The backstory
The Pafburn case (opens a new window) revolved around a residential development in North Sydney, where the owners' corporation sued the builder and developer for construction defects.
The central issue was whether the statutory duty of care under the Design and Building Practitioners Act 2020 (NSW) (DBPA) allowed for proportionate liability, enabling parties to apportion fault among various contributors.
The High Court ruled that the duty of care under the DBPA is non-delegable, meaning that developers and builders cannot transfer liability to subcontractors or other parties.
This decision effectively ended the proportionate liability regime in NSW for construction defects, holding developers and builders fully accountable for defects, regardless of subcontractor involvement.
Implications for developers
The Pafburn decision has significant implications across property development and construction.
Increased liability exposure: Developers and builders are now fully liable for construction defects, and fault cannot be apportioned.
Insurance market strain: The shift away from proportionate liability has increased the risk profile for developers and builders, leading to higher insurance premiums and stricter underwriting criteria.
Regulatory response: In response to these types of challenges, the NSW government has mandated LDI for certain building projects, aiming to protect property owners and investors from the financial impact of latent defects.
Why Latent Defects Insurance (LDI) is now essential
LDI provides coverage for significant structural defects that become apparent after construction is completed, typically covering the cost of repairs and associated expenses.
With the High Court's decision eliminating proportionate liability, developers, builders, and investors face increased financial risk from potential defects.
LDI offers a safety net, ensuring that property owners are protected and that developers and investors can manage their risk exposure effectively.
As one of the brokers with exclusive access to this much-needed LDI capacity, Lockton is pleased to help bring a critical insurance option to the market at a pivotal time for the industry.
Strategic considerations for Developers, Owners, and Investors
For Property developers, owners and investors, the Pafburn case and the subsequent regulatory changes necessitate a strategic approach:
Risk management: Incorporate LDI into project planning and budgeting to help mitigate potential financial exposure from latent defects.
Due diligence: Ensure that all parties involved in construction are aware of their non-delegable duties and the implications of the Pafburn decision.
Insurance planning: LDI is designed to provide coverage for hidden structural defects in a building that become apparent after construction is completed, and it offers a no-fault, first-party insurance solution, meaning claims can be made without proving negligence. Work closely with insurance provider/s and your broker to understand the scope of coverage and any exclusions or limitations.
Regulatory compliance: Although not yet mandatory across all states, interest in LDI is growing to enhance consumer protection. In 2025, long-awaited capacity entered the Australia market. This arrived at a crucial time, with the NSW Government’s announcement seeking to make this coverage compulsory by 2028. Stay informed about NSW's evolving regulations regarding LDI to ensure compliance and avoid potential legal challenges.
Bringing it all together
The Pafburn case marks a pivotal moment for developers and construction companies, highlighting the necessity for comprehensive Latent Defects Insurance.
As NSW mandates LDI for certain projects, developers, owners, and investors must adapt to this new landscape by integrating LDI into their risk management strategies.
Proactively addressing these changes can help safeguard investments and ensure long-term project viability in an increasingly complex regulatory environment.
Lockton’s LDI offering (opens a new window) is complemented by our in-house team of specialist brokers who bring a wealth of expertise in placing large and complex LDI programs.
With a global perspective, paired with a keen understanding of local requirements, we’re able to deliver tailored solutions that are both effective and commercially astute.
Learn more
To learn more, visit our Latent Defects Insurance (opens a new window) page, which provides an overview of LDI, FAQs and regulatory expectations. Alternatively, contact us for more information.
Contents of this publication are provided for general information only. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. Lockton arranges the insurance and is not the insurer. Any insurance cover is subject to the terms, conditions and exclusions of the policy. For full details refer to the specific policy wordings and/or Product Disclosure Statements available from Lockton on request.
