Developer Wins VCAT Dispute Over Insurance Coverage for Building Defects

In a recent decision on 1 November 2024, the Victorian Civil and Administrative Tribunal (VCAT) ruled that Enpresionante Pty Ltd, a development company, was entitled to insurance coverage from the Victorian Managed Insurance Authority (VMIA) for $569,115.57 in rectification costs related to defective building work.

Background: Faulty Construction Leads to Financial Strain

Enpresionante Pty Ltd had initially contracted Ridgecon Pty Ltd, a construction company directed by Muhammad Bardan, to build three townhouses in Balwyn, Victoria. Ridgecon was expected to deliver a completed project in line with contractual standards, but issues quickly arose. The building work was riddled with defects and left incomplete, resulting in a development that required extensive rectification to meet acceptable standards.

Due to the mounting issues, Enpresionante’s financier, Australian Securities Limited (ASL), intervened in March 2017. Acting as mortgagee in possession, ASL took over the project to prevent further losses. They hired a new contractor, Blue Pearl Group Pty Ltd, to rectify the defective work and complete the project. ASL incurred over $831,000 in repair and completion costs, including $270,280 for incomplete works and $549,620 for defective work. When ASL initially sought indemnity under VMIA’s insurance policy, VMIA denied liability, claiming that ASL’s losses were not directly caused by defective work but by financial obligations unrelated to construction quality.

Legal Battle Over Insurance Coverage

Following VMIA’s denial of the claim in February 2021, ASL pursued a legal pathway to recover rectification costs. Initially, ASL sought compensation from Ridgecon directly, obtaining a judgment in 2019 for $700,300.61 in damages. However, Ridgecon went into liquidation shortly after, limiting ASL’s options to recover costs directly from the builder. In response, ASL turned to VMIA, arguing that the costs incurred for rectifying Ridgecon’s defective work should be covered under the insurance policy. VMIA, however, maintained that ASL was not eligible for indemnity, as they were not the original policyholder and, in VMIA’s view, their losses stemmed from their financial agreement with Enpresionante rather than defective building work.

Reinstating Enpresionante Pty Ltd to Strengthen the Claim

With limited options, ASL facilitated the reinstatement of Enpresionante Pty Ltd, which had been deregistered in 2018. By bringing the original policyholder back into the picture, ASL aimed to re-establish Enpresionante’s eligibility for a claim under the VMIA insurance policy. On 26 October 2020, the company was reinstated through court orders, enabling it to lodge its own claims against VMIA for the defective work.

In November 2020, Enpresionante’s liquidator formally lodged claims with VMIA, seeking $569,115.57 to cover the costs incurred by ASL for rectifying Ridgecon’s defective work. VMIA denied the claim once again, asserting that these costs did not directly result from defective work alone, but rather from ASL’s financial involvement and decision to rectify the project.

VCAT’s Ruling: Recognising Developer’s Right to Indemnity

In its ruling, VCAT determined that VMIA’s decision to deny coverage was unfounded. The Tribunal found that the losses faced by Enpresionante, including the increased financial burden from ASL’s intervention, directly stemmed from Ridgecon’s defective work. VCAT ruled that VMIA’s interpretation of the insurance policy was too narrow, and that it conflicted with the broader intentions of the Domestic Building Insurance Ministerial Order, which requires coverage for “loss or damage resulting from defective work.”

This ruling emphasised that the increased loan costs faced by Enpresionante were a direct result of defective work, not merely a financial consequence of ASL’s decision to rectify the development. VCAT determined that VMIA was liable to indemnify Enpresionante Pty Ltd for the rectification costs associated with defective work performed by Ridgecon Pty Ltd based on the rectification costs of $569,115.57, with additional submissions on interest and costs to be provided by 24 November 2024.

Builder’s Background: Muhammad Bardan’s Troubled History

The case also highlights the questionable practices of Ridgecon Pty Ltd and its director, Muhammad Bardan. Ridgecon went into liquidation amidst mounting legal and financial troubles. Bardan himself has a track record that includes multiple disciplinary actions by the Victorian Building Authority (VBA) for failing to maintain regulatory standards across his companies.

In July 2019, Bardan was involved in a serious workplace safety incident. At a Ridgecon construction site in Camberwell, two workers fell from an unprotected balcony under his direction, resulting in severe injuries to one worker. Bardan was subsequently fined $20,000 for failing to ensure adequate safety measures.

Further, Bardan’s other company, Bena Construction Pty Ltd, also faced scrutiny. Its registration was suspended in March 2021 due to the absence of a nominee director, and Bardan was penalised $10,000 for failing to notify the VBA within the required time frame.