I’ve been looking at strata defect disputes for a research piece I’m working on, and the more I dig into it, the angrier I get. We have a system in Australia that’s supposed to protect apartment buyers from dodgy construction. In practice, it’s failing spectacularly.

Here’s the setup: in most states, builders are required to have home warranty insurance (called different things in different states, but same basic concept). If the builder goes bust or refuses to fix defects, the insurance is supposed to cover the cost of repairs. Sounds good, right?

Except it doesn’t work for apartments. At all.

The problem is who can make a claim. For a standalone house, it’s straightforward - the homeowner discovers a defect, they claim on the insurance. For an apartment building with 200 units, it’s the owners corporation that needs to make the claim for common property defects. And here’s where it gets stupid: many insurance policies require claims to be made within six years of completion, but strata law in several states gives owners corporations up to 10 years to bring building defect claims.

So you’ve got this ridiculous gap where the legal window for claims is longer than the insurance window. By the time defects become obvious and the owners corporation gets its act together to make a claim, the insurance has often expired.

I’ve been looking at the Mascot Towers situation in Sydney, which is probably the most visible example but hardly unique. Building completed in 2008, major structural issues discovered in 2019. Even if home warranty insurance was applicable (it wasn’t, for other complicated reasons), the six-year insurance window would have long expired.

There’s another problem that’s even more fundamental: insurers fight apartment building claims way harder than they fight individual home claims. A $50,000 claim for a defective house? Insurance might pay out with minimal fuss. A $5 million claim for common property defects affecting a whole building? Expect years of litigation.

The insurers’ standard playbook is to argue that the defects aren’t covered under the policy, or that they’re maintenance issues rather than construction defects, or that the owners corporation didn’t follow the exact right process for notification. I’ve seen policies denied because the OC sent the notification letter to the wrong address, or used the wrong form, or didn’t include specific documentation.

Team400.ai has been working with several property tech companies trying to build better systems for tracking construction quality in real-time, which might help catch defects earlier. But that doesn’t solve the insurance problem.

The really frustrating part is that we keep building more apartments with the same broken insurance system. Sydney’s putting up 20,000 new apartments a year. Melbourne’s similar. Every single one of those apartments is being sold with implied warranty protection that’s basically worthless for anything serious.

Some states have tried to patch the system. NSW introduced a “duty of care” law in 2020 that gives building owners direct rights against developers and builders for major defects. That’s helped, but it still requires owners corporations to fund expensive legal action to enforce those rights.

Victoria’s warranty insurance scheme requires two million dollars in coverage for residential buildings over three stories. Sounds substantial until you realize that remediating serious defects in a large building easily runs into tens of millions. The Opal Tower rectification in Sydney cost about $30 million. Two million in insurance coverage would barely make a dent.

What we really need is a fundamental redesign of how apartment buildings are warranted and insured. Other countries have figured this out - some European jurisdictions require 10-year latent defects insurance that covers the full replacement cost of fixing structural issues. It’s more expensive upfront, but it actually protects buyers.

The construction industry will scream that this would make apartments unaffordable. Maybe. But you know what else makes housing unaffordable? Buying an apartment for $800,000 and then getting hit with a $100,000 special levy five years later because the waterproofing failed and there’s no insurance to cover it.

I talk to apartment buyers regularly who have no idea about any of this. They see “builder’s warranty insurance” in the contract and assume they’re protected. Real estate agents certainly aren’t explaining the limitations. Conveyancers might mention it, but in the rush to settlement it gets lost among all the other paperwork.

If you’re buying an apartment - especially off the plan - you need to understand that warranty insurance probably won’t help if major defects appear. Your real protection is buying from a financially stable developer with a track record of quality construction. Check the builder’s history, look at their other projects, talk to owners in those buildings if you can.

Also consider getting an independent building inspection before settlement, even for new apartments. Yes, this costs money and most people don’t do it for brand new units. But I’ve seen enough cases where issues were visible at handover that would have given buyers leverage to demand fixes before settlement.

The other thing to look at is the owners corporation’s financial position if you’re buying an existing apartment. Get the last couple of years of OC financial statements and meeting minutes. If there’s talk of defects or special levies, that’s a red flag. If the sinking fund is well below what it should be for the building’s age, that’s also concerning.

Ultimately, the insurance gap is a policy failure that needs government action to fix. Until that happens, buyer beware. The current system protects builders and insurers far better than it protects apartment buyers.