Warranties and insurance: Building and Construction Minister Chris Penk says temporary suspension proposal 'a precautionary tool to avoid the possibility of disruption to the construction sector'

As New Zealand’s building consent system heads for a shake up, with a move from joint and several liability to proportionate liability being one of the major changes, the Government is proposing to give itself the ability to temporarily suspend the requirement for building warranties and/or insurance.

The proposal to have a temporary suspension was not part of the original policy announcement to the public, but documents relating to potential changes to the Building Act were proactively released in December.

John Gray, president of the not-for-profit advocacy organisation, Home Owners and Buyers Association of New Zealand (HOBANZ), described the potential for building warranties or insurance to be waived as "quite scurrilous," saying the Government ought to back its regulatory regime to ensure people building homes have the protection they deserve."

In a Cabinet paper which discussed strengthening consumer protections in the Building Act, Building and Construction Minister Chris Penk said: “New Zealand’s insurance market relies on overseas reinsurers, who may withdraw if systemic building defects emerge or following major shocks such as natural disasters.”

“To manage risks to building sector continuity if sufficient insurance coverage is unavailable, I propose to enable, via Order in Council, the temporary suspension of requirements for building warranties and indemnity insurance.”

Examples used were if warranty and/or insurance providers withdrew from the New Zealand market, there were substantial increases in warranty or professional indemnity insurance costs or other developments that affect the availability of these products.

The suspension could be put in place at any time, for up to two years, and could be extended or revoked. The extension time is limited to a maximum of two years.

In a statement to interest.co.nz, Penk said: “The suspension mechanism is a precautionary tool to avoid the possibility of disruption in the construction sector. We have thought ahead about how best to address the theoretical risk of insurance retreat and have discussed this with the sector.”

Proportionate liability

The Government first made an announcement about changes to the Building Act last August with one of the major changes being a shift to proportionate liability.

When it comes to defective work, joint and several liability means liability is shared between multiple parties - and the payment is shared by these parties. If someone can’t pay, usually the council, which issued the building consent, foots the Bill.

But with proportionate liability, this means each party will be responsible only for the share of the work it carried out.

In November, Penk said: “Councils have the deepest pockets and cannot walk away by filing for insolvency, meaning that ratepayers often end up paying for mistakes made by others, even when the local council’s involvement was limited to signing off the work.”

Shifting to proportionate liability would "ease the burden on ratepayers unfairly footing the bill for damages", he said.

At the time, Penk announced that professionals contributing to building design, such as architects and engineers, will be required to hold professional indemnity insurance.

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.

Penk said this requirement did not extend to other building trades.

Alongside this, there would be mandatory home warranties for all new residential buildings that are three storeys and under, and for renovations of $100,000 and above - covering a one-year defect period and a 10-year structural warranty.

Home warranties cover the repair of defects for residential projects. Current 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.

In the Cabinet paper, Penk said: “MBIE (Ministry of Business, Innovation and Employment) consulted warranty and insurance providers, including the two largest guarantee providers (Master Builders and Halo), Stamford Insurance (current Lloyd’s cover-holder), the largest volume builder, and a prospective guarantee provider.”

“Consulted providers indicated that they can increase their product range and scale up operations in the lead up to the rule change taking effect.”

The Government also planned to strengthen disciplinary penalties for Licensed Building Practitioners by increasing the maximum fine from $10,000 to $20,000 and the maximum suspension period from 12 months to 24 months.

'It’s quite scurrilous'

John Gray, president of the not-for-profit advocacy organisation, Home Owners and Buyers Association of New Zealand (HOBANZ), said: “We want a scheme that protects ratepayers but we must have a scheme that protects the good New Zealanders who decide to have a home built for themselves.”

“One of the most disturbing things that has occurred recently … it’s quite scurrilous in our opinion, [the Government] acknowledged the indemnity insurance and insurance-backed warranties are an important feature of the system but they have this availability to waive that requirement," Gray said.

"They actually clearly understand our warnings in relation to the claims made against these insurance companies will potentially result in that insurance cover being removed."

He said this had happened in Australia and urged the New Zealand Government to "back themselves".

"The Government needs to back their regulatory regime under the Building Act in order to ensure that good New Zealanders building homes have the protection they deserve."

"Because otherwise, they’re left with the implied warranties under the Building Act, which would require them to take civil litigation against all the parties,” Gray said, and in the cases HOBANZ has been close to, people could not afford to employ lawyers and specialists to take a court case - or very few could.

While it sounded great that these regulatory changes would protect ratepayers, Gray said; “we are at risk of throwing the baby out with the bathwater because if we do not insist and maintain the adequate protection for people who want to get a home built for them, then you know it is very wrong. We’re going down the wrong pathway”.

He said there were good builders out there but you do not always know who you're dealing with in terms of performance.

‘An abundance of caution’

Penk told interest.co.nz: “While introducing mandatory professional indemnity insurance and home warranties could increase the sector’s exposure to volatility in the global insurance market, at the same time the insurance sector can now have confidence that a significant and highly certain market now exists for building insurance products in New Zealand.”

“Paired with the Government’s strengthening of disciplinary options for ‘cowboy’ tradies, this change will provide greater confidence to the insurance sector.”

"Acting with an abundance of caution, we have agreed that these requirements may be temporarily suspended in the event of a significant disruption," Penk said.

“This would allow both the market and the Government to respond efficiently and effectively. 

“The most effective and transparent way to implement a suspension will be considered as part of the legislative process that is now underway.”

‘A backstop’

Penk said people would continue to have access to warranties and guarantees available in the market during any suspension of the mandatory requirements.

The Government had prioritised a “market-led” approach as a way to minimise disruption to the sector and enable a faster transition to proportionate liability, he said.

“A suspension mechanism provides a backstop to ensure the sector can continue operating lawfully if private providers face temporary constraints.”

He said any suspension would be a last resort and time-limited, subject to “robust scrutiny, and used only if the requirements become unworkable”.

Builders, building consent authorities and professionals would remain accountable for their share of damages under proportionate liability, Penk said, and existing warranties would also remain in place, with MBIE’s registration of providers ensuring they have the capability to meet their obligations to policy holders over a 10-year period.

When asked by interest.co.nz why the temporary suspension was not publicly mentioned, Penk said: "I consider it highly unlikely that a temporary suspension measure will be needed and is therefore a hypothetical and relatively minor technical detail."

“As such, the possibility of a temporary suspension in response to insurance retreat did not form the basis of the original policy announcement.”

'Penalties should be higher'

In terms of penalties, Gray said these needed to be $200,000 instead of $20,000.

HOBANZ preferred the International Building Quality Centre’s regulatory regime, which mandates insurance requirements and has serious consequences for builders and designers that get it wrong, he said.

“They promote appropriately weighted civil and criminal consequences for those that get it wrong … We need the carrot but we need the big stick for those that get it wrong.”

He said this would also encourage insurers to continue underwriting insurance policies.

When it came to the temporary suspension proposal, Gray questioned the scrutiny that would potentially go behind a call to enact it.

“It’s a very black and white scenario. Either the insurance is available or it is not,” Gray said.

And when it came to the temporary aspect, he said: “When would you get insurance companies back in the market? You don’t know. They may never come back if they’re burnt too badly.”

“In the interim, you’re going to have the industry moving forward, building homes without the appropriate protection for the consumer.”

Insurers 'committed to engaging...with the aim of ensuring consumer protection settings are effective & sustainable'

A spokesperson for Insurance Council New Zealand (ICNZ), a lobby group for general insurers, said ICNZ and insurers met with MBIE, which provided an update on the Government’s decisions to amend the Building Act to introduce proportionate liability.

“The update also referenced a proposed power for the Minister to suspend the requirement for a home warranty or insurance,” the spokesperson said.

“ICNZ is committed to engaging with officials on proportionate liability with the aim of ensuring consumer protection settings are effective and sustainable.”

Changes to home warranty and professional indemnity insurance will be progressed through the Building Amendment Bill and this is expected to be introduced in early 2026, while changes to disciplinary penalties will be in a separate Bill but also expected to take effect in 2026.

When legislation has passed, there will be a one-year implementation period before proportionate liability and other new rules take effect.