Why Latent Defects Insurance is Moving from Niche to Mainstream

When it arrived in Australia in 2022, latent defects insurance (LDI) was initially dismissed as an expensive “nice to have”. But LDI and its close relation decennial liability insurance (DLI) are gaining momentum, as Resilience chief executive Corey Nugent can attest. “We’ve insured 215 projects since LDI was introduced, representing around 12,500 apartments,” Nugent says. “We’ve got an incredibly strong pipeline of activity and stronger developer take-up, particularly from the trusted and larger side of development.” Major players including Deicorp, Thirdi, Urban Property Group and Sekisui House have already adopted LDI across select projects. Smaller developers, especially in the luxury segment, are following suit. “You’re talking about $9 billion worth of construction work that’s currently insured under this program,” Nugent says. “In a tough feasibility environment, that’s a phenomenal take-up rate.” Finance and feasibility While cost remains a concern for developers operating on thin margins, Nugent says the true financial picture goes beyond initial build costs. “You need to factor in costs of rework, inspections and rectification, which can add up,” he says. LDI’s mandatory technical inspection service may look initially onerous but the consistent oversight is a key advantage, especially when talking to financiers. ▲ Resilience chief executive Corey Nugent: True financial picture goes beyond initial build costs. Inca Group managing director Josh Thompson, which introduced LDI for its Ellis Residences development at St Ives, says its financiers were “much more comfortable” knowing it was in place. “As an owner-builder, once we understood how the product worked, we wanted to use it,” Thompson says. “We realised that having another set of eyes via the technical inspections throughout the construction process would ensure we were delivering the highest quality of construction.” Keeping costs down can be key but so is getting funding for the project in the first place—and banks and private credit lenders have now become major advocates. One of these is MA Financial, which has been supportive of LDI from its introduction. It was one of the early adopters in the finance industry, MA Financial managing director Drew Bowie says. ▲ A rendering of Inca Group’s Ellis Residences at St Ives, which is covered by LDI. “The construction industry is a challenging one, as evidenced by the many failures of building companies and the much-needed focus on build quality,” Bowie says. “The further assurances offered by LDI, along with the additional oversight that it brings, benefit both the industry and consumers, while also providing greater confidence for lenders.” In fact, MA Financial gives LDI “considerable weight” and has in the past discounted risk margins, namely interest rates, where LDI is secured, he says. Who’s taking it up? New South Wales remains the strongest market for LDI—unsurprising given high-profile defect cases such as Opal Tower and the Pafburn decision, which put the onus on developers and builders to pay for defects for the full 10-year defect period. “New South Wales was the reputational epicentre of where defects were identified and where it had the greatest impact in terms of the defect proposition and the impact on consumers, the impact on brand and an impact on the good developers,” Nugent said. ▲ A rendering of Deicorp’s Epsom project, which is covered by LDI. But LDI is branching out from its NSW heartland and Resilience is insuring projects in Queensland, Victoria and Western Australia. While larger projects and luxury projects are often the easiest with which to make LDI work, smaller developers are also catching on, given the insurance works on a percentage rate rather than a set fee. Developers such as Inca Group, who has already elected to take on LDI, are the vanguard of the new wave of protection. “In our view it is a necessary price to pay to provide comfort for our buyers,” managing director Josh Thompson says. ▲ Inca Group managing director Josh Thompson: Developers need to actively take LDI on and realise the obligations. “It provides peace of mind to our residents, many of whom are downsizers looking for comfort around the quality and longevity of their apartments.” But developers need to actively take it on and realise the obligations it requires, he says. “It is not as simple as ‘choosing’ to use it,” Thompson says. “The builder-developer is required to submit an application and pass the assessment process to ensure they are capable of delivering the quality required by the insurer. “We like this approach as it requires an independent assessment of our work.” And there is still an education piece for developers and buyers to understand LDI. ▲ Dasco’s Grand Reve at Castle Hill is covered by the 10-year liability insurance. “We have worked closely with the insurer, as well as SDSS, who are the independent technical inspection team, to educate our sales agents and our buyers about what LDI is,” Thompson says. But as buyers grow increasingly savvy, they are beginning to ask for LDI and this is translating into higher sales prices, he says. Nugent says sales revenue increases between 1.5 per cent and 2 per cent where LDI is in place. “By giving that surety to the consumer, [LDI] becomes a profit centre, rather than a cost on the project,” he says. The future of LDI But LDI is not available to everyone. “We only offer the product to builders and developers who have an ability to deliver a project positively,” Nugent says. “We have said no to certain providers. Ninety-something per cent of developers and builders are doing great work with the right mindset but it is that small percentage that produce the negative products that impact all of us.” ▲ MA Financial managing director Drew Bowie: assurances offered by LDI benefit the industry and consumers. Thompson says that the market is eager to use the product. “However at present, LDI is elective and has not formally replaced the strata bond,” Thompson says. “The development industry is essentially waiting for certainty from the Building Commission that LDI can be used instead of the strata bond, which would be beneficial to the entire industry in our opinion,” he says. “Essentially this would indicate to buyers that those developers using LDI were the most credible in the industry.” The NSW Government is consulting with the industry on decennial liability insurance, says Building Commissioner James Sherrard. “We support the introduction of Decennial Liability Insurance (DLI), as a ‘gold standard’ product providing ten years of defect coverage for homeowners,” he says. “We’re working closely with a range of insurers to bring their products to market, who are currently undergoing an important due diligence process.” “Once DLI has been launched and had time to mature, the NSW Government will consider whether it is appropriate to make it mandatory for new developments.” Despite this regulatory challenge, Thompson thinks LDI will and should become the norm. “It would also be an additional barrier to entry for those developers and builders we do not want in the industry,” he says. ▲ Inca Group is planning to take on LDI for all its future projects. Bowie says that while the question of mandating LDI is in the hands of the government currently, MA Financial welcomes a “speedy resolution”. “If regulatory changes are required to help insurers assess and price their risk then that needs to be reviewed with urgency so that all the advancements to planning approval processes can be converted into funded development commencements quickly and efficiently,” he says. Nugent says that it’s up to the industry to push the initiative. “The only way forward to manage this proposition is for those good builders and developers to drive the process.”

Why Latent Defects Insurance is Moving from Niche to Mainstream

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