Chapter 8
Summary and recommendations
Issues raised by builders
8.1
It is important to assure the financial stability of builders.
Industry groups argue that the discipline of the insurers in vetting builders,
with the ability to demand security if necessary, has generally improved the
financial strength of builders and led to a drop in the number of insolvencies.[1]
It is also necessary for the insurers because the claims experience of this
long-tail class of insurance may be volatile over time.[2]
8.2
The committee notes that insurers advise that they would not
participate in a first resort scheme. This is because 'the risk of obtaining
and enforcing a court order is not one the insurer can realistically insure.'[3]
As Vero put it:
One of the basic criteria required to create an insurable event
is, such event is accidental and beyond the control of the insured or any other
party with a financial interest...So-called “first resort” BWI does not and
cannot work because it fails, on several counts, to meet two of the primary
tests of insurance, i.e. those of Insurable/Financial Interest and Insurable
Event. A builder may gain a potential financial advantage by triggering an
event which is not accidental and over which he has control.[4]
8.3
It appears that the requirement for security affects approximately
10 per cent of builders if the NSW Office of Fair Trading reports are
representative. The committee is concerned at the lack of accurate data that is
available on the number of builders who have provided security as a condition
of receiving HWI, and in what form that security takes; in particular, the use
of unlimited bank guarantees. This data should be included in any national data
collection model and monitored carefully with a view to decreasing the burden
on builders over time.
8.4
However the committee agrees with the argument that inhibiting
builders from placing assets beyond the reach of consumers and their insurers
is a benefit to consumers overall.
8.5
The implication that builders who are affected by these
requirements would be better off in a government operated system is unsound. A
government operated system must also have its financial requirements. In the Queensland
system a builder who cannot satisfy the requirements is not asked for other
security - the builder is simply refused a licence.
8.6
The committee is sympathetic to builders' concerns that active
bank guarantees and deeds of indemnity make it difficult to change insurers. It
appears that the authorities and industry bodies share this concern, but have
no solution apart from 'make efforts' to encourage insurers to return
securities.
8.7
The committee has not received evidence that would suggest a
different conclusion from that of VCEC in 2005: that while some individual
builders may have genuine grievances, there is nothing to suggest a significant
systemic problem. However the committee notes the continuing concerns of the
major insurer about the high rate of owner-builder activity in Victoria.
Issues raised by consumers
8.8
The committee agrees that there is a need for better information
to consumers about the product. The committee suggests that a copy of the
insurance certificate, a summary of the insurance product and an explanation of
the relevant dispute resolution procedure should be provided by the insurer to
the builder. The builder should then be required to provide this information to
the consumer to assist all parties understand the nature of the insurance.
Where possible this information should be as standardised as possible. This
disclosure process should be part of the national 'best practice' scheme.
8.9
Furthermore the committee notes that "Home Warranty
Insurance" is not an effective title for the insurance and implies a
misleading level of coverage for consumers. The committee recommends changing
the name of the insurance.
Recommendation 1
8.10
The committee recommends that all parties receive a copy
of the insurance certificate, summary of product and dispute resolution
procedures. The committee recommends changing the name of the insurance.
8.11
The committee acknowledges consumer concerns regarding the
requirement in some cases to force a builder into insolvency before being able
to claim HWI insurance. The consumer concerns on this issue are reasonable and
the suggested additional 'loss of licence' trigger of an insurance claim
appears to provide a solution.
8.12
The recent collapse of Beechwood Homes demonstrated an example of
delay for consumers even when the builder was clearly insolvent. The HIA's
'guarantee of completion' and related suggestions require further examination.
8.13
The committee accepts the predominant evidence that premiums are
lower in NSW and Victoria than in Queensland.[5]
However there are some discrepancies, the cause of which is unclear in the
absence of clear official information, similar to the NSW Office of Fair
Trading reports, in other states.
8.14
The committee recommends that better information should be
published on a nationally consistent basis to improve accountability about this
product. Reporting of premiums should be part of this.
8.15
In comparing premiums it should also be remembered that the Queensland
scheme provides better cover: apart from being first resort, it covers no-fault
subsidence; cover for consumers who are not insured because of fraudulent
misrepresentation by builders; and non-completion without the cap of 20 per
cent of contract value.[6]
8.16
In any case, the insurance is a very small proportion of total
project costs (less than 1 per cent), and the difference between Victorian/NSW
premiums and Queensland premiums is even smaller. The alternative schemes
should be judged mostly on their other merits.
8.17
The committee agrees that consumers should be able to access
thorough information on a builder's licensing and disciplinary record (subject
to possible exceptions for matters still in dispute, to ensure procedural
fairness to builders).
8.18
The fact that most building disputes resolve quickly does not
alleviate the stress and expense of the ones which do not. A key element of a
dispute resolution system is the ability to deal with disputes expeditiously.
It is not acceptable that some disputes drag on for years.
8.19
In any dispute resolution system there may be a tension between
resolving disputes quickly and giving both sides reasonable opportunity to have
their say. Where the right balance lies depends on the situation. On the
evidence the committee suggests that in the few intractable building disputes
the balance may be too far towards slow and expensive.[7]
8.20
For example, in the NSW case, a homeowner might reasonably think
that once an inspector has made a rectification order, which the builder has
disobeyed, the next step should be deregistration of the builder followed by
insurance claim, rather than being forced to re-agitate the whole case before a
tribunal which may have less building expertise than the original inspector.
8.21
There would probably be fewer disputes if there was clearer
guidance to both builders and homeowners about what is or is not a defect. As
noted at paragraph 4.24, a number of 'standards and tolerances' guides have
been published as advice on this, but they do not have legal force. Clearer
standards of what constitutes defective work, preferably with legal force,
would help avoid and resolve disputes.[8]
Recommendation 2
8.22
The committee recommends that COAG and the Ministerial
Council on Consumer Affairs (MCCA) should pursue a nationally harmonised 'best
practice' scheme of consumer protection in domestic building.
The scheme should include but not be limited to:
- disciplinary procedures and penalties;
- clearer definition of defective work;
- quicker and easier dispute resolution;
- the proposed 'loss of licence' insurance trigger;
- the HIA's 'guarantee of completion' and related proposals,
- and better information for consumers (including information on
builders' licence record and average cost of premiums).
8.23
The Committee does not suggest that this necessarily needs to be
done by Commonwealth regulation, if consistency can be achieved by inter-state
cooperation.
Need for more detailed information
8.24
A theme in submissions was the need for better information about
this class of insurance for the sake of accountability and transparency, given
that it is mandatory.
NSW Office of Fair Trading HWI reports
8.25
NSW since 2007 has published reports on its scheme, including
information such as the number of builder eligibilities; the number of
securities held by insurers; number and value of project certificates; premiums
including and excluding charges; and information about claims (though not a
full break down of claims development).
8.26
The committee commends NSW for this. No other state publishes
similar information. Victoria says that it 'is currently working with the
insurance industry on way to improve data collection on the BWI product.'[9]
Vero noted that 'scheme transparency is up and running in NSW, work in progress
in Victoria.'[10]
8.27
The committee agrees that better public information on this
insurance is warranted for the sake of accountability and transparency, given
that it is mandatory. This would hopefully allay some of the stakeholders'
suspicions that insurers make unreasonable profits from it. It should include
key contextual information (such as number of builders, number of
owner-builders, building permits) to illuminate trends.
Recommendation 3
8.28
The committee recommends that COAG and the Ministerial
Council on Consumer Affairs should pursue a nationally harmonised scheme of
detailed reporting of home warranty insurance.
National Claims and Policies Database
8.29
It is not surprising that home warranty insurance was not
included in the National Claims and Policies Database, since the creation of
the database specifically responded to the crisis in public liability and
professional indemnity insurance at that time. It appears there was no
particular expectation that other sorts of insurance should be included.
8.30
In particular, the exclusion of HWI had nothing to do with the
treatment of HWI in Corporations Regulation 7.1.12(2), as discussed in chapter
7.
8.31
The question arises whether it would be useful to include HWI in
the database now. This would go some way to answer demands for better public
reporting of this class.
8.32
In 2003 there were reportedly not enough insurers to assure
confidentiality of information. This no longer applies: five insurers offer
home warranty insurance. According to the database methodology this should
dispel concern.[11]
8.33
The Committee recommends that home warranty insurance should be
included in the National Claims and Policies Database, both to promote
actuarial consistency among the insurers, and to satisfy public demands for
greater transparency about this class. Satisfying public demands for greater
transparency is justified because the insurance is mandatory.
Recommendation 4
8.34
The committee recommends that home warranty insurance
should be included in the National Claims and Policies Database.
Senator Annette Hurley
Chair
Navigation: Previous Page | Contents | Next Page