The minimum indemnity for compulsory home warranty (or Part 6) insurance has remained the same since private Home Warranty Insurance was introduced in 1997.
The minimum has remained at $200,000 per dwelling, but this is about to change.
Home warranty insurance provides home owners with an indemnity for claims made 6 years after work has been completed for structural defects and 2 years for the non-structural variety. Projects consisting of 4 or more stories have been exempt from home warranty insurance since 2004.
There has been no change in the minimum indemnity for 10 years though building costs have increased substantially. This has raised concerns regarding home warranty insurances' ability to adequately protect consumers from the financial consequences of defective or incomplete residential building work.
The collapse of HIH precipitated a home warranty insurance crisis in New South Wales and Victoria. Policies became very expensive, difficult to secure and greatly restricted the amount of residential work that a builder could do in any given year. Insurers required builders to provide them with bank guarantees or mortgages over their personal assets to indemnify them for any possible claims. Most residential building projects were delayed. Some could not proceed at all.
However, over the last 2 years, there has been a loosening of the home warranty insurance market. The number of insurers has increased to 7, premiums have reduced and policies have become readily available.
In the latest development, the Minister for Commerce has announced an increase of the compulsory minimum home warranty insurance cover to $300,000, effective from 1 March 2007. In addition, the $500.00 excess on all claims will be abolished.
According to the Minister's press release, these changes are intended to give a:
"greater comfort and security to home owners and ensure piece of mind with families faced with an uncompleted home and a bankrupt builder. Home owners facing the worst case scenario that having to demolition and re-build a house – will be adequately covered by their policy."
Premiums on new policies are likely to rise. Hopefully the increased competition between insurers will keep a lid on those prices.
Although the new minimum provides improved protection for consumers it does nothing to make the indemnity more accessible. Consumers must still bankrupt offending contractors (unless they have died or cannot be located) before a claim will be paid. This is an enormous burden on the beneficiaries of the policies, predominantly mums and dads. This 'insurance of last resort' has proven very profitable for those writing the policies and it will keep the premiums down, but it does not serve the consumer protection imperative and stands to discourage bona fide claimants. by Ourania Konstantinidis & Rob Riddell
t (02) 9931 4940
t (02) 9931 4865
t (02) 9931 4841
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