Home warranty insurance

The Minister for Building and Construction Maurice Williamson recently announced the government was looking at home warranty insurance to improve consumer protection. The Department of Building and Housing is investigating this option and will report back to the minister this year.

The Australian system

Across the Tasman, home warranty insurance is compulsory (except in Tasmania) but it’s been problematic. The Australian system requires builders to take out insurance for all residential building projects; the homeowner is the beneficiary of the insurance policy.

However, in all states except Queensland it acts as “last resort” insurance – which means consumers can only make a claim if the builder is dead or insolvent (or has disappeared).

Queensland rules
This proviso doesn’t apply in Queensland, which has “first resort” insurance. The state’s consumers can claim for losses arising from non-completion or shoddy work regardless of whether the builder is alive, dead or otherwise missing from action.

For any residential building work of over $3301 in value, builders in the state are required to obtain insurance from a statutory body called the Building Services Authority (BSA).Current insurance premiums range from $160 (for work less than $20,000) up to $3000 (for work over $400,000).

Queensland’s system is government-backed and is seen as offering much higher levels of protection than in other states where private insurers provide cover.

As well as running the insurance scheme, the BSA is responsible for disputes resolution and builder licensing. Builders in the state must be licensed to carry out work valued over $1100. Licence fees and other fees for service fund the BSA.

Among its powers, the BSA can require rectification of defective or incomplete building work. If the contractor fails to do this, insurance cover kicks in and the authority will pay to remedy any outstanding problems.

If the BSA has to pay out, it can pursue the contractor for costs and also has the power to prosecute – fines of up to $25,000 are possible.

Lessons for us

We think Queensland’s system has merit. Compare it with our system: we’ve had a licensing scheme for builders since 2007 but it’s voluntary and the Department of Building and Housing says sign-up hasn’t been high.

Last month, just 566 licensed building practitioners were registered. By contrast there are 38,000 licensed electrical workers.

“First-resort” home warranty insurance may also be part of the solution.

Australia’s experience suggests it needs to be government-backed. An Australian senate inquiry in 2008 found private insurers did not want to participate in a first resort scheme because they considered the risks too high.

The same report described the “last resort” insurance offered by private insurers as so minimal that it shouldn’t be called insurance.