Can Mortgagees Claim on Builders Warranty Insurance?

Australian Securities Limited v Victorian Managed Insurance Authority (Building and Property) [2022] VCAT 759

On 14 July 2022, Senior Member Farrelly in the Victorian Civil and Administrative Tribunal (VCAT) found that the benefit of domestic building warranty insurance in Victoria does not extend to a mortgagee in possession.

Background

On  9 October 2015, Australian Securities Limited (ASL), Enpresionante Pty Ltd (Owner) and Ridgecon Pty Ltd (Builder) entered into a tripartite agreement in relation to the construction of three townhouses. The Builder had obtained all of the required insurance policies for each of the three townhouses from the Victorian Managed Insurance Authority (VMIA). Following the commencement of construction, ASL issued the Builder with default notices following breaches of the Facility Agreement, leaving the works on the properties incomplete and defective.

ASL took possession of the land and engaged Blue Pearl Group Pty Ltd (Blue Pearl) as the replacement builder to complete the construction of the townhouses. The townhouses were later sold at a loss by ASL. ASL successfully claimed that loss in the County Court of Victoria and obtained a judgement for $700,300.61. As a result, the Builder was forced into liquidation and ASL submitted claims on the domestic building warranty insurance policies issued by the VMIA. The VMIA rejected the insurance claims for several reasons, including that:

1. ASL was not a party to the contract or named on the certificate of insurance;
2. ASL was not an owner for the time being of the property/building;
3. the builder did not discharge the obligation to effect insurance to ASL and no application was made to VMIA to extend the insurances coverage to ASL; and
4. ASL was not entitled to the third-party benefits provided in sections 20 and 48 of the Insurance Contracts Act 1984.

ASL appealed the VMIA’s decision to VCAT.

The Tribunal’s Decision

Senior Member Farrelly considered the facts of the case, with particular emphasis on the meaning of clauses 8 and 11 of the Domestic Building Insurance Ministerial Order (Ministerial Order).

Clause 8 provides for the indemnification of a ‘building owner’ in particular circumstances including, but not limited to, loss or damage resulting from incomplete building works and a breach of the implied statutory warranties in section 8 of the Domestic Building Contracts Act 1995 (DBC Act).

Clause 11 of the Ministerial Order provides that builders warranty insurance must extend:

1. to each person who becomes entitled to the benefit of any of the statutory warranties in section 8 of the DBC Act; and
2. to the owner for the time being of the building or land in respect of which the domestic building work is or was being carried out.

The Tribunal focused on the definition of a building owner. A ‘building owner’ is defined in Schedule 1 of the Ministerial Order as:

‘the person for whom domestic building work is being, or is about to be, carried out;’

Senior Member Farrelly found that ASL, in their capacity as a mortgagee in possession, did not fall within the definition of a ‘building owner’ for the purposes of the Ministerial Order. He held that the building works were carried out by the Builder for the Owner. It followed that ASL, as the financier and the mortgagee in possession of the properties, was never the owner of the townhouses. Whilst it was established that ASL had the benefit of implied statutory warranties given by Blue Pearl (as the subsequent builder engaged by ASL), it did not ‘obtain the benefit of the warranties implied by section 8 of the DBC Act into the building contract between the builder and the owner’ at first instance. It followed from this analysis that Senior Member Farrelly agreed with the arguments made by the VMIA in rejecting the claims made by ASL.

Take Aways

The Tribunal held that one of the objects of the DBC Act is to protect the consumer and that mortgagees in possession are not entitled to indemnity under domestic building insurance. In order for a mortgagee in possession to obtain the benefits of domestic building warranty insurance, the insurance must name the mortgagee as the party for whom building work is to be carried out. This may be impracticable given the usual arrangements in place as between the owner, the builder and the financier (who enjoys step in rights under the tripartite agreement and who is not ordinarily the owner of the land or the person for whom the works are carried out).

Observations

We can only speculate as to whether a possible submission that, by virtue of the terms of the mortgage, ASL was the ‘owner’, was fully argued in this case.

Queries

If you have any questions about this article or would like us to review any of your trust arrangements, please get in touch with the authors or anyone from our Building & Construction team.

Disclaimer

This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.