Builders warranty insurance protects homeowners if a builder who has undertaken domestic building work to their home or apartment (including common property) dies, disappears or becomes insolvent and the builder’s work is defective or incomplete. In this decision (the first of its kind in Victoria) VCAT had to determine the proper test for when a homeowner’s loss or damage ‘occurs’ within the meaning of such policies and the application of the relevant periods of insurance.
The Applicants to VCAT were the Owners Corporation and unit owners of an apartment development on Malvern Road, Toorak. QBE was the builders warranty insurer for the insolvent builder of the development. The occupancy permit for the development was issued on 26 October 2008.
Between around March 2015 and March 2016, the Applicants became aware of potential fire safety defects in the development. They subsequently lodged claims with QBE for indemnity for the cost of rectifying these defects.
QBE’s policies, issued in accordance with the relevant domestic building insurance Ministerial Order, provided cover in the event of the death, disappearance or insolvency of the builder, for loss or damage ‘occurring’ during the periods of insurance for structural and non-structural defects.
QBE initially denied the claims on the basis that they had been lodged after the six year period of insurance under the policies had expired.
The Applicants appealed QBE’s decision in VCAT. They alleged that because the defective building works were breaches by the builder of implied warranties under the building contract, the Applicants’ loss had ‘occurred’ at the time the builder completed the development, as this is when the breaches of the contract took place.
QBE subsequently issued a revised decision denying the claims on the basis that the Applicants’ loss or damage ‘occurred’ when the defects actually became evident to them, which was after the periods of insurance under the policies had expired.
QBE’s revised decision was based on previous Court authorities regarding:
- claims for latent building defects that have found an owner’s loss, in the context of negligence claims, occurs when a defect, or damage related to it, becomes ‘manifest’; and
- claims under ‘occurrence’ based policies of insurance that a beneficiary’s loss was consequent on damage becoming evident.
A preliminary hearing was held to consider:
- Whether the Applicants’ loss occurred when the works were completed; and
- If not, whether the Applicants’ loss occurred during the periods of insurance under the policies. The Applicants submitted that QBE’s decision was incorrect as it was based on tests derived from authorities that did not themselves concern claims for breaches of implied contractual warranties. They said that the policies did not require that loss be known to owners for loss to have ‘occurred’. QBE submitted that:
- It was appropriate to adopt the test for when loss ‘occurred’ in negligence claims for latent building defects and claims under other types of occurrence based insurance policies. The policies were issued in accordance with the Ministerial Order, and rules of statutory construction provide that where a statute uses words or phrases that have established meanings those will apply unless context suggests otherwise;
- The indemnity being sought was the cost of rectifying defects, meaning that the cost of rectification must be consequent on awareness of their existence; and
- By setting different periods of insurance for loss occurring from non-structural defects and other heads of loss, the legislature must have intended that the policies respond to defects manifesting themselves at times other than completion of the work. Senior VCAT Member Davis upheld QBE’s denial of the claims. He found that the Applicants’ loss did not occur at the time the works were completed. It instead occurred when the Applicants became aware of the existence of the alleged defects. He further noted that if the Applicants were correct, then it would be open for property owners ‘…to make claims many decades into the future. That would not only lead to an absurd situation, but would make such claims almost impossible to defend.’
This decision is extremely significant as it provides guidance on an owner’s entitlement to cover under builders warranty policies and the manner in which the period of insurance operates. If an owner cannot substantiate that they became aware of a defect, or damage related to it, within the relevant period of insurance, these sorts of policies will not respond. As noted above, there had previously been no authorities on this question in Victoria.
If you would like further advice on owners corporation matters or building matters, James can be contacted by email at JCollier@moray.com.au or by telephone 03 8687 7354. Moray Agnew https://www.moray.com.au/
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