Will ten-year builders warranty insurance soon be compulsory?

Once again, the Ministry of Innovation, Business and Employment is looking into the feasibility of making it compulsory for builders to take out insurance to protect homeowners – Builtin reviews the pros of such a system, plus the likelihood of it being introduced this time around

A builder’s warranty (also known as a builder’s guarantee or home warranty) protects a homeowner’s financial investment during construction, as well as covering defects for up to ten years. Examples of schemes currently offered in NZ include those provided by the Registered Master Builders Association (RMBA), New Zealand Certified Builders (NZCB) and Builtin’s Homefirst Guarantee.

Nothing new

First mooted at the height of the leaky homes crisis in 2009 by then Building and Construction Minister Maurice Williamson, it was proposed that homeowners could opt out of the scheme if they felt it was not needed.

The idea was dropped in 2011 but picked up again two years later, when a system based on the Australian model was proposed. However, once again, a compulsory system was dropped in favour of an education-based approach encouraging homeowners to choose whether or not they took out a guarantee.

What’s changed?

Most recently, the possibility of builders warranty insurance becoming mandatory in New Zealand is less a result of the government wanting to protect homeowners and is more due to a desire to cap the liability councils can face for defective building work.

However, capping council liability exposes homeowners to the risk of being out of pocket, if other parties, such as the builder, aren’t around to contribute their share to the cost of repairs. That’s why the Law Commission recommended compulsory builders warranty insurance would have to be introduced alongside any capping of council liability.

What are the odds?

To date, the government has been unwilling to go this far, opting to keep the current liability framework and using compulsory disclosure statements to increase awareness of builders guarantee insurance among homeowners, so that they can choose whether or not to take it.

However, anecdotal evidence suggests many builders aren’t following the new disclosure rules, and awareness of builders guarantees among the public remains low. They can also be a difficult sell for builders – who wants to recommend their customers take out insurance in case they go bust or their workmanship isn’t up to scratch?

While that’s part of the reason a mandatory approach makes sense, it means that all builders and ultimately, all homeowners pay for the poor performance of a few bad operators.

Are they a good idea?

The Building Act makes builders responsible for their work through implied warranties for up to ten years, so, you might ask, why is compulsory insurance needed on top of this?

The reality is that our construction industry is a volatile one, with lots of competition, low barriers to entry, low margins and, in many cases, building firms run by people who lack business and financial management skills (an aspect of building the LBP scheme doesn’t address).

Failure is inevitable for some, with customers and suppliers often bearing significant losses. That’s really where independent builders guarantees come to the rescue, at least for homeowners.

If they’re compulsory, a builder who can’t get one because they aren’t up to scratch won’t be able to build. Here at Builtin, we believe this will make it harder to be part of the industry and help to weed out poor performers, which has to have a positive effect on the overall health of the sector.

Where can you get one?

Members of RMBA can provide a Master Build Guarantee, which is self-insured and operated by Master Build Services, a business owned and controlled by RMBA. They have a range of guarantees to choose from, with varying levels of cover.

NZCB members are required to provide Halo Guarantee Insurance, which is managed by a broker and underwritten by a cover holder at Lloyds of London.

For builders who are not a member of either of these two trade associations, or for members who wish to provide an alternative, Builtin Insurance is New Zealand’s leading independent provider of builders guarantees.

A free pre-approval process means only builders who meet standards for construction management practices, qualifications, skills and experience, on-site quality control and financial solvency can provide Builtin guarantees.

Builtin Accredited Builders can choose from a range of ten-year guarantees to suit their business, including:

• The full Homefirst Guarantee that comprises both pre-completion financial risk and defects cover for new builds, alterations and additions.
• A Defect Repair Guarantee for builders doing specs or turnkey homes.
• A Small Project Guarantee for jobs under $30,000.

Builtin’s guarantees are underwritten by CBL Insurance, a New Zealand-based, A-rated insurer. CBL has more than 40-years’ experience and insures over five million homes worldwide, including more than $2bn worth of residential property here in New Zealand.

Protection for the builder

Both the Halo and Builtin guarantees include a “waiver of subrogation”. This is a powerful benefit, as it gives the builder protection from the cost of fixing defects if a claim is made under the guarantee after the first 12 months.

In this situation, the insurer fixes the defects without seeking recovery of their costs from the builder. However, they may go after other parties, such as product manufacturers and subcontractors, if they are deemed responsible for the problem.

A final word

As to whether they’ll become compulsory here any time soon, your guess is as good as ours. With an election looming and major political challenges to anything that could increase the cost of building houses, it may take a change of government, or another major industry failure, before mandatory building warranty insurance becomes a reality.

In the meantime and despite this, given their very reasonable cost for the protection they give, an independent builders guarantee makes good sense for customers and builders alike.

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Builtin is New Zealand’s trade insurance expert. For more information visit www.builtininsurance.co.nz or contact Ben Rickard at ben@builtin.co.nz or 0800 BUILTIN.