Building indemnity insurance scheme under review

Rising costs and the threat of more collapsing builders have prompted a major review by the state government to make sure homeowners are safe.

The collapse of Felmeri Group left dozens of incomplete homes across the state, including at the Wallaroo Shores development, pictured.

Increasing the cap on insurance payouts and improving consumer protections when builders go bust are among changes being considered as a part of a major review of the state’s building indemnity insurance (BII) scheme.

Issues raised from recent insolvencies, including the $30m collapse of Felmeri Group, are being considered as part of the first review of the scheme since 2013, when the former Weatherill government was forced to step in and underwrite it following the exit of commercial providers from the market.

Rising building costs and the threat of more insolvencies in the construction sector have in part prompted the review being led by the offices of Treasurer Stephen Mullighan and Consumer and Business Affairs Minister Andrea Michaels.

The state government is working with industry groups the Housing Industry Association (HIA) and Master Builders Association (MBA) to develop the scope and design of a public consultation process, which is expected to start in October.

Mr Mullighan said the review would be informed by recent insolvencies in the construction industry and consider ways to better protect consumers when their builder collapses.

“While the number of South Australian builders that have gone into administration is comparatively small when compared to other jurisdictions, the impacts on affected individual consumers nonetheless may be substantial,” he said.

Felmeri Group had failed to organise insurance for several of its projects in the lead up to the company’s collapse in May.

“Reviewing the way builders’ indemnity insurance is provided will help ensure people have a robust safety net in place when building a home.”

Since 2013 the South Australian Government Financing Authority has underwritten BII through a reinsurance agreement with provider QBE.

In May a second provider, financial services firm Assetinsure, entered the South Australian market, which requires builders to take out BII for all projects that require development ­approval and have a value of $12,000 or more. Under current laws homeowners are able to claim up to $150,000 if a builder becomes insolvent.

When Felmeri Group collapsed in May, it was revealed that insurance had not been secured for up to 20 of the home builder’s 120 affected customers, and the state government stepped in to arrange retrospective cover for uninsured customers.

While the government said it was too early to calculate its financial exposure to the Felmeri collapse, and the potential impact on future premium increases, Ms Michaels said the review would consider “what protections should be afforded to consumers at various stages of the build process, what can be done to better support consumers when their builder has failed to comply with the legislation governing BII, and in cases of substandard work”.

MBA SA chief executive Will Frogley said it was time to consider increasing the $12,000 and $150,000 financial thresholds in light of surging building costs, while also looking at ways to improve the way annual insurance caps are applied to individual builders.

“The other thing is the feedback we're getting is that administration and reporting requirements have gone through the roof,” he said.

“Builders are being required to provide what they say is an extreme level of financial reporting and any reporting, we think, shouldn’t be more than on an annual basis.”

HIA SA executive director Stephen Knight welcomed the review but said it was important to support housing affordability by limiting any potential premium increases.

Consumer and Business Services will also commence an education campaign for consumers, explaining how customers can check that BII is in place and providing information on consumer protection requirements.

The BII scheme generated a loss of $22.7m across 2019 and 2020 following a spate of builder collapses that resulted in a hike in premiums.

The scheme has since generated a profit of $15.8m over the course of 2021 and 2022, with the rate of insolvencies in South Australia on the decline in the wake of Covid-19.

BII has generated a total loss of $15.7m since 2013-14.