When Siddarth Prakash and Chetna Mahadik's builder went bust and fled the country in 2020, they were confident Victoria's state-run domestic building insurer would guide them through the stressful situation. 

But they say it turned into a nightmare.

Their inner-city dream home remains unfinished, five years after work began.

"It's been very, very difficult," Mr Prakash told the ABC inside the building.

"It's been very trying and it's really taken me to places which I had never expected to go just for making an insurance claim and building an ordinary family home."

The Victorian Managed Insurance Authority (VMIA) provides domestic building insurance in Victoria and is available when a builder goes bust.

It covers the completion of the project as well as paying for some defective remediation works.

Multiple families have accused the state run-building insurer of forcing them to accept the lowest-cost replacement builders causing more distress, and leaving some homeowners hundreds of thousands of dollars out of pocket to rectify defects.

They have also told Stateline their dealings with the VMIA have been worse than the collapse of their builder.

Homeowners reservations about cheap quotes

A constant complaint is that the VMIA forces claimants to go with the lowest quotes to finish the job, or forego their insurance payout.

These quotes, families say, don't always cover all the defects left behind by insolvent builders.

When Mr Prakash and Ms Mahadik made a claim with the VMIA, they sourced their own quotes from builders to finish the work.

The VMIA also sourced a builder, who provided a quote that was $250,000 less than quotes obtained by the family.

In addition, the VMIA's preferred builder said the work could be completed within the couple's original budget so no insurance payout was needed.

Mr Prakash says the builders he approached completed thorough audits of his house and found major defects with the slab and building frame.

But, he says the VMIA's preferred builder, only spent 30 minutes onsite.

"They had a miracle quote, a miracle quote that was extremely low which claimed they could deliver the world,'' Mr Prakash said.

The couple had no option but to sign on with the builder — despite their reservations — with the VMIA offering to superintend the works.

But as work progressed more defects were uncovered, which the VMIA did cover, before the builder eventually terminated the contract.

The VMIA said homeowners did not have to use its preferred builder, but it had the right to assess a claim and only pay the amount its nominated builder would have charged.

It warned homeowners to be careful before signing with another builder whose capacity and capability to do the work had not been assessed by the VMIA.

Families claim VMIA used intimidation tactics 

The authority has been overwhelmed in recent years with the collapse of major builders, inundating it with thousands of claims.

Just last week it announced it was hiking premiums by more than 50 per cent.

Many families were too afraid to speak on the record over concerns it would affect their claims with the VMIA, but they complained that the authority was unnecessarily combative and used lawyers to intimidate stressed families.

Mr Prakash and Ms Mahadik, who are living with Mr Prakash's parents and their own children, have had to borrow hundreds of thousands of dollars to keep their dream alive.

They feel the situation could have been avoided had the VMIA listened to their concerns about the cheap quote.

"We felt that the process disadvantages a builder who had done a forensic examination of the place, identified all the defects and gave an honest quote to complete," Mr Prakesh said.

"That was set aside by the VMIA, who went with an alternative builder,'' he said.

The VMIA and the family are in dispute over a claim to cover the new builder to finish the job.

One proposed settlement includes a non-disparagement agreement.

The VMIA declined to comment on individual cases.

"VMIA is focused on completing homes for claimants as quickly as possible to the standard they signed up for with their original builder,'' a spokesperson said.

Ms Mahadik hails from India where trust in government is low, but when she moved to Australia she said she had faith in local authorities.

"I feel like this has really impacted my trust in government," she said.

"When government says that they're there for people, I no longer know whether they really are or not.''

Lost money and heartbreak

Other families have also told the ABC that when Porter Davis went bust, they were forced to use Simonds Homes to finish their homes because it was the cheapest quote.

Following the collapse, Jared and Shontel Ford's incomplete home was riddled with defects, including warped walls and uneven floorboards.

When the ABC visited, Ms Ford was able to bounce on the floor of the master bedroom like a trampoline.

The ABC has seen itemised quotes the Fords obtained from builders to complete and rectify their home which are pages long.

Stateline has also seen the VMIA's offer, a two-page quote from a volume builder, which is $150,000 cheaper.

Mr Ford said the VMIA's offer does not cover all the defects — the couple are legally challenging the VMIA but feel let down by the insurance process, saying it had been adversarial throughout.

The impasse is costing the family money and heartache.

"What's the point of having insurance if they're not going to help you when you're in trouble? Isn't that the whole point?'' Ms Ford said.

Frustrating the couple is the fact the VMIA's quote wasn't as detailed.

Volume builders were also able to get access to Porter Davis's database, making it easier to desktop quotes.

It's cold comfort to the Ford's who are losing money while their dream home sits incomplete and uninhabitable.

The VMIA said it was "successfully helping a record number of claimants complete their homes by partnering with established large builders with proven capability and capacity who can use economies of scale to leverage their existing agreements with trades and suppliers".

Since July 1, 2023, VMIA said it had resolved more than 4,000 domestic building claims and made offers worth more than $218 million in total.

Shadow Housing Minister Evan Mulholland said there needed to be more transparency and an effort to treat distressed homebuilders with respect.

He also hit out at the use of lawyers and secretive settlements.

"The best form of medicine for this government and the VMIA should actually be transparency, accountability, honesty, and people coming forward telling their experience."

A government spokesperson said it was the state's expectations that the VMIA continued "to prioritise getting homeowners into their homes as quickly as possible using builders that can be trusted to deliver".

The government said parties were not required to sign a non-disparagement clause, but they are sometimes used to encourage good faith negotiations to resolve complex matters.

It said if anyone felt they had not been dealt with appropriately they could lodge a formal complaint with VCAT.

But distressed families say VCAT is plagued by its own delays, unaffordable and creates further distress for families.