Building a new home or doing a significant renovation could find somewhat dearer if the NSW Government requires people to take out insurance or a guarantee to cover things going wrong.
Sydney Renovation Builders going bust or shutting up shop, new homes left bare, deposits lost and flaws in buildings are problems this proposal is intended to remedy.
Fair Trading NSW asserts this sort of cover, builder’s guarantee, will protect home owners from insufficient construction and poor builders.
It is all part of a proposed major overhaul of the Building Act to raise standards and performance in the construction industry.
However current builder’s warranty guarantees from trade organisations are costing significantly less than 1 percent, the organisations say.
MBIE has stopped short of suggesting the insurance/guarantee ought to be compulsory, but says people would have to”actively” opt out.
Consenting authorities like councils are forking out too large a share of the claims costs for defective building work, MBIE says, and are often the only party left to compensate homeowners.
They paid out $1 billion in ten years, 2008-18, to repay building disputes.
Who provides this sort of cover now?
Both of NSWs primary construction trade organisations, the Registered Master Builders Association and NSW Certified Builders, offer 10-year guarantees, insuring the work of the members.
The cover comprises loss of deposits paid to a builder, structural flaws such as weathertightness and non-completion of this construct.
The large general insurance companies in Sydney have shied away from this form of insurance. Just 1 insurer supplies it, Stamford Insurance.
Licensed Builders and Registered Master Builders charge less because of their 10-year guarantees than MBIE indicates but will disclose their exact price.
Licensed Builders”Halo” 10-year warranty is closer to 0.5 percent of the expense of the construct than 1 percent, while the Master Build 10-year warranty is between 0.5 per cent and 1 per cent.
Grant Florence, chief executive of Accredited Builders, said Halo was distinct from Master Build because Halo was independently managed and underwritten by a syndicate of Lloyds of London. It was significant to the underwriter that members of Accredited Builders needed to have a trade qualification to be members.
Registered Master Builders Association chief executive David Kelly said it was sensible for people building a new house to take out insurance or a guarantee.
“It is somewhat like general insurance. You do not expect your house to burn down or there to be an earthquake but when it happens you will need something in the background.”
Master contractors had an independent board which oversaw their warranty scheme and independent actuaries advising how much cash the board required to set aside to pay for the warranties. It compared its promise to Reserve Bank requirements for insurance companies to guarantee that the scheme was solvent.
Key questions were how much danger did the Government expect suppliers of insurance and promises to take on. If it had been too high then the price of the guarantee or insurance would rise appreciably, Kelly said.
Is it mandatory?
Florence of Certified Builders believes so. Homes were often Australia’s largest investment and they deserved to have confidence in the builders that they picked and insurance supported that. The leaky houses issues had hurt the public’s confidence in the construction industry.
If it wasn’t mandatory Florence said unscrupulous contractors, ones possibly who couldn’t get insurance, would convince homeowners that they didn’t need it.
Florence stated the insurance issue was connected to whether or how much liability agreeing authorities like councils should have when building went wrong and councils had issued codes of compliance for those buildings.
He held the controversial view that councils should not have any liability. He said the model was incorrect. Councils were assessing that building consents were followed to safeguard their risks and obligations.
“But I think they all do is just causing large inefficiencies in the business. The cost to the business around the councils with that liability is enormous.”
“I think if we wish to produce a step change in this we will need to be bold… and consider managing that risk another manner.”
The insurance industry had a role to take in sharing the risk and builders could take more risk themselves, Florence said.
Kelly said a concern was that this sort of insurance cover was viewed as a”silver bullet” to handle a fighting consents system. Councils were calling for the liability to be eliminated out of them when things went wrong in construction and called for insurance or guarantees to be mandatory.
“We believe that’s somewhat simplistic We encourage guarantees absolutely but do not see that as the comprehensive solution,” Kelly said.
Will insures in Sydney provide this sort of guarantee or insurance?
Insurance council chief executive Tim Grafton stated in principle that the council’s insurance members supported the proposals for insurance to pay for building a new home and renovations over $30,000.
But they wouldn’t be rushing in to provide that since insurers considered the building industry as too risky.
This form of insurance was a”long tail” in which a policy holder paid one fee upfront but the warranty or pay lasted 10 years.
The construction sector had seen a lot of failures and even the largest and best had lost millions of dollars in the past couple of years. There was a real question mark around how long construction companies continued.
There was low quality and substandard products that had led to fines and prosecution. At the same time, there was widespread non-compliance with the installation of passive fire protection systems and the installation of non-structural seismic restraints.
There was also the issue of”phoenix contractors” who set up a company and if they were getting into trouble they folded it up and put up as a new firm.
The authorities wanted the authorities to implement the reforms first and the insurance industry have a two-year monitoring period to find out how successful they had been in de-risking the building industry.
“There is not much point trying to mandate it today because you won’t get anyone rushing in to provide it,” Grafton said.
Is this sort of insurance needed?
.Research done for MBIE shows 40 percent of new houses and significant renovations needed a warranty or insurance.
.Research estimated about 2.5 percent – one in 40 – residential building consents led to disputes settled in court or by dispute resolution procedures.
.Consenting government paid out $1 billion to settle building disputes in the last ten decades, 2008-18.
.Of that one-third – $332 million- insured other parties’ flaws since they were”unavailable” to cover their share so the bill was paid by ratepayers.
.In Canada and Australia, many provinces and nations had made this insurance compulsory.