Builder Warranty Insurance: a riddle wrapped within a mystery within an enigma?
By Justin Cotton, Director, Lovegrove & Cotton – Construction and Planning Lawyers
There is a wealth of uncertainty in the community, seemingly amongst builders and owners alike, as to the extent of coverage of warranty insurance for domestic (or residential) builders.
As most of you know, a registered domestic builder is required to carry warranty insurance for all building contracts worth more than $12,000 in value. In order to maintain their registration as domestic builders from year to year, they must be eligible for warranty insurance.
It is mandated by the Building Act 1993 that domestic builders must carry this insurance, but despite the common misapprehension amongst many in the builder fraternity, the insurance exists to protect owners (in limited circumstances) and should not be seen as some back stop or ‘life preserver’ for builders. This is despite the fact the builder pays the premiums.
The extent of coverage depends on the relevant Ministerial Order that applies to the policy, depending on the time the building contract was entered into. Prior to July 2002, under the old Ministerial Orders the insurance policies had to provide owners with up to $100,000 per dwelling, in coverage for defective building works (ie in breach of the section 8 warranties) and incomplete works.
Often times under the old insurance regime much effort and emphasis would be placed on the Insurer forcing the original Builder to return to site to rectify their defects at their own cost. This is obviously more economic than having another contractor working over the top of the original Builder’s work at a risk mark up.
Since July 2002 under the new insurance regime and subsequent Ministerial Orders, the Insurers must provide coverage of up to $200,000 per dwelling. The major catch though is that under the newer regime the Builder has to have died, disappeared or become insolvent before an insurance claim may be made.
The cap of $200,000 includes coverage for defective works (ie works not in accordance with the building contract or in breach of the section 8 warranties) and for incomplete works. Coverage for incomplete works is capped at 20% of the adjusted Contract Price (ie adjusted for any variations during the works).
In addition the $200,000 cap can include coverage for some alternative accommodation, relocation/storage and legal/consultant fees (“incidentals”) within that overall figure.
Generally speaking, the Policy of insurance must cover owners for non-completion of the works or breach of statutory warranty (ie defects) because of death, disappearance or insolvency of the Builder.
Owners should be wary of the definition of “developer” within the terms of an insurance policy. The current Ministerial Guidelines allow an Insurer to prevent Owners who are regarded as “developers” from claiming for completion costs. So any such Owners would be able to claim for defect rectification costs only, as well as any ‘incidentals’ that can be claimed within the $200,000 cap.
The definition of “developer” in the Vero policy is someone for whom 3 or more homes are built on one building site (or more than one building site) under one domestic building contract.
A typical Policy must now cover Owners for non-structural defects for a period of up to 2 years following the completion of the work or the date of termination of the building contract, whichever is earlier. For structural defects, coverage must ensue for a period of 6 years from completion of the work or the date of termination of the building contract, whichever is earlier.
At recent builder seminars the writer has attended, this has been a source of great confusion and some angst for some of the builders present, particularly when it is mentioned that a builder can be liable to an owner in a potential ‘building action’ for 10 years after completion (ie the issue of the Certificate of Occupancy or the Certificate of Final Inspection).
The confusion has been that insurance coverage for structural defects only lasts for 6 years, leaving a ‘black hole’ of another 4 years where there is no insurance coverage. Of course, most defects will have already materialised in the first 6 years, but for the remaining 4 years in the 10 year liability cap it is still possible for an owner to sue a builder for damages for defective building work.
Owners need to be wary of not getting caught out for not making a claim in a timely way. An Owner must notify the Insurer of the death, disappearance or insolvency of the Builder within the required time.
In the current Vero policy it is 180 days of becoming aware of the event or happening or when the Owner might reasonably have been expected to become aware of that event or happening.
In addition, such Policies will often include a caveat that Owners must not limit or exclude their rights against a party against whom they might otherwise be able to recover, ie the Builder. This can sometimes make Owners wary of terminating their building contracts against a builder who has gone ‘AWOL’ and appears to be on the cusp of becoming insolvent.
However, it appears that Insurers will not prevent an owner from claiming on their indemnity just because they have terminated for just cause against a Builder. It will not necessarily prevent the Insurer from claiming against the Builder in any event, given the guarantees that directors of building companies must give to Insurers when they take out the Policy.
