Australia: New Home Warranty Insurance Arrangements in NSW
Building and Construction Update

Material changes will occur to the home warranty insurance system in New South Wales on 1 July 2010. These spell the end for private home warranty insurers, stand to simplify the process of applying for home warranty cover and put in place a mechanism to improve access for builders previously frozen out of residential building work.

The changes are effected through the commencement of the NSW Self Insurance Corporation Amendment (Home Warranty Insurance) Act 2010. The background to the changes is set out in our March 2010 Building and Construction update here.

The Act provides for the NSW Government through its NSW Self Insurance Corporation to become the sole home warranty insurance provider and to provide the capital backing for the home warranty insurance scheme. In doing so, the Government will loan $15.6 million to the NSW Self Insurance Corporation to set up the Home Warranty Insurance Fund (HWIF), to be repaid out of premium revenue in years to come.

There will be one set of eligibility conditions for all builders, as opposed to the current arrangements where different rules apply depending on the insurer. Further, a single Government reinsurer will allow premiums to eventually be priced consistently across New South Wales. Hence the simplification.

Builders who currently have eligibility with one of the three existing insurers will be transferred to the Government scheme automatically, with no changes to their existing eligibility profile. The HWIF will not insist on bank guarantees or mortgages, but may well require third party indemnities from building company directors or others.

NSW Self Insurance Corporation will set the premiums and service standards. It is in the process of engaging private insurance firms (aka scheme agents) to issue policies, to collect premiums and to undertake claims management. At the outset these will be QBE Insurance (Australia) Limited and Calliden Insurance Limited. Vero will exit the scheme entirely on 30 September 2010. Brokers will continue to be the main shopfront for builders to purchase their home warranty insurance cover.

One significant reform is the introduction of building management service providers (BSMP) with a view to improving the availability of home warranty insurance to builders perceived to present a greater financial risk. Such builders are generally new entrants to the industry, those with a patchy or poor claims history or those without the requisite financial wherewithal. Many such builders are currently denied sufficient home warranty insurance cover and have, as a result, been frozen out of most residential building work.

Such builders will now have an option. They can agree to engage a BSMP as a condition of the provision of home warranty cover. The Act and Fair Trading are very short on detail as to how this will work. However, the theory seems to be that through a BSMP reviewing the contract documentation, checking the builder's costings and monitoring the performance of work, builders on the margins are more likely to meet their contractual obligations, thereby reducing the risk they present to the Home Warranty Insurance Fund.

BMSP's services won't be free. Questions have arisen as to how a builder who has priced in a BMSP can compete with those who have not.

The hope is that after 1 July 2010, only a minimal number of builders will be unable to obtain cover. This would improve the prospects for new builders and increase the number of builders available to undertake residential building work in New South Wales, thus reducing the state's 20,000 annual dwelling construction deficit. It is also hoped that these measures will reduce the likelihood and quantum of future claims which will ultimately influence the premiums charged and how quickly the $15.6M loan to the HWIF is repaid.

The Office of Fair Trading has established a dedicated website for home warranty insurance with a large number of frequently asked questions here.

From the consumer's point of view, little will change. Consumers will still be faced with compulsory insurance that only offers indemnity of last resort. Consumers will still need to foot the bill for prosecuting breaches of the statutory warranties and in most cases will wait years to have their claims paid. Maybe this will be addressed in the re-write of the Home Building Act, but don't hold your breath!

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