Security for Home Warranty Insurance
What is Home warranty insurance?
To contract for residential building work over $20,000.00 in NSW, builders are legally required to provide the owner with a certificate of insurance covering the owner for completion or rectification of the building work should the builder die, disappear or become insolvent.
This insurance has been commonly known as Home Warranty Insurance.
At present insurance cover is provided by the NSW Government Self Insurance Corporation through the Home Building Compensation Fund (HBCF).
Deeds of indemnity
For a number of years before 2010 the insurance was provided by private insurers. The private insurers at times required personal guarantees by way of a Deed of Indemnity (Deed) for payments made by the insurers for completion or rectification of residential building work.
The HBCF also have provisions for the use of Deeds in certain circumstances. Generally the Deeds are only requested where the trading company does not have assets or capital to cover potential claims or where the company does not have a long trading history and the company’s management capabilities cannot be determined.
The Deed requires that the signing party, the indemnifier, pay to the insurer in certain circumstances, compensation for any payments made by the insurer to complete the building work or rectify any defective work where the builder is dead, has disappeared or become insolvent.
Often Deeds are executed by the directors of the company in their personal capacity or in many cases by family members who are not an officer of the company but who hold enough assets to satisfy the criteria. The special nature of the arrangements under a Deed has left many exposed to claims for payment long after the builder ceased to exist or ceased trading.
Deeds are commonly used where the relationship between the parties do not fall within normal contractual arrangements or where the parties require an ongoing agreement that will be enforceable for a long period of time.
When do the provisions of Deeds expire?
As home warranty insurance provides cover for rectification of defective building work for a period of up to six years, and previously up to seven years, a claim can sometimes take ten years to be resolved. The provisions of the Deed does not expire unless by written agreement of the parties, therefore Deeds enable the insurer to recover payments paid made on a claim at any time in the future, as far as it is able to within legislative requirements.
The Limitation Act in NSW provides that actions founded on a Deed are limited to twelve years from when the cause of action accrues to the plaintiff. This means that insurers may have twelve years from when they make a payment on a claim within which to bring an action under a Deed against the indemnifier. If the insurer receives a claim in the sixth year of cover and it takes a year for the claim to be finalised, it can be up to nineteen years after the work was completed before the potential for a demand on the indemnifier expires. It is evident therefore that some indemnifiers may be retired or may have ceased business many years prior to the claim and the indemnifier may be placed in an extremely difficult financial situation trying to defend or cover the demand.
When will a Deed terminate? A Deed will only be terminated by agreement in writing by the parties. The new HBCF Deed does however contain a provision that the agreement is terminated automatically where three years has passed since the date of completion of the last building project by the builder covered under policies issued on or after the date of the agreement. The termination does not affect liability for any claims made prior to the termination or any claims that may arise from notification prior to the termination.
Other security options
It is recommended that legal advice is sought before entering into a Deed.
If possible alternative arrangements should be made rather than entering into a Deed. The HBCF provides alternative arrangements by way of capital injection into the business or reduced limits of insurance cover until the business shows an acceptable trading record.
A system of financial oversight known as the Building Contract Review program can also be provided for new businesses who do not have a track record. Insurance brokers should be able to provide information as to eligibility and limitation criteria or details can be obtained on the HBCF website.
In circumstances where the trading company is taken over by another person an executed Deed indemnifying the actions of the company may still be enforceable even if the indemnifier has no further connection with the company.
It is prudent therefore for indemnifiers to write to the insurer advising them of the circumstances and seeking a release from the Deed. It is usual practise however that the indemnifier still has to indemnify work that was contracted while the Deed was in force.
Common Deed provisions
Common provisions in most Deeds are that the indemnifier will:
- Pay within a short period of time (e.g. 20 days) the amount paid on the claim;
- Pay for legal costs, if any; and
- Pay for additional expenses such as expert reports.
The HBCF Deeds and some private insurer Deeds contain provisions that the indemnifier is to be contacted when a claim on the policy is received by the insurer however the indemnifier usually has no rights as to the assessment of the claim.
Deeds generally contain joint and several liability provisions so that where there is more than one indemnifier the insurer is still able to recover the full amount paid on the claim from one indemnifier where the other indemnifiers are dead or do not have the assets to cover the claim. It is recommended that separate agreement be made between the indemnifiers to ensure one person does not end up having to cover the claim.
While Deeds may be seen to be a useful means by which a builder can obtain eligibility for home warranty insurance a potential indemnifier should be fully aware of the potential financial impact in the future.
Parties contemplating signing a Deed should obtain legal advice about their specific circumstances.
Kreisson building and construction team is experience in all aspects of building law. We can advise and act on:
- Claims on Indemnity;
- Home Warranty Claims;
- Building Disputes.
To obtain our contact details and information on other legal services we provide to the building industry please phone Kelvin Keane on 02 8239 6515.
The information contained in this article is offered as general advice only and may not apply to the reader’s specific circumstances. It is recommended that the reader obtain advice relevant to their specific circumstances should they wish to proceed further.