The Supreme Court of New South Wales (Stevenson J) has clarified the strict statutory framework governing “last resort” home building warranty insurance under the Home Building Act 1989 (NSW) (HBA). The case highlights the critical importance of timely notification and the role that a builder’s insolvency plays in determining coverage under statutory insurance. The decision also underscores the necessity for strict compliance with statutory timeframes under sections 92(5), 103BB and 103BC, and the limited scope for judicial intervention where those conditions are not met.

The plaintiff, The Owners – Strata Plan No. 81376 (Owners Corporation), manages a 98-unit residential development in Parklea. The development was constructed by Dyldam Developments Pty Ltd (Builder) for Amaline Properties Pty Ltd (Developer). Lumley Insurance's predecessor (Insurer) issued a Residential Building Insurance Policy (policy) in October 2006 in respect of the development. The certifier issued an occupation certificate on 4 September 2008.

Defects in the works were identified. The Owners Corporation commenced proceedings against the Builder and the Developer in 2013, alleging breach of the statutory warranties (statutory warranties) implied in the building contract by section 18B of the HBA.

Settlement agreements were concluded in 2017 and 2021 respectively, obliging the Builder to complete identified rectification work. The Owners Corporation contended that the rectification work performed by the Builder was incomplete and defective. Both the Builder and the Developer went into administration in 2022.

The Owners Corporation sought indemnity under the policy for building defects, claiming approximately $13 million.

The policy was a "last resort” policy, responding only to “Insured Events” occurring during the "Period of Insurance", and only where the Builder was insolvent, had died, or had disappeared.

The Court was asked to determine three separate questions:

• Whether a 2012 letter constituted a valid claim under the policy;

• Whether a January 2022 letter was a timely claim;

• Whether a June 2022 letter was a timely claim.

Each question was answered “no.”

Policy construction: “Insured Event” and insolvency as a condition precedent

The Court found that the policy only responded to loss resulting from an "Insured Event" occurring during the "Period of Insurance".

An “Insured Event” included breach of statutory warranty only if the Builder was insolvent. The Court held that, as such, insolvency was a condition precedent to cover. It also held that there was no standalone cover for legal or expert costs, unless an "Insured Event" had occurred.

“There was no cover unless and until the Builder became insolvent; consistently with the nature of the cover provided by the Policy as being ‘last resort’ cover.” – Stevenson J

The 2012 letter: not a claim, but a valid notification

The Owners Corporation relied on a 2012 letter from its solicitor to the Insurer in support of its claim for indemnity for legal and expert costs. However, the 2012 letter was held not to be a valid claim, because the Builder was not yet insolvent.

The letter was considered a valid notification under section 103BB(3) of the HBA, preserving the right to make a delayed claim in relation to the loss notified in that letter after the policy’s "Period of Insurance", provided that an "Insured Event" had occurred and the claim was made within the long-stop 10-year limit under section 103BC.

The 2022 letters: out of time

There was no dispute that the 2022 letters from the Owners Corporation constituted a claim for indemnity under the policy. The Court found that the occupation certificate issued in September 2008 marked the completion of work under section 3C of the HBA. Therefore, the 10-year limitation period under section 103BC(1) expired in September 2018. The 2022 claims were made after this period and were thus out of time.

Effect of section 92(5) of the HBA: no extension of the long-stop period

The Owners Corporation contended that rectification work under the settlement agreements extended the limitation period under section 92(5), which provides:

“[A] contract of insurance that is in force in compliance with this section in relation to residential building work (the original work) done by a person extends to any residential building work done by the person by way of rectification of the original work."

The Court rejected the contention.

In terms of the policy, claims could be made during the "Period of Insurance", i.e. six years after issue of the occupation certificate in September 2008. But the effect of the Owners Corporation’s solicitor’s letter of 21 February 2012 was, by reason of section 103BB of the HBA, to permit the Owners Corporation to make a claim “after the period of insurance”.

The Court held that the natural and ordinary meaning of the words used in section 92(5) is that, for so long as the relevant contract of insurance is “in force”, it will “extend” to rectification work carried out by the same “person” who carried out the “original work”, but would no longer do so once the contract of insurance was no longer “in force”. Thus, once the 10-year long-stop expired, the policy ceased to be in force, and section 92(5) could not revive it.

“It would have the alarming effect of potentially extending the long stop limitation period in section 103BC, and thus the term during which an insurer under a policy required by the HBA was on risk, for up to 10 years and up to something that might approach 20 years. Indeed, had the Builder not fallen into insolvency, as long as it performed work every six years, the Policy would respond indefinitely: an outcome that Parliament sought to avoid by enacting section 103BC.” – Stevenson J

• Policy wording is critical: This case underscores the critical importance of precise policy wording in home warranty insurance contracts. Subtle differences in drafting can significantly affect coverage and the interpretation of key terms such as "Insured Event" and "Period of Insurance".

• Builder insolvency is often a condition precedent to coverage under “last resort” policies.

• Notification within the policy period is essential; even if insolvency occurs later.

• Section 92(5) of the HBA does not restart the 10-year limitation period; it only extends coverage to rectification work while the policy is still in force.

• Early notification under section 103BB(3) can preserve rights - but only within the outer limit of section 103BC.

• Occupation certificates are not easily invalidated: even if issued in breach of statutory conditions, they are not necessarily nullities.

• Insurers have solid authority to resist late claims based on statutory bars alone.

Should you wish to discuss this matter further or explore similar issues, please feel free to contact our Property Insurance and Recoveries team.