Home Warranty Insurance
Update - 14 July 2009
The Insurance Council of Australia and its members welcomed the opportunity to meet today with the NSW Acting Minister for Fair Trading Linda Burney MP to discuss home warranty insurance.
Insurers confirmed to the minister that they have their own individual eligibility criteria which are submitted to the Office of Fair Trading, and will use that criteria when considering provision of coverage of home warranty insurance, including for those builders who may have been impacted by the recent withdrawal of two providers in the home warranty insurance market in NSW and in other states.
Myth versus Fact
Myth:
Home warranty insurance is for builders.
Fact:
Home warranty insurance is acquired by the builder and issued to the homeowner to protect them against loss due to non-completion, defects and breach of statutory warranties by the builder. It is legally required and is only triggered if a builder dies, disappears or becomes insolvent before completing the home or fixing the defects.
Home warranty insurance does not cover contractual disputes or defective work by a builder who is still in business. These matters are dealt with under consumer protection legislation, usually through tribunals.
Home warranty insurance is needed because:
- It is required for the builders’ registration
- It establishes consumer confidence in the industry
- It promotes the builders’ adherence to building standards, in turn providing the builder with a good reputation for his or her customers and prospective customers
- It recognises the economic importance of the residential building industry.
Builders apply to the insurer for eligibility to have their work covered for home warranty insurance. The average cost of the home warranty insurance certificate for a home is 0.5 per cent of the average contract value. It is usually passed on to the homeowner in the contract price.
Myth:
Eligibility requirements are onerous and unfair.
Fact:
No-one wins when a builder goes broke. Home warranty insurance eligibility criteria is designed to:
- Minimise the possibility of builder collapses.
- Ensure only financially sound, technically competent, builders can access home warranty insurance.
- Help ensure builders are better placed to ride out the downturns.
To be eligible for home warranty insurance a builder must have real assets in a business.
Builders are categorised by a financial analysis methodology used by the majority of Australian financial institutions to assess credit risk.
Builders with sound business and risk management practices welcome the discipline home warranty insurance eligibility invokes.
Myth:
Builders are leaving the industry in droves because they can’t get home warranty insurance.
Fact:
There are more builders in Australia now than when the scheme was introduced five years ago. The boom home building conditions of 2002 – 2004, during which up to 180,000 new homes were built each year, would not have been possible if difficulty in obtaining home warranty insurance eligibility had been systemic.
During 2005, 150,000 new homes were started, nationally. Five years previously it was just 115,000.
The annual amount spent on new homes and renovations has almost doubled in the same period with Australians now spending over $20bn each year.
Myth:
Insurance companies cap the work the builder does.
Fact:
Builders are provided eligibility for home warranty insurance up to the amount of turnover that the current assets in the business will support. Builders who are growing can request higher turnover eligibility and, provided they are earning sufficient margin on their new jobs, the request is usually approved.
Tying eligibility to turnover has been represented as a ‘cap’ by those who want a return to a state run insurance scheme or home warranty insurance abandoned as a consumer protection mechanism. In fact, less than 10% of builders, nationally, request an increase in their turnover eligibility.
Myth:
New builders are disadvantaged.
Fact:
Start-up / new builders can also apply for home warranty insurance eligibility on a job by job basis without a requirement for capital until they build their business and are ready to move into a different classification.
Myth:
Insurance companies aren’t taking on any risk.
Fact:
Home warranty insurance provides cover to the homeowner for up to seven years after the home is completed. So the premium taken at the commencement of the project is for claims that may arise at any time during this period.
Claims can occur throughout the policy period and, typically, there is a spike in claims as the seven year period is ending.
A combination of tighter home warranty insurance eligibility criteria and improved economic conditions has seen the number of homeowners making claims because of builder insolvency drop, but they are still significant.
For a PDF version please click here.
Insurance Council Contact:
John Driscoll
General Manager Consumer
p: (02) 9253 5100
f: (02) 9253 5111
jdriscoll@insurancecouncil.com.au