Victoria’s domestic building insurance scheme “fell short” when handling complex claims, especially for homeowners whose properties had defects, an investigation has found.

The Victorian Ombudsman examined the scheme after the collapse of Porter Davis in March 2023 – the biggest builder insolvency in the state’s history.

Its review of claims handling processes before and after the collapse found issues including poor communication with homeowners on case progress; lack of transparency around the use of volume builders; and a tendency to view homeowners as roadblocks to processing claims.

The scheme’s manager at that time, the Victorian Managed Insurance Authority, had taken steps to prepare for large loss events but made a “significant misjudgment” on Porter Davis.

“As the insurer, VMIA had monitored Porter Davis in the years before its collapse, including a review of its financial position, completed in November 2022,” says the ombudsman’s report, tabled in parliament today.

“One consideration VMIA had was that acting prematurely may have caused Porter Davis reputational damage, worsening its financial position.

“However, given Porter Davis collapsed just four months later, it seems that the review finding that Porter Davis was ‘moving back towards profitability’ was a significant misjudgment.”

While most Porter Davis homeowners did not suffer unreasonable delays in claims processing, the people who did endured serious personal and financial hardship.

“Homeowners expected to be protected if their builder died, disappeared or became insolvent.

“For many homeowners this was true, but for complex cases VMIA fell short on meeting this purpose of the policy.”

The ombudsman found examples of VMIA staff dismissing homeowners’ concerns and using inappropriate language to describe them.

“While the domestic building insurance team was doing its very best to resolve claims as quickly and effectively as possible, unfortunately, the combined stressors of an intense workload, high expectations and difficult behaviour from some homeowners impacted the attitude that some VMIA staff had towards homeowners.”

The ombudsman says the need for reform in the domestic building insurance system was recognised in recent legislative changes.

“However, more needs to be done to improve domestic building insurance management processes, communication with homeowners and overall system transparency. Creating a better dispute system is one way the government … can improve the service for Victorians.”

The state government has implemented reforms including the establishment of the Building and Plumbing Commission to manage the domestic building insurance scheme.

“The biggest change is that the ... scheme will move from being ‘last resort’ to being ‘first resort’,” the report says. “However, this change will not take effect until 2026.”

See the report here.