Building insurance flagged for improvement five months before Porter Davis collapse

Home building insurance was identified as a key issue in the construction crisis by an Andrews government working group five months before the collapse of Porter Davis left customers uninsured and out of pocket.

The group was brought together last year to find short-term ways to resolve spiralling costs for home builders and buyers that were crippling the sector.

Tristan McSwain, who has been excluded from government support for Porter Davis customers, at his empty block in Cranbourne.Credit: Eddie Jim

The working group, chaired by the Department of Treasury and Finance and made up of government, union, industry and consumer representatives, delivered Minister for Regulatory Reform Danny Pearson a 14-point plan in October.

Documents released to the state opposition under freedom of information and obtained by The Age show it recommended the government advocate for banks to be more flexible with loans to builders, improve communication to help customers understand supply chain issues and better prepare builders for price rises and disputes.

It also called for more transparency around domestic building insurance, including training for regulators on how to check the insurance status of a home-build project and the option to make that function available to customers.

A government spokesman said progress was made on all 14 recommendations, which the October briefing said should be acted on quickly to “deliver a positive impact within three to 12 months”.

Minister for Regulatory Reform Danny Pearson.Credit: Luis Ascui

But the plans around building insurance were not finalised by March, when 560 families were left uninsured as Porter Davis collapsed.

A Victorian Managed Insurance Authority spokesperson said regulators had been given access to a platform to look up projects and check on insurance policy information, and it aimed to have it more widely accessible to consumers in four to eight weeks.

Porter Davis customers unprotected by insurance, for which the company should have paid, have complained the insurance system was opaque, difficult to navigate and allowed them to be misled.

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.

But customers such as Tristan McSwain, who paid a smaller 3 per cent deposit at the tender stage, were excluded from the compensation scheme when it opened two weeks ago. Only those who paid the full 5 per cent were eligible.

“From our point of view, we can’t understand why we’re not covered,” McSwain told The Age.

Consumer Affairs Victoria says builders must obtain insurance for all residential builds valued at more than $16,000 before taking a customer’s deposit or “any other money”.

McSwain faces a loss of more than $20,000 that Porter Davis received to build his four-bedroom family home on an empty lot in Cranbourne in Melbourne’s south-east.

Short-term ideas agreed to by the working group

1. Victorian government advocate to the Commonwealth to request the Tax Office slow down aggressive debt recovery from building businesses for a further period.
2. Victorian government advocate to banks to be more flexible over the short term on finance for builders.
3. Victorian government advocate to ASIC that its policies and communications clarify that business debt restructure will not automatically trigger concerns about insolvent trading.
4. Create a domestic building advocacy service in Victoria.
5. Communication/campaign strategy for professional advisers to reduce misconceptions around lawful debt management and suspension of building licences.
6. Communication/campaign strategy for consumers to: assist consumers to understand the supply chain issues causing genuine problems for builders; and minimise risk of builders taking advantage of information asymmetry.
7. Communication/campaign strategy for builders aimed at disseminating information to assist small and medium businesses to manage supply shortages, price rises, and deal effectively with disputes.
8. Increase transparency of data on building disputes moderated by Domestic Building Dispute Resolution Victoria to better inform the market and assist with consumer advocacy services.
9. Transparency of domestic building insurance information. Improve effectiveness of Victorian Managed Insurance Authority’s existing digital platform by: offering training for regulators with current access to the platform (eg Consumer Affairs Victoria, Victorian Building Authority) on how to search project information; and,= exploring feasibility to expand access to platform for broader audience (eg to consumers).
10. Educational campaign and/or communication material to raise awareness of the Building and Construction Industry Security Payment Act 2002 and increase clarity on when and how to use it.
11. Continue to prioritise work to co-ordinate state and local government approval processes to expedite availability of local extractive materials.
12. Allow apprentices to work in areas affected by bushfires under remote supervision.
13. Consult further with the building industry on the time frame for implementation of any new regulations and allow for an appropriate transition period.
14. Homes Victoria will demonstrate best practice within Victorian government and the broader market in making on-time payments to builders, improving flexibility around milestone payments and engaging builders on pricing adjustments.

“Every time we go to the block now, it’s this kick in the guts reminder that we’ve been screwed over,” he said.

“We may not be able to build. And if we do, definitely we can’t build what we were hoping to build.”

The government has so far declined to step in for eight other customers left without the necessary insurance by smaller builder Hallbury Homes, which also collapsed this year.

A spokesman said the government was investigating longer-term reforms on insurance to protect customers.

Opposition home ownership spokeswoman Jess Wilson said the Andrews government was asleep at the wheel and home buyers and builders were paying the price.

“Residential builders tell us on a daily basis that the rapid increase in construction costs is crippling the industry and making it harder to deliver new homes in an affordable and timely way,” she said.

Concern for the sector is so significant that Victorian Managed Insurance Authority chief executive Andrew Davies last week said insurance premiums would need to increase.

The working group also called in October for the government to work with the Tax Office, banks and the Australian Securities and Investments Commission to be flexible with struggling builders.

“The government progressed all short-term ideas put forward by the working group,” a spokesman said. “We’ve consistently engaged with the building industry to understand issues and risks, seeking input from a range of sources.”

A full package of advice, including longer-term ideas to have an impact beyond 12 months, was due to be provided to Pearson in December, the briefing shows.

In April, The Sunday Age revealed Pearson had also received a briefing, in July last year, warning him of a wave of insolvencies in the sector and options to reduce risk for consumers.

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