Insurance insider backs liability reforms – with caveats

The Building Amendment Bill, which proposes the introduction of a proportionate liability system, passed its first reading in Parliament on 2 July and has been referred to a select committee

During the select committee process, industry stakeholders and the public will have a chance to provide feedback on the proposed changes – which include: 

• Moving from joint and several liability to proportionate liability in the building system
  – Introducing mandatory home warranties for new builds and major renovations valued over $100,000.
  – Requiring professional indemnity insurance for building design professionals. 

• Making it easier for councils to work together or combine Building Consent Authority (BCA) functions. 

• Introducing a fast-track 10-day consenting pathway for eligible residential buildings with solar generation and sustainable features and reducing Project Information Memoranda (PIM) processing times from 20 to 10 working days. 

• Expanding options for the construction of granny flats, including allowing eligible offsite-built units to be constructed before a PIM is issued. 

• Modernising building research funding by combining the Building Research Levy with the Building Levy and introducing a more contestable model. 

Proportional liability dominates discussion

A key change is the introduction of proportionate liability, which means that in cases of defective building work, parties are responsible for the share of costs that reflects their contribution. 

To support the change, mandatory home warranties will be introduced for new houses, multi-residential buildings up to 10m high and renovations $100,000 or above that involves Restricted Building Work (RBW) and require a building consent. 

Warranty providers must register with MBIE and offer cover for at least one year for defects and 10 years for structural defects. 

Professional indemnity insurance will be mandatory for designers, such as architects and engineers, with the aim of strengthening accountability and helping ensure they can meet claims if issues arise. 

Rick Hao, Director and Commercial Insurance Manager at Prestige Insurance, said the reforms could provide benefits for the industry but would not eliminate risk.  

Better protectionq

“Mandatory warranties will provide much better protection for homeowners, particularly where a builder has ceased trading or is no longer around to rectify defects. 

“Professional Indemnity (PI) insurance also has its limitations. PI is generally written on a claims-made basis, meaning the policy needs to be in force when the claim is made, not when the work was carried out. If a defect is discovered years later and the designer, engineer or other professional has retired, ceased trading or allowed their policy to lapse, there may be no insurance available to respond. 

“For that reason, I see mandatory warranties and PI insurance complementing each other rather than replacing one another. They each address different parts of the overall risk.” 

Hao said it was too early to say whether premiums would increase, and that much would depend on the final legislation and how insurers choose to underwrite the new environment.  

“The reforms don’t reduce the underlying construction risk,” he added. “They simply change how that risk is allocated between builders, designers, homeowners and insurers. Over time, I expect insurers will adjust their underwriting and pricing to reflect that new allocation of risk.” 

Hao said he does not expect the market will need to “reinvent the wheel” to provide appropriate cover – and that he expects insurers and warranty providers to refine and enhance existing products to meet new legislative requirements. 

“We may also see new players enter the market as the reforms create opportunities for specialist warranty providers and insurers,” he added. 

Bill timings

The Bill is now before a select committee. Following that, it will proceed to a second reading, then will land with the Committee of whole House before progressing to the Third Reading stage. After its Third Reading, the bill will be granted Royal Assent – due for the end of year 2026.

The amendments relating to:

• Building Consent Authorities come into force on the day after Royal Assent.
• Off-site constructed small stand-alone dwellings come into force one month after Royal Assent.
• The registration of home warranty providers come into force three months after Royal Assent.
• Proportionate liability, professional indemnity insurance, and home warranties come into force on the first anniversary of Royal Assent.