Is LDI the right answer to the building defects crisis?

Expert gives a masterclass

Is LDI the right answer to the building defects crisis?


By Daniel Wood

“The [NSW] government’s response to the compliance crisis was to move into this highly regulated phase that we’re in now,” said Rob Finnigan (pictured above), during  a recent Underwriting Agencies Council (UAC) seminar.

Finnigan, a partner at Wotton + Kearney (W + K), summarised recent construction industry reforms in response to several decades of deregulation, rapid growth and serious defects issues in the residential high-rise market.

The W + K expert’s astute observations provided important context for construction industry stakeholders – including insurers – in the wake of the NSW government’s bid to introduce 10-year (decennial) liability insurance, or latent defects insurance (LDI).

LDI would enable an apartment building’s owners corporation to have a serious defect fixed up to 10 years after the building is first occupied. W + K has said that this insurance product – that it expects to be compulsory by 2028 – could “transform the insurance framework for high rise residential buildings.”

Intense high-rise construction

“To put this into its proper context, it’s worthwhile thinking about how many high-rise residential buildings have gone up in New South Wales, particularly in Sydney, over the last 20 years, and how many are going up over the next 20,” said Finnigan.

He said Sydney’s population was about four million in 2000 but is on track to be eight million soon after 2050.

“The problem with Sydney is that we’re in a basin, so the only way to go is up,” said Finnigan.

This means the NSW government is focused on planning and development laws to encourage high-rise residential buildings.

However, he said, during this era of intense high-rise construction, the country has also suffered a building compliance crisis.

“After the privatisation of the [building] certifying role during the 1990s,” said Finnigan, “many commentators think that’s caused building standards to drop and the quality of buildings to drop.”

He cited a range of buildings with major defects issues, including Opal Towers and Mascot Towers in Sydney. Both buildings were evacuated in 2019 due to structural issues. He also mentioned the infamous Grenfell Tower in London where 72 people died when the building caught fire.

“They’re all systematic of the same sort of problem,” he said.

Finnigan said this “problem”, of a building defects crisis in NSW, across Australia and in other parts of the world, is a direct result of deregulation of the construction industry.

“The sure point here is that deregulation of the industry has led to a drop in standards,” he said. “That’s happened while there’s been a massive increase in high-rise residential development.”

The basic issue, he said, is failures to comply with the standards in the Building Code of Australia.

Finnigan said the NSW government’s first response to these issues was a report handed down in 2018. The authors identified three main problem areas with the design and construction of high rise buildings: unclear accountability, insufficient controls and inaccurate documentation.

Six pillars of reform

The government responded, he said, with what it called six pillars of reform.

The reforms included training for industry professionals and enhanced documentation and record keeping. However, Finnigan said a key change was a renewed focus on building inspections.

“The aim of this strategy to reform the building industry was really about more transparency and accountability for builders and design professionals and the key objective is to make sure that the quality of the buildings is enhanced,” he said.

The result in NSW, he said, is the “highly regulated phase that we’re in now.”

A powerful Building Commissioner

That highly regulated phase included the appointment of a NSW Building Commissioner in 2019. Earlier this year, the NSW government announced the creation of an entire department to go with him to oversee the regulation of the construction industry.

Finnigan said the reforms include strengthened registration requirements, mandatory building inspections and mandatory design compliance declarations.

The government also brought in the Building Product Safety Act in response to the cladding crisis, he said, and the Building and Development Certifiers Act to separate certifiers from developers.

“The next one was the Design and Building Practitioners Act and that was really in response to this compliance crisis,” said Finnigan.

The last piece of major legislation, he said, was the Residential Apartments Building Act.

“That gave powers to the Building Commissioner to go in and inspect buildings before they were completed and issue stop work orders, rectification orders, or prohibition orders,” he said.

Finnigan said the government has now set the stage for the introduction of LDI because it believes the state now has “the most rigorous and detailed compliance regime in Australia” which is catching defects during the construction phase and reducing the risk of building defects.

“The main thing is the New South Wales government and the Building Commissioner want to change the culture of the industry so that apartment owners have confidence when they buy apartments, that’s absolutely crucial,” he said.

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