Should insurance cover for building a new house or a big renovation be compulsory?

Wednesday, 17 July 2019

The Government is proposing people building a new house or doing a significant renovation should buy insurance to protect them against loss of deposit, non-completion and defects.

Building a new house or doing a major renovation could get a bit dearer if the Government requires people to take out insurance or a guarantee to cover things going wrong.

Builders going bust or shutting up shop, new houses left unfinished, deposits lost and defects in buildings are all problems this proposal is designed to remedy.

The Ministry of Business Innovation and Employment argues this type of cover, builders warranty, will protect home owners from substandard building and poor builders.

Research shows one in 40 residential building consents ends in disputes settled in court or by dispute resolution processes.

It's all part of a proposed major overhaul of the Building Act to raise standards and performance in the construction industry.

* Builders may have to upskill to meet higher standards under the overhaul of the Building Act

* Insurance in New Zealand is changing

Grant Florence, chief executive of Certified Builders, a builders' trade organisation, says insurance for building a new house or a major renovation should be compulsory.

* 'Collapse of disaster insurance market possible in Wellington'**

MBIE estimates the cost of insurance or a guarantee would be about 1 per cent of the cost of building, so for instance that might be $4000 if the cost of building the house is $400,000.

However current builders warranty guarantees from trade organisations are costing less than 1 per cent, the organisations say.

MBIE has stopped short of proposing the insurance/guarantee should be compulsory, but says people would have to 'actively' opt out.

Consenting authorities like councils are forking out too big a share of the claims costs for defective building work, MBIE says, and are often the only party left to compensate homeowners.

They paid out $1 billion in 10 years, 2008-18, to settle building disputes.

Who provides this type of cover now?

Both of New Zealand's main building trade organisations, the Registered Master Builders Association and New Zealand Certified Builders, offer 10-year guarantees, insuring the work of their members.

The cover includes loss of deposits paid to a builder, structural defects including weathertightness and non-completion of the build.

The large general insurers in New Zealand have shied away from this type of insurance. Only one insurer provides it, Stamford Insurance.

Consenting authorities like councils paid out $1 billion in 10 years, 2008-18, to settle building disputes.

Certified Builders and Registered Master Builders charge less for their 10-year guarantees than MBIE suggests but neither will reveal their exact cost.

Certified Builders 'Halo' 10-year guarantee is closer to 0.5 per cent of the cost of the build than 1 per cent, while the Master Build 10-year guarantee is between 0.5 per cent and 1 per cent.

Grant Florence, chief executive of Certified Builders, said Halo was different from Master Build in that Halo was independently managed and underwritten by a syndicate of Lloyds of London. It was important to the underwriter that members of Certified Builders had to have a trade qualification to be members.

Registered Master Builders Association chief executive David Kelly said it was sensible for people building a new home to take out insurance or a guarantee.

'It's a bit like general insurance. You don't expect your house to burn down or there to be an earthquake but if it happens you need something in the background.'

Master builders had an independent board that oversaw their guarantee scheme and independent actuaries advising how much money the board needed to set aside to cover the guarantees. It compared its guarantee to Reserve Bank requirements for insurance companies to make sure the scheme was solvent.

Key questions were how much risk did the Government expect providers of insurance and guarantees to take on. If it was too high then the cost of the guarantee or insurance would rise considerably, Kelly said.

Insurance Council chief executive Tim Grafton says insuring builders and the building industry is too risky.

Should it be mandatory?

Florence of Certified Builders thinks so. Homes were often Kiwis' biggest investment and they deserved to have confidence in the builders they selected and insurance supported that. The leaky homes problems had hurt the public's trust in the building industry.

If it was not mandatory Florence said unscrupulous builders, ones possibly who could not get insurance, would convince homeowners they did not need it.

Florence said the insurance issue was linked to whether or not or how much liability consenting authorities like councils should have when builds went wrong and councils had issued codes of compliance for the buildings.

He held the controversial view that councils should have no liability. He said the model was wrong. Councils were checking that building consents were followed to protect their risks and liabilities.

'But I think all they are doing is just causing massive inefficiencies in the industry. The cost to the industry around the councils having that liability is huge.'

'I think if we want to make a step change in this we need to be bold… and look at managing that risk a different way.'

The insurance industry had a role to take in sharing the risk and builders could take more risk themselves, Florence said.

Kelly said a concern was that this type of insurance cover was seen as a 'silver bullet' to tackle a struggling consents system. Councils had been calling for the liability to be removed from them when things went wrong in building and called for guarantees or insurance to be compulsory.

'We think that's a bit simplistic We support guarantees absolutely but don't see that as the complete solution,' Kelly said.

Will insurers in New Zealand provide this type of insurance or guarantee?

Insurance council chief executive Tim Grafton said in principle the council's insurance members supported the proposals for insurance to cover building a new house and renovations over $30,000.

But they would not be rushing in to provide that because insurers regarded the construction sector as too risky.

This type of insurance was 'long tail' where a policy holder paid one fee upfront but the guarantee or cover lasted 10 years.

The construction industry had seen numerous failures and even the biggest and best had lost millions of dollars in the last couple of years. There was a real question mark around how long building companies lasted.

There had been low quality and substandard products that had led to prosecution and fines. As well, there was widespread non-compliance with the installation of passive fire protection systems and the installation of non-structural seismic restraints.

There was also the problem of 'phoenix builders' who set up a business and when they were getting into trouble they folded it up and set up as a new company.

The council wanted the Government to implement the reforms first and the insurance industry have a two-year observation period to see how effective they were in de-risking the construction sector.

'There's not much point trying to mandate it now because you won't get anybody rushing in to provide it,' Grafton said.

Is this type of insurance needed?

.Research done for MBIE shows 40 per cent of new homes and significant renovations had a guarantee or insurance.

.Research estimated about 2.5 per cent - one in 40 - residential building consents resulted in disputes settled in court or by dispute resolution processes.

.Consenting authorities paid out $1 billion to settle building disputes in the last 10 years, 2008-18.

.Of that one third - $332 million- covered other parties' defects because they were 'unavailable' to pay their share so the bill was effectively paid by ratepayers.

.In Canada and Australia, many provinces and states had made this insurance compulsory.