Understanding HOW Insurance

27 June 2013

Home Owners Warranty Insurance is a complex area of law that has had numerous amendments over the years. It is important to be aware of the key dates when managing any building with defects to avoid missing critical deadlines.

Introduction

As from 1 May 1997, New South Wales has the following 2 schemes of insurance:

• The Fair Trading Administration Corporation Insurance for work done before 1 May 1997 and governed by the Fair Trading Administration Corporation Insurance Scheme.
• Private insurance scheme ie Home Owners Warranty Insurance.

Since the HBA began on 1 May 1997 there have been 4 significant changes to the private insurance scheme, the latest as recently as 1 April 2009.

HOW Insurance Mark I

In a typical scenario:

• Applies to residential building work commenced in the period from 1 May 1997 to 30 June 2002.
• “First resort insurance”.
• Owners corporation can make a claim directly to insurer without taking other action against Builder or developer.

HOW Insurance Mark II – “Last Resort”

• Applies to residential building work commenced in the period from 1 July 2002 to date.
• Known as the “last resort scheme”.
• Owners Corporation must exhaust all avenues against the Builder.
• Owners Corporation becomes entitled to make a HOW claim when the builder dies, disappears or becomes insolvent.
• Makes a distinction between “structural defects” and other defects.
• Different time limits apply for making of claims by Owners corporations:
  – Structural defects: 6 years from completion of works
  – General defects: 2 years from completion of works
• Claims to insurers are easily overlooked because of the complaints process under the HBA and “the last resort insurance” scheme.

HOW Insurance Mark III

• With effect from 31 December 2003, clause 74 of the Home Building Regulation 2004 grants an exemption for the requirement for a builder to comply with Part 6 of the HBA.
• Exemption applies to construction of multi storey building which means:
  – a rise of more than 3 storeys
  – that contains 2 or more separate dwellings.
• All other aspects of HOW Mark II remain effective.

HOW Insurance Mark IV

• Applies to a contracts of insurance entered into after 19 May 2009.
• Last resort insurance scheme.
• New insurance trigger inserted into the HBA that Builders license has been suspended because of failure by the Builder to comply with the CTTT or Court order.
• Amendment extends definition of insolvency to include suspension of contractor’s licence.
• Other aspects of Mark II and III apply.

When are the Works completed?

For the purpose of defect claim a critical date that needs to be established is that date that the works were completed.

This date is important because:

• For policies issued after 1 July 2002 the time limit for lodging claims is 6 years in the case of structural defects and 2 years in the case of other defects from the completion of the works.
• For civil proceedings against Builder and/or Developer alleging breach of warranty the time limit for commencing proceedings is 7 years from the completion of the works in respect of a contract for residential building work entered into before the amendments and 6 years from completion of works with respect to a contract entered into after the amendments.

What does completion of Residential Building works mean?

Establishing when the works were completed until the latest reform was often a difficult exercise.

A failure to properly establish the correct date could mean that the time limit is missed and being time barred from making a claim.

Pre amendment position

With respect to a contract for residential building work entered into before the recent amendments, section 18E of the HBA states:

18E Proceedings for breach of warranties

1) Proceedings for a breach of a statutory warranty must be commenced within 7 years after:

a) the completion of the work to which it relates, or

b) if the work is not completed:

i) the date for completion of the work specified or determined in accordance with the contract, or

ii) if there is no such date, the date of the contract.

With respect to a contract for residential building work entered into after the recent amendments, section 18E of the HBA states:

18E Proceedings for breach of warranties

1) Proceedings for a breach of a statutory warranty must be commenced in accordance with the following provisions:

a) proceedings must be commenced before the end of the warranty period for the breach,

b) the warranty period is 6 years for a breach that results in a structural defect (as defined in the regulations) or 2 years in any other case,

c) the warranty period starts on completion of the work to which it relates (but this does not prevent proceedings from being commenced before completion of the work),

d) if the work is not completed, the warranty period starts on:

i) the date the contract is terminated, or
ii) if the contract is not terminated-the date on which work under the contract ceased, or
iii) if the contract is not terminated and work under the contract was not commenced-the date of the contract,

e) if the breach of warranty becomes apparent within the last 6 months of the warranty period, proceedings may be commenced within a further 6 months after the end of the warranty period,

f) a breach of warranty “becomes apparent” when any person entitled to the benefit of the warranty first becomes aware (or ought reasonably to have become aware) of the breach.

For the purposes of Section 18E the date of completion is defined in section 3B which states as follows:

3B Date of completion of residential building work

1) The completion of residential building work occurs on the date that the work is complete within the meaning of the contract under which the work was done.

2) If the contract does not provide for when work is complete (or there is no contract), the completion of residential building work occurs on “practical completion” of the work, which is when the work is completed except for any omissions or defects that do not prevent the work from being reasonably capable of being used for its intended purpose.

3) It is to be presumed (unless an earlier date for practical completion can be established) that practical completion of residential building work occurred on the earliest of whichever of the following dates can be established for the work:

a) the date on which the contractor handed over possession of the work to the owner,

b) the date on which the contractor last attended the site to carry out work (other than work to remedy any defect that does not affect practical completion),

c) the date of issue of an occupation certificate under the Environmental Planning and Assessment Act 1979 that authorises commencement of the use or occupation of the work,

d) (in the case of owner-builder work) the date that is 18 months after the issue of the owner-builder permit for the work.

Main Documents to be lodged for Claim

The insurers claim form lists the documents to be lodged.

The main documents consist of the following:

(a) The building contract

(b) Builders certificates of HOW insurance

(c) Value of the building works and details of progress payments

(d) An accurate description of the defective or incomplete works. Unless the list of defects is short the Owners Corporation should obtain a report from a building consultant which sets out:

• • All the defects
  • Cause of the defect
  • The relevant provision of the Building Code or legislation which has been breached in the case of each defect
  • Scope of works for rectification of each defect
  • An estimated rectification cost
  • Any experts reports or photos

Rejected or disputed insurance claims

If an insurance claim is rejected or if an amount approved for payment by the insurer is unsatisfactory, the home owner can appeal to the Consumer Trader and Tenancy Tribunal.

There is a 45 day time limit for appealing a decision of the insurer.

Appeals to the CTTT must be lodged within 45 days of written notification by the insurer that the claim has been rejected (clause 65 of the Home Building Regulation 2004).