‘We don’t want an empty chair problem’: Government to look into professional indemnity insurance and home warranties after announcing plans to move to proportionate liability for defective work

The Government will be exploring consumer protection measures such as professional indemnity insurance and home warranties after it announced major changes to the building consent system.

In what's touted as the biggest changes to the building consent system since the Building Act came into force in 2004, Minister for Building and Construction Chris Penk announced plans to move from joint and several liability to proportionate liability for defective work.

Alongside this, he announced councils will be allowed to voluntarily consolidate their Building Consent Authorities with each other.

When it came to the liability change, Penk says it would ease the cost burden on ratepayers for defective building work as councils are hesitant to sign off on building consents and inspections because they can be held liable for all defects, leaving ratepayers footing the bill.

“This often happens when one of the parties responsible cannot pay for repairs, for example, if a business goes bust.

“Currently, building owners can claim full compensation from any responsible party – and it’s often councils, with the deepest pockets and no option to walk away, that end up paying out.”

“The risk-aversion this creates leads to frustrating delays and extra cost for builders and homeowners,” Penk says.

Consumer protection measures

Joint and several liability means liability is shared between multiple parties - and the payment is shared by these parties. Proportionate liability means each party will be responsible only for the share of the work it carried out.

Professional indemnity insurance covers professionals who provide a service or advice. This insurance provides cover when a third party or someone who engages in your work alleges professional negligence and takes legal action.

When it comes to professional indemnity insurance, Penk says it's quite common across design professionals such as architects and engineers when it comes to things like apartment developments.

"So that wouldn’t need to change and Cabinet will consider whether that kind of scheme should be mandatory, for example."

Home warranties cover the repair of defects for residential projects. Examples of this include the Master Build 10-year Guarantee which is offered by the Registered Master Builders Association or the Halo 10-year Residential Guarantee from the New Zealand Certified Builders Association.

Empty chair problem

When asked about why Cabinet had not made a decision on professional indemnity insurance and home warranty schemes at the post-Cabinet press conference on Monday, Penk told reporters the first thing the Government was doing was signalling to the sector that it would be moving to proportionate liability.

“We can now work closely with the sector and all interested Kiwis to make sure we get the details of those schemes correct.”

There are detailed conversations to have with the sector to ensure there’s no gaps in the system, he says, and the Government needs to take the time to bring the sector along with them.

Penk says the Government has had conversations with the insurance sector.

"We need to give everyone the comfort and the certainty that we are moving to this system to see what the willingness of them to step up is." 

“We don’t want to add cost simply by shifting the liability and therefore the cost from the ratepayer and the council to a private avenue instead. So we need to carefully balance those considerations.”

“People do go in and out of business and we don’t want an empty chair problem where a vulnerable consumer is left with a gap in terms of their coverage,” Penk says.

Chilling effect

When asked whether there could be a rise in insurance costs due to previous things that weren't insured becoming insured, Penk says "that was potentially true".

“But the reality is that these products are available now and actually in many cases are relied upon already so the additional cost that comes with the chilling effect of that joint and several liability that councils face is adding the time and the delay, and therefore the cost in that realm as well.

“So we’re sort of paying twice in the sense that we’re trying to protect against the system and therefore being risk-averse and slow as councils."

This was at the same time as people were paying for things like the Halo guarantee or the Master Build 10-year guarantee, Penk says.

A spokesperson for the Insurance Council of New Zealand/Te Kāhui Inihua o Aotearoa (ICNZ) says it has had discussions with the Government about their preliminary thinking on moving to proportionate liability.

These discussions included some of the challenges for insurers around this approach, the spokesperson says.

“We look forward to having further discussions with them as the policy is developed.”