The insurance industry is preparing for a shift in demand as latent defects insurance (LDI) gains traction in Australia’s construction and property sectors.
LDI, which insures against structural damage caused by undetected construction flaws, differs from traditional liability coverage by offering a no-fault, first-party claim process. Instead of determining negligence, policyholders can claim by proving that the damage stems from a design, material, or workmanship defect that emerged after the building’s completion.
With the New South Wales government targeting a 2028 deadline to mandate LDI on residential projects, industry players are now assessing implications for underwriting, client advisory, and compliance services.
Lockton, one of the intermediaries with access to recently introduced market capacity, has stressed the importance of arranging this coverage before construction begins. Once on-site work has commenced, insurers typically will not accept risk.
“For the first time in years, we’re seeing meaningful capacity enter the local market, and we’re excited to bring that opportunity to our clients,” said Phil Clauzel, client director at Lockton.
He added that this is a chance to align policy structures with emerging regulations and evolving risk appetites.
“Proactively building a strong claims history will strengthen your organisation’s position if legal mandates are enforced,” Clauzel said.
Typical LDI policies cover the full reinstatement value of the property and extend for 10 to 12 years. Developers, owners, lenders, and even tenants can be included as insured parties, and the coverage can be transferred upon the sale of the property – adding flexibility to capital transactions and supporting balance sheet resilience.
In the Australian Capital Territory, proposed legislation under the Property Developers Act 2024 could introduce similar LDI requirements.
The Property Council of Australia has raised concerns over the policy’s cost impact, suggesting that new home prices could rise by between $15,000 and $35,000.
“The ACT is in danger of navigating a housing crisis with one hand tied behind its back. Regulatory changes like this, introduced without a ready market or complementary reforms to liability, could make things worse,” said Ashlee Berry, executive director of the Property Council’s ACT and Capital Region division, during testimony to the Legislative Assembly’s insurance cost inquiry.
Berry also urged the ACT government to overhaul its liability regime, criticising the prevailing model where final responsibility falls disproportionately on developers.
“The current ‘last person standing’ model puts all the burden on the final party – typically the developer – regardless of where responsibility lies,” she said. “It’s outdated, it’s unfair, and it drives up costs for everyone involved – especially homebuyers.”
These developments come amid growing scrutiny of the broader planning and construction environment.
At the 2025 Sydney Property Think Tank, economists, developers, and legal advisers examined how delays, cost inflation, and labour shortages are impacting project delivery and insurance exposure.
Nerida Conisbee, chief economist at Ray White, highlighted a mismatch between housing demand and delivery in NSW – with fewer than 46,000 homes built last year against a target of 57,000.
“Either house prices must rise to meet construction costs, or we need to find a way to build cheaper,” she said.
From an insurance perspective, these structural issues are influencing claims forecasts, premium pricing, and underwriting thresholds.
Lockton reported that global carriers and MGAs are re-entering the Australian property insurance space, leading to greater choice for insureds. Many organisations are achieving more favourable terms by adjusting deductibles, layering placements, or reconfiguring their insurer panels.
