Domestic Building Insurance

VMIA's role

VMIA has offered DBI since 2010 under a series of directions from the government. Under the current direction, VMIA must:

• at its discretion, provide DBI to builders that satisfy underwriting terms and conditions set by VMIA
• set underwriting terms and conditions so as to recoup the full costs of providing DBI
• handle all DBI claims under its issued policies.

While builders can also purchase DBI from some private insurers, VMIA is by far the largest provider. VMIA provides DBI to around 15,000 residential builders in Victoria.

Claims handling

The flowchart in Figure 2 shows the typical process for a DBI claim. 

Between 2019–20 and 2023–24, VMIA received 14,342 DBI claims. As of October 2024, it had:

• fully accepted 24 per cent 
• partially accepted 42 per cent
• denied 32 per cent, with the rest to be assessed. 

Note that these figures are not equivalent to the proportion of homeowners who have accepted claims, as individual homeowners may make several claims against a policy. Also, a claim that is originally denied or partially accepted may later be fully accepted when resubmitted if circumstances have changed.

For denied claims, the most common reasons VMIA found were:

• the homeowner had suffered no loss (23 per cent)
• the builder was not insolvent (21 per cent) 
• the item in dispute was not a structural defect (21 per cent).

For accepted claims, the median settlement amount was $34,942 and the mean was $61,698.

Underwriting criteria

When a builder applies for DBI, VMIA assesses the risk of a potential claim, considering factors such as the builder's financial assets and project history. This assessment is known as underwriting. 

An insurer's underwriting guidelines should include information to help decide if it approves a policy or not, based on the price set for it to cover its risk. The guidelines may have different levels of acceptable risk based on the size of the policy that the builder has requested (the eligibility limit). 

VMIA’s underwriting guidelines clearly state:

• its risk appetite for particular eligibility limits and the process for setting them
• the criteria for risk assessment.

We found no evidence that VMIA does not meet the standards recommended by APRA in its Prudential Practice Guide GPG 240 – Insurance Risk.

VMIA's underwriting guidelines meet APRA's standards as its risk management framework includes methods for monitoring compliance, such as:

• internal audits
• reviews by senior officers. 

VMIA's underwriting guidelines say that the initial assessment by a risk analyst will be reviewed by a manager before VMIA issues a letter of eligibility to the builder. If the analyst recommends VMIA should decline the application, VMIA's builder assessment committee will review the decision.

A 2019 report by the Essential Services Commission found:

• VMIA's underwriting standards were appropriate in determining the risk of builders
• its process was broadly in line with a commercial insurer. 

A 2024 internal audit completed for VMIA found 'thorough detail' in VMIA's guidelines to guide staff through DBI eligibility processes. 

In response to one of the audit's recommendations, VMIA introduced a further quality assurance process. A DBI contract specialist will review 25 randomly sampled applications each quarter to assess if they comply with underwriting guidelines. This goes beyond APRA's standards. 

VMIA's first quality assurance report found that some officers had not properly confirmed builders' registration details. VMIA then updated the guidelines and no such issue was found in the next report.

The DBI product's financial position

DBI is a ‘long-tail’ insurance scheme, as homeowners can make claims up to 6 years after the contract is completed for the insured work. This means there is a risk to the insurer that the pool of premium funds may not cover claims when they are lodged. An insurer sets aside money, also known as a 'claims reserve', to cover future claims based on an estimate of what those claims will eventually cost.

Since VMIA began issuing DBI in 2010, the product has not recouped its costs. 

The ministerial direction initially required VMIA to set underwriting terms and conditions to meet commercial criteria. It gave VMIA the discretion to charge builders an additional loading in order to recoup the taxpayer-funded costs of providing DBI. 

In 2016, the ministerial direction changed to require VMIA to set underwriting terms and conditions to recoup full cost of the DBI product and associated services. 

VMIA's DBI revenue and costs are compared below.

Note: Under the AASB 1023 General Insurance Contracts accounting standard, the claims reserve and insurance claims payments include VMIA's best estimate of expected claims payments. This includes a risk margin that has a 75 per cent probability that the claims reserve will be sufficient.

Mainly due to the PDH insolvency, DBI claims rose sharply in 2022–23 and remained relatively high in 2023–24. This led to the DBI product's financial position deteriorating more sharply. VMIA recouped its costs on a cash basis until 2022–23, when its deficit grew beyond the $399.5 million held as a claims reserve.

Figure 3: VMIA's DBI financial position from 2009–10 to 2023–24 ($ million) and number of insurance claims

Source: VAGO, based on data from VMIA.

In July 2024, following an independent actuarial review, VMIA's board increased premiums by 65 per cent for single-dwelling policies and multi-unit policies. VMIA's own analysis showed that this increase would return the DBI product to surplus within 4 years.

After the PDH insolvency, VMIA engaged an external advisory panel on an ongoing basis to assess the financial viability of the top 20 volume builders. It did this to help identify warning signs of future insolvencies. These measures, plus its premium rises, have been put in place following consultation with DTF on managing the DBI product's financial sustainability. 

Despite these actions, risks to DBI's financial sustainability remain. In 2024, as part of VAGO's audit of VMIA's financial report for the 2023–24 year, we found that while VMIA's actuarial consultants had reasonably estimated VMIA's DBI liability using appropriate methodology, pressures on the building sector have made the future liability estimate less certain. 

VMIA also commissioned a peer review of its actuarial arrangements in November 2023. It accepted the review's recommendation to consider a higher risk of builder insolvency in the near future. 

Claims handling guidelines

VMIA's claims handling guidelines show the process VMIA officers must follow when assessing claims. The guidelines include:

• clearly defined delegations of authority
• consistent procedures for claims settlement
• clear criteria for accepting or rejecting claims.

The guidelines also note that, following an initial assessment by an officer, the assessment must be approved by another officer with delegated financial authority. And if a homeowner requests an internal VMIA review of a decision, a different portfolio lead must review the case. This meets APRA's standards and VMIA has told us that it follows these guidelines.

Unlike for its underwriting process, VMIA does not have an ongoing quality assurance program to check officers comply with its claims handling processes. A quality assurance program may provide more assurance that officers are following appropriate processes. 

VMIA commissioned an internal audit on its claims management controls, which was delivered in March 2023. The audit found strong controls were in place, noting a high degree of efficiency and consistency in VMIA's claims management processes. 

However, it recommended that VMIA consider establishing surveys with homeowners to see how they experience the claims process. VMIA has not issued these. 

Measuring homeowner satisfaction would provide useful information as part of a broader performance reporting framework.

Timeliness of claims processing

VMIA includes expected claims processing timelines in its internal service standards (see Figure 4). It uses these to decide how it allocates its resources. But VMIA told us that these timelines have not been established to set standards for performance reporting or to give to homeowners. 

Figure 4: VMIA's internal service standards for claims processing timelines

Source: VAGO, based on VMIA's internal service standards.

In its DBI policy, VMIA says that if it does not make a liability decision within 90 days of receiving the claim, the claim is automatically accepted. 

VMIA told us that many actions beyond its control can impact overall case timelines.

Using its internal service standards as benchmarks, since 2020–21, VMIA has: 

• met its liability decision service standard in 99.8 per cent of cases
• met its liability decision to quantum decision service standard in 46 per cent of cases
• met its claim receipt to quantum decision service standard in 65 per cent of cases.

VMIA's claims handling system includes markers within each claim that show if it has met its internal service standards. 

Aside from its 90-day liability decision standard, VMIA does not formally track its performance against its timelines. And it does not inform customers of indicative timelines for key steps in the claims process.

VMIA notes that it cannot fully control timelines for the claims process, as this depends on prompt information from homeowners, reports from inspectors and quotes from builders. However, VMIA is missing opportunities to better inform homeowners about when they might typically expect information on matters that are highly important to them.

Communicating with homeowners

When VMIA communicates with homeowners about liability decisions, it clearly explains reasons for accepting or rejecting a claim. 

For quantum decisions, VMIA tells the homeowner which builder has been selected to do the work to satisfy the claim (if necessary) and the disbursed amount. VMIA also tells the homeowner they have the right to lodge an appeal with VCAT. 

However, VMIA does not fully inform the homeowner about its process for calculating the homeowner's loss and the quote it then selects to satisfy the claim. 

Additional information about VMIA's process could help the homeowner understand VMIA's decision.

Dispute resolution

The Australian Government Treasury's 2015 Key Practices for Industry-based Customer Dispute Resolution and the Victorian Ombudsman's 2016 Good Practice Guide to Handling Complaints list key practices to make sure there is procedural fairness in industry-based dispute resolution. They note that agencies should give complainants:

• information on other options for review at any stage 
• timely, ongoing communication on the investigation's progress 
• the reason for any decision in writing.

VMIA has an informal internal review process. It says that additional documentation is necessary for the review and that it is unlikely to reach a different decision if the review is based on the same information as the original claim. 

However, in its letters to homeowners about liability decisions and quantum decisions, VMIA does not tell the homeowner about the option for an internal review. It only mentions the homeowner's right to appeal the decision with VCAT.

For homeowners who have requested a review, VMIA does not give the estimated timeframe for the internal investigation. In its letter on the outcome of the review, VMIA explains the reasoning for its final decision and tells the homeowner about their right to appeal with VCAT.

VMIA’s claims handling guidelines say that a portfolio lead will examine the documentation for the review and will confirm their findings with the head of claims. But the guidelines do not contain any instructions to guide the portfolio lead to do this.

Better communication with homeowners about the internal review process and more formalised internal guidance on doing a review may help VMIA:

• effectively manage homeowner expectations
• support better decision-making.

VBA regulates the building industry

VBA regulates Victoria's building industry. It is a portfolio agency of DTP. 

VBA supports builders and building surveyors to comply with their obligations, including in relation to DBI. To do this, VBA:

• provides information and guidance
• registers and issues licences to eligible builders
• does compliance and enforcement activity.

Role of surveyors 

Builders must purchase DBI on behalf of homeowners for projects valued at more than $16,000. 

Building surveyors are required to make sure that builders have a valid DBI policy before they issue a building permit. 

The surveyor must be satisfied that the named builder on the building permit is identical to:

• the named builder on the domestic building contract
• the certificate of insurance from the insurer.

CAV provides information on building contracts

DGS oversees the consumer affairs portfolio, which includes CAV. 

CAV provides information about requirements for domestic building contracts, including any insurance requirements. CAV also manages a building information line that gives advice to building owners and tradespeople on their rights and responsibilities when building or renovating.

VBA's compliance and enforcement strategy

VBA's compliance and enforcement policy outlines its approach to regulating the building industry. 

VBA makes sure compliance and enforcement happens through:

• its registration and licensing processes
• providing guidance and education to practitioners
• taking enforcement actions
• publishing the outcomes of its compliance and enforcement activity. 

VBA does not check DBI is in place when issuing building permit numbers

Building surveyors cannot issue a building permit without a building permit number. VBA issues building permit numbers. VBA issues over 90,000 building permit numbers each year. 

VBA requires a range of information from surveyors before it will provide a building permit number. But VBA does not ask surveyors for information or assurance that a DBI policy exists. 

VBA relies on surveyors following their obligations to check that DBI is in place. VBA then monitors surveyors' compliance through audits and inspections. 

VBA told us that it considered capturing DBI policy numbers in its initial design of the permit application system in 2019, but this was made less of a priority.

VBA should strengthen controls to validate DBI is in place before issuing a building permit number to surveyors.

Oversight of practitioners 

To monitor if building surveyors comply with their obligation to check DBI is in place when issuing building permits, VBA regularly audits documentation related to issued building permits.

As part of the audit, VBA checks surveyors have made sure the DBI policy details match those in the building permit, such as the builder's and homeowner's name. VBA showed us examples where building permit details did not match DBI policy details. 

VBA told us it sent letters to the audited surveyors to make sure they provided the necessary information or fixed any mistakes. 

But VBA does not know how many instances of DBI noncompliance have been found since the audit program started, because it does not track this.

VBA inspects active building sites through its Proactive Inspection Program. This program identifies examples of noncompliance before occupancy. When VBA inspects building sites, it also checks that DBI is in place for building works valued at more than $16,000. 

In 2023–24, VBA inspected 8.18 per cent of all permits issued.

VBA carries out disciplinary actions against builders who do not comply with DBI requirements. In 2023–24, VBA took disciplinary actions against 3 builders that had taken deposits or started building work without getting DBI.

VBA also oversees buildings through builders' registration and licensing processes. VBA prompts builders to provide proof they are eligible for DBI cover:

• every year
• when they register or renew their licences.

VBA also publishes reports that summarise all audit activities and investigations. It publishes these on its website twice a year. 

Investigations

VBA told us that it applies a risk-based approach when it investigates registered builders. VBA identifies high-risk builders by looking at data from the Australian Business Register, VBA’s complaints portal, registration and inspection databases and media sources. 

A recent VBA investigation found a builder used falsified DBI certificates. This led to a $250,000 fine and the builder being disqualified. 

Specific DBI audit after PDH insolvency

In June 2023, after PDH's insolvency, VBA began a DBI compliance audit program that targeted the top volume builders. 

The VBA audit asked builders to provide DBI policy details and documentation to check if builders received deposits before securing DBI. VBA's progress report on this audit program in December 2023 shows that of the 14 audited volume builders, all of them demonstrated examples of taking deposits before the DBI start date. 

VBA is considering further disciplinary actions or investigations. VBA told us that these audits are still underway as it takes time to gather evidence for formal disciplinary actions. Its annual report says that it aims to complete 40 DBI audits in 2024–25.

Practitioners' awareness

VBA reminds builders and surveyors about their DBI obligations through practice notes and communications. After PDH's insolvency, VBA:

• sent out newsletters
• updated their website
• posted on social media.

VBA provides educational webinars in its Practitioner Education Series to share knowledge with surveyors. But this material does not include DBI-related content. We found no evidence that VBA monitors surveyors' awareness on DBI or insurance requirements in relation to building permits.

Agencies' coordination

Multiple agencies are involved in promoting compliance with DBI requirements, so effective communication between them is important. 

VBA has multiple inter-agency information-sharing agreements with CAV, VMIA and other professional bodies. 

In April 2023, following PDH's insolvency, the DBI interdepartmental committee was set up to share information and coordinate actions about DBI. Members included representatives from DPC, DTF, DTP, DGS, VMIA, CAV and VBA. 

The DBI interdepartmental committee met weekly from 19 April 2023 to 9 August 2023. It coordinated a DBI-related communications strategy and delivered the PDH compensation fund. 

In August 2023, the DBI interdepartmental committee was brought under another building reform interdepartmental committee that involved DPC, DTF, DTP and DGS. 

CAV's website update

On its website, CAV provides guidance on building work including:

• an example building contract
• checklists to remind them to check DBI is in place for projects of more than $16,000. 

Following PDH's insolvency, CAV updated their website to provide more information on DBI and links to other regulators' websites.

Joint communications campaign

After PDH's insolvency, VBA led a joint communications campaign with CAV and VMIA. It targeted builders, surveyors and homeowners to raise awareness of:

• DBI requirements 
• builders' and surveyors' roles
• VBA's role in regulating surveyors' and builders' compliance. 

CAV and VBA used emails, newsletters and social media posts to deliver these key messages to builders, surveyors and homeowners.

Compensation fund 

More than 500 PDH customers lost their building deposits as PDH did not take out DBI for them. In April 2023, the government offered a one-off relief payment for PDH customers who were left without insurance. DGS worked with VMIA to check claims and deliver compensation. 

This payment was later extended to customers of other builders. By the end of 2023–24, a total of $19.3 million was paid to 864 applicants.

Improvement since the expert panel reviews

In December 2019, the government appointed an expert panel to review how it regulates the building sector. The panel membership includes the Commissioner for Better Regulation (now VBA's CEO) and other experts from the building industry, law and consumer protection sectors. 

The expert panel review was done in 3 stages. 

In 2023, the panel released 2 reports that identified and advised the government on early initiatives that can be done to improve the building system. The panel's terms of reference say that the stage 3 report will consider recommendations for a new building act. The report is yet to be published.

Key recommendations made in the first 2 stages of the review led to legislative amendments and system improvements. Those related to DBI were:

• amending the Building Act 1993 to broaden the circumstances in which VBA can enter into information-sharing arrangements with one or more agencies
• establishing a building consumer information website managed by DTP.

New offences to enforce DBI compliance

Following PDH's insolvency, the Domestic Building Contracts Act 1995 and the Building Act 1993 were amended to:

• insert 2 new offences penalising builders who demand or receive money under a major domestic building contract if they have not made sure that DBI is in place
• provide powers for VBA to compel a person to provide information if they are suspected of committing an offence in relation to DBI.

The new legislation was enacted on 27 February 2024.

Prior to this amendment, builders were only considered breaching legislation if they:

• carried out building work under a major domestic building contract without required insurance
• claimed to be insured when they were not
• demanded a deposit of more than 5 per cent of any contract price above $20,000 or 10 per cent of any contract price below $20,000 before starting any work under the contract.

The amendment made clear that if a builder demands money for contracted building work without obtaining DBI, it is an offence. It seeks to make sure that homeowners and their money are protected. 

The amendment allows VBA to take stronger actions against builders who do not comply with DBI requirements. 

Addressing gaps in legislation

When introducing the Building Legislation Amendment (Domestic Building Insurance New Offences) Bill 2023, the Minister for Planning acknowledged that PDH's insolvency revealed another issue. This is where builders deliberately use multiple agreements to avoid the $16,000 threshold at which DBI is mandatory. 

In response, in September 2024 DGS completed a review of the Domestic Building Contracts Act 1995, which sets out the rules around contract deposits and payments. DGS is now considering feedback received during the review and it plans to provide further updates on its website when the legislative reform has progressed.