Sweeping new changes proposed to reform current government home warranty insurance monopoly scheme in NSW.
HOME BUILDING AMENDMENT (COMPENSATION REFORM) BILL 2017
The Home Building Amendment (Compensation) Reform Bill 2017 was introduced in the Legislative Assembly by the Hon. Victor Dominello, the Minster for Finance, Services and Property, on 24 May 2017. The bill is part of a wider overhaul and reform announced by the Government in November 2016.
Why the need for reform?
The focus of the Bill is to reform the current government monopoly scheme in New South Wales, which was established in 2010.
In reference to the Scheme, in the Second Reading Speech, the Minister said that:
- when the scheme was established it was intended to run on a commercial basis, funded by premiums, with no cost to taxpayers;
- the scheme has been financially unsustainable and has become a burden on all taxpayers.
- as at 30 June 2016 the scheme was $375.8 million in deficit;
- the scheme is inefficient, “with far too much of the premium being absorbed by costs and too little return to home owners;”
- “the scheme is frustrating for many builders who can face complicated and opaque eligibility assessments before they are allowed to buy the product which can delay work and disrupt their ability to win contracts;” and
- “builders cannot take their business somewhere else and are unhappy about the level of customer service and transparency they receive.”
What are some of the key reforms?
As detailed in the Bill and in the Second Reading speech; the proposed reforms, if adopted, will:
- introduce “a modern, fit for purpose home building compensation scheme;”
- confer on the State Insurance Regulatory Authority (the Authority) regulatory functions relating to home building insurance and private insurers who provide the insurance, including the power to establish mandatory guidelines about insurance premiums and other matters and the power to reject proposed insurance premium;
- open the door for new providers to enter the scheme with innovative product offering;
- prohibit claims made 10 years or more after the work insured was completed;
- establish an indemnity scheme for claims relating to licensed insurers who become insolvent;
- will give builders “get a more transparent system that can give them more choice about how they cover their projects;”
- enable home owners to receive cover that exceeds the minimum prescribed in the legislation;
- reflect extensive industry and public consultation;
- allow the Government’s insurance provider, the NSW Self Insurance Corporation, to continue to deliver insurance to builders through Insurance and Care NSW [iCare] while opening the scheme to new players;
- allow cover under alternative indemnity products to be offered, such as fidelity fund schemes and specialised insurance arrangements; and
- mean that insurance guidelines can be issued that will be binding on licensed insurers and providers and which will cover issues such as premiums, market practices, claims handling, prudential standards, contracts of insurance, underwriting and builder eligibility.
SPLIT COVER INSURANCE
One of the key reforms is the provision of cover for two separate (split/cover) insurance products, which can be provided by different licence holders.
Each of the split cover amounts will be set at $340,000 with the result that home owners will have available a minimum total cover of $680,000.
One product will cover home owners against the risk of loss due to non-completion and associated breaches of statutory warranty during the construction period.
The second product will cover home owners against the risk of loss after the work is complete for the duration of the statutory warranty period.
Builders will need to take out cover for both risks, whether through buying a combined cover product or by buying the two split.
Additional risks and cover
The proposed reforms also confirm that cover can be offered for additional kinds of risk or loss, which could potentially include:
- first-resort style products that offer consumers access to help while a builder is still solvent and trading;
- the provider and the builder agreeing on arrangements to improve quality control of the building work or to help manage disputes as part of the cover; and
- the facility for a home owner to purchase top-up cover.
Some views that have been expressed
Brian Seidler, Executive Director of the Master Builders Association, has said:1
“These are long overdue and far reaching reforms to the home building compensation fund scheme. The MBA has been closely involved in reform discussions with the government on this over many years. This Bill is the first of a number of key steps needed to improve the scheme for both builders and consumers. The MBA believes these reforms are a positive step and looks forward to working with the government on the more detailed regulations and guidelines that will be needed to put these reforms into practice.”
According to Mr Phil Sim and Steve Griffin from SecureBuild:2
“The reforms outlined in the Bill will allow for new and innovative approaches to be delivered vastly improving consumer protection and allowing builders to get on with building the housing we require in this State.”
Further consultation proposed
If the Bill is passed, the next stage will be for the Authority to consult on the development of supporting regulations and insurance guidelines which will involve an extensive process through the second half of 2017.
It has been proposed that the Authority will consult carefully to ensure that the new scheme achieves the confidence of home owners, builders, brokers and prospective insurers and providers
What happens next?
The Bill is yet to be debated in Parliament.
We will provide regular updates on the Bill as they develop.
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1The Second Reading Speech
2The Second Reading Speech