Victoria's building reforms and their impact on the domestic building insurance market

The Victorian Government continues to implement its Building Reform Program, not only supporting its Housing Statement (announced in September 2023), but bringing the State broadly into line with New South Wales and Queensland with new measures to address longstanding issues with serious defects, design, and financial instability in the domestic building sector.

In the first tranche of reform, the Building Legislation Amendment (Buyer Protections) Act 2025 (Vic) strengthens the regulatory powers of the Building and Plumbing Commission (BPC) (formerly the Victorian Building Authority), enhances consumer protections, improves standards, and implements a new model of domestic building insurance.

Some (mainly administrative) provisions of the Act commenced on 1 July this year, with the major substantive provisions (outlined below) set to commence on 1 July 2026 (unless otherwise proclaimed).

"Last-resort" domestic building insurance

As a first stage of reform, the Act transfers the Victorian Managed Insurance Authority's (VMIA) domestic building insurance functions to the BPC. At the same time, the Act says all mandatory domestic building insurance (including professional indemnity, performance bonds, guarantees, indemnities, public liability, etc.) must be obtained solely from the BPC. Essentially, this closes the domestic building insurance market to general insurers for mandatory insurance products, but leaves the door open to general insurers if the Government later reduces the scope of mandatory insurance (of course, general insurers may be less inclined to enter a market that can change very quickly).

To facilitate this, an insurance account will be established by the Building Act 1993 (Vic) into which payments for domestic building insurance purposes will be made, and from which payments for domestic building insurance liabilities will be paid.

This insurance remains on a "last-resort" basis, meaning those claiming against the insurance must first go through a dispute resolution process with the builder, and only access such insurance if the builder is dead, insolvent, or has disappeared.

"First-resort" domestic building insurance: Statutory Insurance Scheme (SIS)

A second stage of reform, and arguably the centrepiece of the Act, will be the creation of a Statutory Insurance Scheme (SIS) for residential developments of three storeys or less. For these developments, the SIS will provide domestic building insurance on a "first-resort" basis for contracts valued at $20,000 or more, but developers, builders, and prescribed persons are not entitled to assistance under the scheme. The insurance premium will be payable by the builder on behalf of the building owner.

For an owner to be entitled to make a claim, they must have suffered loss in connection with incomplete, defective, or non-compliant building work. If the SIS claim is successful, they are then entitled to rectification or completion of defective or incomplete works or payment of compensation.

This marks a significant departure from the existing process, in which a building owner must progress through a dispute resolution process and can only claim insurance if the builder is dead, insolvent, or has disappeared.

Because the SIS is a government monopoly, administered by the BPC, the BPC will be able to reduce the number of payouts by using its new coercive powers to order builders to rectify work. If work is not rectified, the BPC can take disciplinary action and seek to recover costs from a builder for the rectification works. The BPC can tender for works covered by the SIS if the builder fails to rectify the works.

The benefits of such a scheme are obvious: the Government guarantees insurance products, can reduce the number (or at least value) of payments by instead ordering builders to rectify work, and recover costs from builders where necessary.

A similar scheme has been operating in Queensland relatively successfully and building owners have benefited from a greater level of protection. However, the price for greater protection is often higher premiums from more claims being made and the insurer providing greater support to consumers when dealing with builders. This is particularly an issue because SIS premiums are required by the Act to be at a level that makes the scheme sustainable.

Rectification orders

To support the sustainability of this new insurance regime, and to address issues with defective works not being rectified, the Act empowers the BPC to order rectification of incomplete, defective, and non-compliant building works. Such orders can be made against developers and those who carried out the works. This includes registered domestic or commercial builders, builders without building practitioner registration, subcontractors, and others responsible for the works.

Importantly, these rectification orders are not confined to any one property type, but may be made for any building class at any time during construction and within the 10-year period following the issue of an occupancy permit.

Those against whom an order is made cannot seek a stay to the order, and must comply within the specified timeframes. If they don't, there could be restrictions on the sale, occupancy, or registration of plans of subdivision for apartments.

Developer bond scheme as an interim measure for larger developments

The Victorian Government is planning to expand the scope of the SIS in future to also capture residential developments of more than three storeys. Until that time, as an interim measure, the Act creates a developer bond scheme. This scheme requires developers of residential developments of more than three storeys to secure a bond of 2% against the cost of building work. This bond will fund defect rectification and must be lodged prior to an occupancy permit application being made.

It will be the responsibility of the BPC to approve access to the bond. A bond may be in the form of a bank guarantee, a bond issued by an authorised insurer (approved by the BPC), or another form prescribed by the regulations (if any).

This scheme essentially emulates the implementation of the Strata Building Bond and Inspection Scheme in New South Wales. In that State the scheme, albeit no panacea, has arguably reduced legal disputes over defects in large residential developments, while improving rectification and boosting consumer confidence.

Inspection regime before and after occupancy permits

Alongside creating the developer bond scheme, the Act empowers the BPC to conduct inspections prior to an occupancy permit application and after an occupancy permit is issued.

For developments with a construction period of more than six months, developers must notify the BPC six to 12 months in advance of when they plan to apply for an occupancy permit. For developments with a construction period of less than six months, developers must notify the BPC 30 days before applying for an occupancy permit.

After notification is made, the BPC will conduct an inspection of the building. If any serious defects are identified and a rectification order is subsequently issued, the developer will be restrained from applying for an occupancy permit, registering a plan of subdivision, and completing an off-the-plan sale until the rectification order has been complied with. Additionally, purchasers will be able to rescind a contract if an occupancy permit is not issued or a developer bond not paid.

Once an occupancy permit is issued, the BPC will conduct an inspection 15 to 18 months afterwards. If required, a second inspection will occur 21 to 24 months after an occupancy permit is issued. If defects are identified in the first inspection but not rectified by the second, then the owners corporation may apply to the BPC to obtain access to the bond to rectify identified defects.

Inspections will be conducted by building assessors nominated by the developer and approved by the owners corporation or appointed by the BPC. They must act impartially and are empowered by the Act to enter premises to perform inspections.

The next stages of regulation for the Victorian building industry

The Victorian Government will introduce additional prescriptions both for the proposed SIS and builders. This includes minimum financial requirements for builders and the terms of insurance offered by the BPC (including scope of cover, period of insurance, extensions, and any optional cover).

Further reforms are in the pipeline, including the Domestic Building Contracts Amendment Act 2025 (Vic), which recently passed the Victorian Parliament and that seeks to amend the regulatory framework for domestic building contracts. However, the Victorian Government has not yet outlined a clear timeline as to further reforms, and it can be expected this will be a multi-year process, with the Act's provisions not fully commencing until mid-next year.