Insurance could torpedo self-certifying build plans

Thursday, 31 October 2024

No commercial insurer in the New Zealand market offers builders cover for non-completion or defective work, and that will be a problem for the Government’s planned consent reforms.

Building and Construction minister Chris Penk has announced that an opt-in self-certification scheme for qualified building professionals working on low risk residential builds will be developed.

The goal is to “cut through the tangle of red tape” which makes the current building consent system inefficient and time consuming, and reduce delays and cost for consumers, he said.

“A model where building practitioners shoulder more of the risk should incentivise better quality work and lower the liability risk for ratepayers.”

Large, complex developments will not be part of the scheme, and safeguards will include a clear pathway to remedy poor work, strengthened qualification requirements, and strict disciplinary actions for incompetent self-certifiers.

At the policy launch in Auckland, Penk said consumers would be best served by relying on these mechanisms in conjunction with assurance such as guarantees and bonds ‒ for example those offered by Master Builders and Certified Builders.

Other mechanisms such as professional indemnity insurance would also provide the protection that New Zealand consumers need, he said.

Detailed policy work and consultation will be done, but Penk has made it clear that builders will need guarantees, or insurance to self-certify.

That could be a problem. Canterbury-based construction expert Mike Blackburn said there was a need for adequate insurance cover to go along with the proposed changes.

“But there is a real gap between what the Government is talking about, and the ability of the industry to obtain the required cover.”

Builtin Insurance Brokers director Ben Rickard said the Government was essentially looking to the guarantee programmes offered by Master Builders and Certified Builders for consumer protection.

The mention of insurance was misleading because there were no commercial insurance policies covering non-completion and defective work available for builders in the New Zealand market, he said.

“We used to run one for Certified Builders, and also our own one for a number of years. But as a broker you need an underwriter to take the risk and pay the claims.

“Our underwriter was Lords, but they decided to pull out of New Zealand, so we wound down our policy.”

Until recently there was one other private insurer who offered a building guarantee type of policy, he said. But he understood their underwriter had exited the market, and they were now pulling out too.

It meant that unless a builder was with a group builder, such as Signature Homes which offers its own guarantee, the only options were via Master Builders and Certified Builders.

Rickard said to access those guarantees builders had to be a member, and he has heard Master Builders had boosted scrutiny of the financials of those in its guarantee programme.

The Government was robbing Peter to pay Paul with this plan, he said.

“They are talking about how much it will save, but it’s basically about less inspections and consent costs, which is likely to lead to more claims, and insurers will pick up the slack. That’s not a great business model for insurers.

“They will want underwriting of the risks, and surety that builds will be up to standards, and if the council is not doing it, who will? They will want some form of inspecting, so the cost shifts to the insurer.”

He was not convinced the scheme would work in a market like New Zealand’s, which was largely made up of thousands of small businesses that did not have quality assurance programmes.

The Australian market was much bigger, and there was no private insurance programme for building, rather it was all state government underwritten, he said.

“In the more sophisticated UK market there are private insurers, but they all have their own inspection and consenting processes.”

While the scheme was do-able in theory, he wondered if the Government had announced it prematurely without knowing if there was appetite from insurers for it, Rickard said.

“There is currently no insurer in New Zealand in this market, so who else has the Government talked to determine if there are other options?

“They have to show they’ve reached out to insurers, that there are some willing to enter the market, and we need to know what it will take for them to actually do so.”

Certified Builders chief executive Malcolm Fleming said that overall he supported the scheme, but there were issues that needed to be addressed, and one of those was insurance.

It was very difficult for builders, especially smaller builders to get professional indemnity insurance, he said.

“I suspect there is a lack of appetite from insurers to take it up, because they think building is just too risky, and they have long memories about the leaky home crisis.

“So we’ve asked for a meeting with a minister around this to see if he has received advice to the contrary, and also to clarify some potential confusion around insurance and guarantees.”

Safeguards had to be in place, and all bases had to be covered so consumers could have confidence in the scheme, and in the quality of builds that take place under it, he said.

“But the fact that only trade qualified builders will be able to opt in to the scheme is important.

“A good, trade-qualified builder will stand behind their work, and when they are supported by a trade association, with a guarantee, it does provide a lot of cover, and confidence for the consumer.”

But Institute of Building Surveyors president David Clifton was concerned about the reliance on the licensing bodies’ guarantees, which was not correct or workable as an insurance policy.

They were schemes to protect their members and had little effective consumer protection, he said.

“This raises the question of whether the Government intends to provide indemnification schemes for LBPs to enable this process of self-certification to be implemented.

“Our sources indicate that professional indemnity insurance is not currently widely accessible, other than for large-scale design and build contracts.”

It might be considered there were alternatives via licensing bodies, such as Master Builders, he said.

“But with the sheer cost of a scheme, we feel they would not be able to support a full professional indemnity policy, like Registered Building Surveyors hold, for each building company.”