Frustration builds over home insurance costs

INSURANCE problems in the home building industry are likely to get much worse before they start to get any better.

This is despite the WA Government’s legislative efforts and the potential introduction of a third private sector insurer to the market.

Master Builders Association director Michael McLean described builders’ indemnity insurance as the biggest issue affecting homebuilders in WA.

“It’s causing major frustration. I had one builder from Albany who had a turnover of $6 million to $7 million who is closing his doors because he can’t get cover,” Mr McLean said.

“The regional areas are probably being affected the worst.”

Consumer and Employment Protection Minister John Kobelke has introduced legislation that:

p gives him the power to suspend the housing indemnity insurance scheme from residential builders;

p removes the need for developers to be covered by a home indemnity insurance policy for loss of deposit or non-completion costs; and

p paves the way for a mutual fund to be set up to act as another insurance provider.

Mr Kobelke said the Government wanted to continue the mandatory indemnity insurance scheme.

“Removing the scheme would mean consumers have no cover for loss of deposit, non-completion or faulty workmanship or material problems. This is unacceptable,” he said.

Mr McLean said the Government’s new legislation might provide some hope for builders if the mutual fund could be established.

“The major risk for a client is in the construction stage of the home. Once the house is completed the risks are fairly minimal,” he said.

“The trouble with housing indemnity insurance policies is that they have a six-year tail.

“The legislation also makes provision for the minister to suspend the home indemnity insurance scheme, but he’s not likely to do that unless another insurer pulls out or the industry gets into real strife. The trouble is, the industry is in real trouble.”

Housing Industry Association executive director John Dastlik said the mutual fund could be good for the home building industry.

“It will bring more competition and we welcome that. Our concern, however, is whether the fund will conform to Australian Prudential Regulation Authority guide-lines,” he said.

“We don’t want another Canadian Home Warranty Insurance scenario.”

Canadian Home Warranty Insurance was a home building industry mutual fund that collapsed several years ago. It is understood the fund still has between $600 million and $800 million in outstanding claims.

Mr Dastlik said he was confident a third insurer would soon be coming to the market, however he would not reveal which company was considering it.

“We’ve been trying to get more competition in the marketplace,” he said.

Mr Dastlik also said insurance was not such a big problem.

“The vast majority of people who need insurance have either gone through the system or are on the verge of getting cover,” he said.

“Now it’s a matter of annual reviews or builders trying to get higher cover. There are still some delays but we’re working on that.”

Builders’ indemnity insurance problems began with the collapse of HIH Insurance – one of the biggest players in the insurance market. Dexta then decided it would leave the market, leaving only Royal and Sun Alliance and Reward Insurance.

One of the things possibly masking the problems in the housing indemnity insurance market is the boom in owner-builder starts.

Owner-builders are not required to get home indemnity insurance during the construction phase of their home. However, if they wish to sell the property within six years, they then need to get cover.

The South Australian Government recently put out a warning to people frustrated about the delays in getting their home built because builders could not get indemnity insurance cover.

Some were considering becoming owner-builders and getting a registered builder to project manage the construction of their home. This approach opened homebuilders up to a number of insurance headaches, such as workers’ compensation.

Mr Dastlik said the GST had been responsible for the boom in owner-building.

“This phenomenon occurs wherever the GST or a similar tax has come in,” he said.

Mr Dastlik said he had not heard of any builders advising clients to pursue the owner-builder route, but admitted it could be possible.