixed.
Why is that? And, how did we get here?
Introduction
Everyone’s heralding the upcoming start of 2 new laws that are set to improve the rights of strata buildings to make claims for original construction faults and that impose new and stricter controls on builders and certifiers in the:
I’ll be writing soon about those new building laws as they make significant structural changes to the non-insurance area of strata building defect claims.
But, in the meantime, things remain pretty bad for NSW strata buildings [and other strata buildings around Australia] with defects.
However, it wasn’t always that way.
When I started getting strata buildings compensation for defects, there were fair protections for new strata owners, recovery rights and regimes that could be effectively enforced, and money that could actually be recovered to fix the building.
There’s been a steady reduction/erosion in those rights, the imposition of more limits and barriers to making claims, and increasing complexity and cost to pursuing those claims.
So, in this article, I review the tortured history of strata building claims for original construction faults over the last 50 years. It’s a fascinating tale of woe for strata buildings and strata owners and a sorry indictment of regulators in my opinion.
Maybe seeing where we came from on these matters will help us understand what we should be trying to achieve in the future.
The early [salad] days: the 1970s & 1980s
From 1972 residential strata buildings were covered by a compulsory government-run insurance scheme administered by the Builders Licensing Board that had the following features.
Builders had to be licensed and paid insurance premiums to the Builders Licensing Board when they started building work
There was a deemed contract that applied [the House Purchasers Agreement] containing minimum protections for building quality and insurance coverage amounts. There were eventually 4 versions of the House Purchasers Agreement applying for different construction periods]
Builders Licensing Board inspectors could inspect defects and issue rectification orders.
If defects were not rectified by the builder, strata buildings could make an insurance claim to the Builders Licensing Board.
The Builders Licensing Board assessed the claim and, if approved, paid monetary compensation.
Strata buildings could appeal Builders Licensing Board insurance decisions to Tribunals or Courts.
The insurance cover for strata buildings changed over time and was in 2 parts, eventually being:
$20,000 per lot for defects in apartments; and
$20,000 times the number of lots for common property defects;
Insurance claims had to be made within 2 years of completion for minor faults and within 6 years for major or structural faults.
The Builders Licensing Board could recover the money paid under insurance from the builder as well as take disciplinary action on their license.
In 1987, the Building Services Corporation replaced the Builders Licensing Board but effectively did the same things.
The relevant laws were contained in the Building Services Corporation Act 1989.
These were simpler and more innocent times in the building and strata sectors.
But, things were okay for strata buildings with defects as they were able to routinely get defects fixed and to recover compensation when buildings had major issues.
The defect claim heydays: in the early 1990s
In March 1990 the old laws were replaced by the Home Building Act and Regulations 1989.
Here are the original versions of each:
Home Building Regulations 1989
The House Purchasers Agreement was gone and instead statutory warranties described in the new laws were implied into all home building contracts. The warranties included, for example, that work be performed in a proper manner in accordance with the contract, that materials are fit for purpose, and that work is done diligently. Pretty basic stuff.
And a new, but similar, insurance scheme began at the time administered by the Building Services Corporation.
But, there were 3 significant improvements.
The amount of cover under the new insurance scheme was $100,000 per dwelling; so, for strata buildings that was $100,000 times the number of apartments.
Insurance claims could be made for up to 7 years after completion.
There were no distinctions between minor, major or structural faults.
This was also a first resort insurance scheme; which meant strata buildings made insurance claims to the Building Services Corporation, appealed any refusal or disputed assessment in a Tribunal or Court and the Building Services Corporation could recover what it paid from the builder.
But, in 1992 an inquiry started into the Building Services Corporation, chaired by Peter Dodd which reported in 1993. The key findings of the report were that it was inappropriate for the government to control the functions of industry regulation and consumer advice, dispute resolution, and insurance, and those roles should be separated.
Here are a few things Peter Dodd said at the time that I find amusing now:
‘... I believe that the BSC is in an untenable position with the roles it is fulfilling. So long as it is both insurer and arbiter on disputes it must be susceptible to claims of conflict’,
‘I can find no reasonable argument why the BSC should be provided with a Government sanctioned, monopoly position as insurer’, and
‘there is no reason a competitive, private-sector insurance market cannot operate and there are examples in other states.
The Dodd Inquiry recommended that the government move away from underwriting home warranty insurance and allow the privatisation of the home building insurance market.
An insurance free for all or let’s party like it’s 1999; the millennium comes & goes
In 1997 there were major amendments to the Home Building Act and Regulations.
The Fair Trading Administration Corporation was created as a statutory corporation and took over most of the Building Services Corporation’s functions.
But, importantly, the insurance required by builders for residential work, including strata buildings, was privatised and major insurers began offering that insurance.
A few changes were also made to increase insurance to:
increase the insurance cover to $200,000 per dwelling; and
make claims for incomplete [as opposed to defective] only possible if the builder was insolvent, deceased or could not be found [the innocuous beginnings of what became last resort].
The then Minister for Fair Trading, Hon Faye Lo Po’, also made some comments that I also find amusing in the light of what followed:
she referred to problems with the existing system, explaining that private insurance could change this,
she said that bad builders will be able to be excluded; ‘they will not get insurance and therefore will not get work in the residential building industry’,
she said ‘good builders will be rewarded with lower premiums’, and
she said that ‘private sector insurers will be able to manage the risks far better than a government scheme’.
Well, the insurance companies embraced the new privatised insurance market with gusto and offered competitive Home Owners Warranty [HOW] insurance to builders big and small.
The main players were GIO, Dexta, Allianz, Royal & Sun Alliance, Reward, and HIH. Bu mid-2000 HIH was reported to have secured almost 40% of the HOW market.
In 1998 private certification was introduced to NSW to replace certification and approval of new buildings by local councils with the minister for Urban Affairs and Planning, Hon Craig Knowles, saying it would:
‘remove unnecessary regulation and streamline the assessment process’, and
‘result in reduced approval response times, reduced holding costs, and improvements in the service provided to applicants.
Private certification was being pushed by the development sector because developers wanted to speed up development processes, remove bureaucratic obstacles, because Councils had a monopoly, and because Councils were being unreasonable and slow over inspections.
And, remember Sydney was in the middle of an apartment building boom in readiness for the upcoming 2000 Sydney Olympics.
It was good times when the millennium arrived and we partied. But, the fun didn’t last long.
In March 2001, HIH collapsed with debts of about $5.3 billion. That was pretty big news!
Consequently, almost $2 billion of construction activity was placed on hold as builders were left without insurance coverage.
The collapse saw other insurance providers starting to charge higher premiums which in turn led to builders being unable to afford insurance.
In early 2002, Dexta Corporation Limited was unable to secure an underwriter and was forced to exit the home building insurance market.
Allianz then also left the home building insurance market in December 2002.
So, what did the government do?
First, they commissioned another inquiry. The Ministerial Council on Consumer Affairs ordered a national review of home warranty insurance and consumer protection known as the Allen Inquiry to consider insurance, building licensing, contracts, dispute resolution, and compliance. Their conclusion was to:
‘put less emphasis on insurance and give more attention to strengthening the regulatory framework’.
Second, the government had to underwrite all the HIH policies via the Fair Trading Administration Corporation.
Third, they made changes to home building insurance coverage which I’ll explore in the next part of this story.
So, within 5 years the new privatised insurance scheme had all but failed, a huge amount of money had been lost or wasted, the government was back in charge and the rot began eating away at strata building defect claims rights.
Let’s start winding everything back; the rest of the noughties
So, in July 2002 the building laws were changed again to deal with the recent [unexpected?] events.
HOW insurance [now called Builders Warranty Insurance [BWI]] become last resort cover for all claims [not just incomplete work], so that claims could now only be made if the builder was insolvent or had disappeared or died.
The time for making insurance claims was also reduced to:
6 years from completion for structural defects, and
2 years from completion for non-structural defects.
Later in 2002, another NSW Parliament Select Committee inquiry into the ‘Quality of Buildings’ reported on its findings.
The press release included these statements, [sadly also amusing today]:
‘The report proposes greater regulation of the Home Building industry to protect home buyers and builders without the red tape, which could strangle this vital industry in our economy.’
‘That is: setting out who is responsible for aspects of a residential building, holding those responsible accountable for their actions and making those who act inappropriately carry the liability for their actions.’
‘We have delivered a strong set of recommendations that require careful and measured legislation.’
Not much was done off the back of this inquiry. Thankfully!
But, in September 2003 a further inquiry was started called the NSW Home Warranty Insurance Enquiry headed by Richard Grellman.
Grellman’s inquiry concluded that the private sector should continue to provide home warranty insurance except those who had purchased apartments in multi-storey buildings; the rationale being that high-rise buildings were like commercial projects with materially different risks compared to free-standing homes. In other words, bigger buildings were better built so didn’t need insurance protection.
Grellman also said that reinsurance in the global insurance market for work on multi-storey buildings was simply not available at that time and if insurers were required to cover multi-storey buildings, it would not have been viable. In other words, it was too hard or expensive to get insurance for bigger buildings.
So, by December 2003, the building laws were changed again to exclude buildings of more than 3 storeys from insurance completely.
Those larger buildings were now simply left with their rights to sue the builder [and maybe others] under the statutory warranties or under common law.
By the end of 2004, the principle of proportionate liability was codified into s 35 of the Civil Liability Act 2002 which operated to split liability between responsible parties in damages claims. And, it quietly became the sleeper issue in strata building defect claims and remains so today.
In 2005 the strata laws were also changed to include s80D which prevented strata buildings from taking legal action [including making defect claims] without approving that action in a general meeting. I remember it well and nicknamed it the ‘Andreone/Triguboff amendment’ since it was made in direct response to the major cases I was running at the time against certain well known developers and builders in the wake of the Sydney Olympics apartment building boom.
In March 2007 home building insurance cover was increased to $300,000 per dwelling; that was good if you could make a claim.
And, then we had a few more government inquiries.
In 2008, the Productivity Commission’s report on the Consumer Policy Framework in Australia also reviewed the home building sector, and specifically HWI. The report described the insurance regime as a ‘running sore’ since privatisation and the collapse of HIH. It concluded that a national approach was required to resolve the concerns about home building insurance and to achieve needed improvements in other aspects of consumer protection in home building.
In 2008, the Australian Parliament’s Senate Standing Committee on Economics also conducted an inquiry into mandatory ‘last resort’ home building insurance schemes in Australia. That report found many problems with dispute resolution in domestic building but it did not support the return to a first resort government insurance scheme
In the committee’s view the better response was to improve the builder licensing and dispute resolution arrangements directly saying:
‘The key is the early identification of poor building performance and linking this to registration, rather than to government ownership of the insurance.’
The Committee recommended that COAG and the Ministerial Council on Consumer Affairs ‘should pursue a nationally harmonised best practice scheme of consumer protection in domestic building'.
These conclusions were followed by a series of further changes to building laws that kept chipping away at strata building rights.
In May 2009, new obligations were introduced that required strata buildings to notify insurers of any losses that would be claimed within six months after the loss became apparent. Plus, insurers were permitted to reduce compensation if the strata building failed to act to enforce a statutory warranty promptly.
But, this still wasn’t enough to keep the private insurers happy.
In July 2009, Lumley General and CGU Insurance Limited announced their intention to withdraw from the home building insurance market.
So, in November 2009, the government announced that it would underwrite home building insurance completely in a last-ditch attempt to keep some private insurers in the market.
But, in June 2010, the last three private insurers, Calliden Insurance Limited, QBE Insurance (Australia) Limited, and Vero Insurance Limited also left the market.
So, by July 2010, BIGCorp became the sole underwriter of all home building insurance and Residential Builders Underwriting Agency and QBE became authorised agents to provide that insurance.
BIGCorp has since become part of Icare and remains the only provider of home building insurance in New South Wales.
Things just get keep getting worse: the latest decade
So, we started the last decade in a bit of a strata building defects shambles with many rights removed or eroded but still trying hard to get building defects fixed and compensation paid.
However, things were about to get even worse as the following 2010 - 2020 timeline shows.
2012
In 2012 home building insurance cover was increased to $340,000 per dwelling.
2014
In October 2014 the High Court decided Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36.
That decision held that a builder did not owe a duty of care to successors in title to the developer to avoid pure economic loss as a result of latent building defects affecting a strata title serviced apartment complex.
Although the High Court did not exclude the possibility that a builder might owe a duty of care to other kinds of strata buildings, the circumstances appear to be very limited and the duty can be contractually excluded.
In November 2014, the Lacrosse building in La Trobe Street, Melbourne was badly damaged by fire which spread quickly because of external cladding combustibility. It was a shock to many, but not enough to prompt much regulatory action.
2015
In January 2015, the definition of structural defects was changed to a 2 part definition so that it needed to be both a ‘major defect’ and occur in a ‘major element’ of the building. And, the change was backdated to February 2012.
In October 2015, the government finished the Lambert inquiry, that reviewed the Building Professionals Act 2005 (NSW) about private certification of building work. But, not much happened straight away on that either.
2016
In 2016, the government announced that private insurers could return to the market, and in June 2017, the Home Building Amendment (Compensation Reform) Act 2017 allowed insurers to offer split cover for defects and non-completion risks. But none did.
So, the current building insurance regime in New South Wales remains unchanged and is detailed here and here.
2017
In June 2017, the Grenfell Tower fire in London highlighted risks with external cladding combustibility again, but this time, with tragic loss of life. The international uproar did cause some action in New South Wales.
The NSW Cladding Taskforce was established in June 2017 and has been working to identify affected buildings and develop solutions for the building owners. It’s still working on those issues.
In October 2017, the Environmental Planning and Assessment Amendment (Fire Safety and Building Certification) Regulation 2017 (NSW) (Fire Safety Regulations) introducing more stringent requirements around fire safety design, construction, and certification including:
plans for certain fire systems to be signed off by the certifier,
Fire and Rescue NSW to complete re safety inspections for multi-unit residential building projects,
critical stage inspections to be undertaken, and
assessment of the ongoing performance of essential re safety measures to be undertaken by ‘competent re safety practitioner’.
2018
In October 2015, the Strata Schemes Management Act 2015 also introduce developer bonds and compulsory post completion inspections which apply to building work commencing after 1 January 2018 that is not covered by the existing home warranty insurance scheme [buildings over 3 storeys].
It operates as follows:
Before getting an occupation certificate, developers must pay a building bond of 2% of the contract price for the building work.
Within 12 months [or the expiry of the strata initial period] developers must appoint a qualified building inspector [not connected to the developer and approved by the strata building] to carry out an inspection of the building.
The building inspector must inspect in the period between 15 and 18 months after completion and issue an interim building report.
The builder must then rectify any faults identified in the interim report.
Between 21 to 24 months after completion the building, the building inspector must re-inspect and issue a final building report identifying un-remedied faults and required repair works.
The strata building can then use the building bond for the identified repair work in the final report.
Any unused building bond is released to the developer 2 years after completion or 60 days after the final report [whichever is sooner].
Whilst it’s early days to assess this new scheme, it’s important to realise that even if works for minor faults that are apparent at 15-18 months, it cannot address latent defects that appear after the interim and/or final reports.
On Christmas Eve 2018, Opal Tower in Olympic Park was evacuated because of cracks that developed in the building due to structural faults. It took more than 12 months for those issues to be addressed to the point where residents could return to the building.
2019
In February 2019, Neo 200, in Spencer Street, Melbourne was badly damaged by fire which spread quickly because of external cladding combustibility. News reports later revealed that the City of Melbourne Council had raised concerns about the building's cladding the previous year.
In June 2019, Mascot Towers in Mascot was also evacuated because of cracks that developed in the building due to structural faults. Those problems remain unresolved and, as far as I know, the litigation over the faults is continuing.
After Mascot Towers, in August 2019, David Chandler was appointed as NSW’s first Building Commissioner. He has investigatory and disciplinary power over builders, plus oversight of licensing and auditing of the building industry.
He has been increasingly active during 2020 working on the new laws and in 2021 issuing a number of stop-work orders on unfinished strata buildings.
2020
In April 2020, the report of the Legislative Council ‘Regulation of building standards, building quality and building disputes’ was released.
There are 22 recommendations and some are actually OK. But, at this stage, none have been effectively implemented.
Conclusions
So, where are we now and what’s next?
It’s a pretty sad state of affairs that after 50 years and plenty of lessons for anyone paying attention, strata buildings now face a building defects landscape with the following undesirable features.
Private certification of construction that needs fixing.
Lower building standards that now routinely include major structural faults.
The widespread use of building products that are not appropriate.
Larger [over 3 storeys] buildings having no insurance protection,
Last resort insurance protections only for other buildings.
2-year insurance claim time limits for most defects and 6 years for the rest.
Stricter and unrealistic rules for defect notifications.
Impediments to starting legal action.
Complex, slow and expensive multiparty civil litigation against sophisticated defendants for major defects.
Court decisions that reduce civil remedies,
An untested short-term bond scheme.
Never ending government reviews that haven’t improved much.
It’s no wonder strata buildings have given up and the developers and builders are laughing.
But, being defeatist isn’t the answer. I’m certainly not.
So, I’ll be writing about new and innovative ways to address strata building defects over the rest of 2021 as we see what government, developers, builders, designers and certifiers do next.
Francesco …
Mar 10, 2021