Australia: NSW Fair Trading's Consultation Paper "A re-write of the Home Building Act 1989" - Home warranty insurance issues
Building and Construction Update

Although not an element of the re-write of the Home Building Act, the underwriting arrangements for home warranty insurance will change significantly from 1 July 2010. The existing arrangement, i.e. underwritten by the private sector, is about to end as there is no longer a critical mass of insurers interested in supporting it.

Lumley and CGU ceased issuing project certificates on 31 December 2009. The reduction in competition has resulted in a premium gouge with some builders reporting recent premiums of 10% of the contract value. Further, the remaining insurers seem reluctant to indemnify work to a level equivalent to their predecessors. All of course in the context of housing supply in New South Wales falling short of underlying demand by approximately 20,000 dwellings per annum.

Home warranty insurance has certainly taken a battering over the years. But it seems nothing will put it down. It reminds one of the Black Knight in Monty Python's Holy Grail. Unfortunately, unlike the movie, it is no laughing matter.

The spin of "major structural reform" and the re-write of the Home Building Act seems just that. Builders and consumers should prepare to be disappointed. New underwriting arrangements and amendments that tinker around the edges side-step the fundamental issues, namely the hardship that arises out of a last resort system and the brake this form of insurance places upon the roll out of sufficient residential work to meet the underlying demand. There is really nothing in the consultation paper that suggests that the NSW Government is addressing these concerns. There will, it seems, be no winners.

The consultation paper outlines four 'key options' for change. Two of those options would simply reflect the way the Act has already been applied by the courts, so I won't waste your time on them here.

Other 'key options' include:

1. Preventing claims by common directors of building companies, spouses, relatives and members of the executive committee of an owners corporation (the last of which seems quite odd); and
2. Introducing a fifth trigger to the indemnity, where the building contract involved a licensed partnership that has failed to comply with a rectification order and one of the partners becomes bankrupt.

These are marginal at best.

The consultation paper includes an array of other 'options for change', most of which are in fact clarifications. It does however include a suggestion that home warranty insurance should not apply where the original licensed contractor returns to the site to rectify defects under the original contract (which makes sense). Another practical suggestion is to amend the Act to provide that an owners corporation can lodge a claim in respect of defects that are common to multiple dwellings on behalf of individual unit owners.

Much like that "Black Knight" in the Holy Grail, home warranty insurance has little prospect of delivering on its goals, but it still fights on regardless. However in a perverse twist, it is the consumers and builders who stand to lose their arms and legs!

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