Government ignored advice to expand building insurance cover

Victoria’s former minister Danny Pearson rejected advice on how the government could expand its state-backed home building insurance scheme to protect consumers whose builders abandon their projects but aren’t declared insolvent.

Documents released under freedom of information and obtained by The Age reveal that last July, then-housing minister Pearson asked for advice from state bureaucrats on ways to reduce the risks for customers after the Master Builders Association warned of trouble in the sector.

Danny Pearson asked for advice about expanding protections for home builders but didn’t proceed with the changes.Credit: Luis Enrique Ascui

In response, Pearson asked the Department of Treasury and Finance for a forecast on insolvency trends and ways to “mitigate the risk of adverse impacts” on consumers in situations where builders walk away from contracts.

While the Department predicted insolvencies would “normalise from early to mid-2023”, based on advice from the Victorian Managed Insurance Authority, it presented a range of options to Pearson to boost protections for home builders, such as expanding the current insurance scheme to include abandonment cover.

Customers are currently unable to make a claim under domestic building insurance – also called builders warranty insurance – when builders work away from contracts, without declaring insolvency, and would instead be directed to a dispute resolution service or VCAT.

The briefing note, released to the state opposition, said that while about 98 per cent of the 1500 to 2000 claims lodged annually were due to insolvency, introducing an “abandonment trigger” could help as many as 570 customers a year who are currently unable to make claims.

But no legislative changes were introduced during Minister Pearson’s time as housing minister to reduce the risks faced by home builders.

When Pearson’s office was asked why the government didn’t proceed with expanded cover on Tuesday, a government spokesperson said work was progressing “to investigate potential future reforms relating to how insurance protects consumers”.

“We’ve consistently engaged with the building industry to understand issues and risks, seeking input from a range of sources,” the spokesperson said.

While the Department advised Pearson that creating the abandonment trigger could “address the risks” for consumers, it also warned that the reform could force the Victorian Managed Insurance Authority to hike up premiums “making competing products more attractive”.

Thousands of Porter Davis customers are awaiting news on builders to take over their home construction.Credit: Eamon Gallagher

The state-backed Victorian Managed Insurance Authority (VMIA) is the primary provider of cover if a builder dies or becomes insolvent.

Consumer Affairs Victoria says builders must obtain insurance for all residential builds valued at more than $16,000 before taking customers’ deposits or any other money.

The Department said that the most effective way to introduce any abandonment cover would be to make the VMIA the sole provider of building insurance as well as clearly outlining a legal definition of “abandonment”, highlighting current challenges in proving a builder had disappeared.

Liberal frontbencher Jess Wilson accused the government of failing to take meaningful action to protect consumersCredit: Eamon Gallagher

Opposition housing spokeswoman Jess Wilson said the latest documents reveal the Andrews government had again “failed to take meaningful action” to protect consumers.

“Victorian home buyers and home builders continue to pay the price for the incompetence of the Andrews government,” Wilson said.

“As a consequence, Victorian home buyers and home builders are losing confidence in the sector and dreams of homeownership are slipping further out of reach.”

The briefing notes were presented to the Minister in July and September 2022, months before residential construction company Porter Davis went into liquidation, leaving 1700 unfinished homes across Victoria and Queensland in late March.

Another 779 customers who had signed a contract and paid a deposit were also affected, while 410 employees were made redundant.

In April, Premier Daniel Andrews announced a $15 million rescue package for customers who lost their deposits if they had paid “up to 5 per cent” of the total cost of the build.

Earlier this month, Department Deputy Secretary, Chris Barrett, told a parliamentary committee that the VMIA could receive as many as 4000 claims driven by the collapse of residential construction company Porter Davis, which went into liquidation leaving 1700 unfinished homes across Victoria and Queensland.

A spokesperson for the VMIA told The Age that so far in 2023, the number of building company insolvencies is lower than it was during pre-COVID years.

“The Porter Davis collapse has meant we have a larger number of claims than we have seen previously,” the spokesperson said.

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