The cost of building industry guarantees and insurance could hit homeowners in the pocket, according to the Insurance Council of New Zealand

The cost of building industry guarantees and insurance could hit homeowners in the pocket, according to the Insurance Council of New Zealand

Homeowners will have to pay higher insurance premiums if the Government doesn’t make building industry guarantees and insurance compulsory.

That’s the prediction from Insurance Council of New Zealand (ICNZ) chief executive Tim Grafton in response to proposed changes the Government is making to the Building Act.

A Ministry of Business, Innovation and Employment (MBIE) discussion paper on the law changes recommends a system where builders would have to offer homeowners a guarantee and insurance for their work on all new residential homes, or significant alterations. But homeowners would also retain the right to opt-out of such schemes.

The guarantee and insurance could be paid for separately, or as part of the total cost of the building work and would provide cover for 10 years after the work has been completed. MBIE says this would provide protection for homeowners and provide an incentive for builders and designers to produce high-quality building work.

But Grafton says if it isn’t compulsory less people will take part and the end result will hit homeowners in the pocket.

“The downside of not having a compulsory system is the premiums will be higher. You need more people involved to reduce the cost.”

Grafton says he’s met with various government ministers and officials since 2014 to discuss the issue of guarantees and insurance cover for residential construction.

“Our constant message to the Government and officials has been that for insurance to work best you need to have higher building standards that are monitored and enforced and you have to have the ability to chase phoenix builders.”

He says there have been too many cases of builders liquidating companies and then continuing to trade, often after avoiding their liabilities.

Grafton says you don’t have to look far to see the industry has problems, from the leaky building crisis to the litany of construction company failures.

“For an insurer to consider taking on that risk you need a regulatory framework that works well. And if you look back at the New Zealand building industry over the past two or three decades it’s been a pretty sad sight.”

He refers to the compulsory insurance system that they use in Queensland as a good example of a system that works.

All residential building work done in Queensland valued at over $3,300 (including labour and materials) must have home warranty insurance. As part of the building process, the builder pays a premium to the Queensland Building and Construction Commission to insure the construction. The premium is then included as part of the contract and is paid before work begins.

It can protect the homeowner if a licensed builder does not complete the work, the property owner terminates the contract, the contractor fails to rectify defective work, or the building suffers from subsidence or settlement. And a builder can be struck off the industry register if they fail to repair their work, or if they are bankrupt.  

Grafton’s call for a compulsory guarantee and insurance scheme is backed up by comments from New Zealand Certified Builders (NZCB) chief executive Grant Florence. He says  the Government should be taking a harder line on the industry and that homeowners shouldn’t be able to opt-out.

But MBIE says it considered making such guarantees and insurance products compulsory by removing the ability for policyholders to opt out. But it felt that it would be a significant intervention "that isn’t in proportion with the size of the problem". It also says it would place greater pressure on the market to be able to meet the demand and there are no other comparable compulsory private insurance schemes in New Zealand.

And MBIE says the lack of interest in the market from the insurance companies is another problem.

"Providers have been reluctant to enter the New Zealand guarantee and insurance product market for a number of reasons. Guarantee and insurance products have not always performed well internationally. It is a unique form of ‘long-tail’ liability insurance. Homeowners pay a one-off premium in return for being covered for up to 10 years. This can be a significant liability for providers and they can find it hard to take steps to manage those risks (such as raising premiums or declining cover). Additionally, the total premium pool for guarantee and insurance products is relatively small."

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11 Comments

MBIE says it considered making such guarantees and insurance products compulsory by removing the ability for policyholders to opt out. But it felt that it would be a significant intervention "that isn’t in proportion with the size of the problem"

So we must suffer more leaky fiascos and more regulatory burden as councils seek to create regulations the industry can't comply with while also delivering cheap, shoddy building?

We remove any obligation of personal responsibility for quality and craftsmanship from those in the industry by outsourcing risk and cost of poor quality to the tax/ratepayer.

Privatise the profits, socialise the costs, smack everyone on the head with over-regulation in an implausible attempt to prevent poor workmanship.

'implausible attempt to prevent poor workmanship'

You underestimate the ability of underwriters to identify 'problem' builders and impose tougher terms and higher premium rates on them, thus making those builders less competitive when tendering. Banks are likely to demand building guarantee insurance, giving insurers even more clout. And homeowners are now more knowledgeable about building performance issues following the leaky homes disaster. A compulsory state regulated or administered insurance scheme that would be subject to political meddling is not a good idea, especially in these socialistic times. In any case such a scheme, private insurance or some 'fairness based' collective concept, is going to address only one part of a shoddy homes fiasco given these things are commonly systemic in nature, with builders just a part contributor to the end mess.

The question that has not been answered, is that for the countries or jurisdictions like Queensland that have it, does it work?

Not enough population to make it work? Queensland population is approx the same as NZ's.

Out of proportion to the problem? The leaking building fiasco cost is in excess of $12 billion.

NZ needs to have better front end management, and then we would need less of this back end retrospective compliance.

Although Grafton represents multiple vested interests in attempting to steer the conversation away from an insurer based back end solution, he is correct in stating there would need to be much tougher front end regulatory oversight and processes in place for any guarantee scheme, including a QLD style pool system, to work. I imagine the cost and legal exposure risk of this to territorial authorities and the state featured in MBIE's calculations when deciding to recommend against compulsion or a collective scheme.

I recently built and a 10 year guarantee cost me $8K for a 300 sqm mid/upscale house. Lots of hoops to go through, the process was quite demanding and the insurer carefully vetted the builder who was also legally bound into the guarantee.

Yes MM, homeowners are more aware about building performance. More aware but not exactly better equipped. Recall your observations some months back about the appallingly wasteful construction inefficiencies that you witnessed with a new residence within your family. By a high profile reputable builder I believe. We too have had exactly that experience within our family. Squandering of time and resources, poor & slack finishing, short cuts everywhere. We were staggered to discover just how far the tentacles of the hungry lion Fletchers reached into the job. Just about all the supply, cladding,window joinery, plumbing hardware etc etc came from outfits within their organisation. In short, all on site danced to their tune. And when things went amiss? Up went exactly the same shutters and impenetrable face that so many EQ claimants encountered. They must have an organisation training manual based on that of Todt, 1937. It’s all about firstly getting the job and secondly screwing the money out of your pocket as cheaply as possible. But to take your first point, it would be very welcome indeed, for the public of NZ to have any institutional back up at all, that screened, identified and published problem builders

FG. It was constant battle of attrition ensuring the builder (a notable registered master) complied with the scope. Fortunately I had experience in contract management and had insisted the contract was set up to allow me regular site access and close supervision. Nevertheless there were still multiple (and some serious) cock ups requiring significant rework. And I'm not one of those picky swines; I accept things will not always be 100% prefect. My experience with this build has resulted in me now recommending to our friends that they engage their own hard nosed contract supervisor instead of relying on the builders in house 'project manager' to ensure things run properly. Yet despite all the wastage and delays our builder confirmed he'd made good money from our job. Which is as we would want it but the fact he still did on such a poorly managed project speaks volumes about our construction industry.

No need for the state to run it at all. Just make it mandatory and avoid the need for taxpayers to pick up the tab for shoddy practices again in the future.

Rick. OK. But the state would still need to enact the legislated framework under which your scheme would operate. This would, to be equitable, have to include the ability to take legal recovery action against territorial authorities for inadequate consenting and oversight. Given the significant resources of such a fund (compared with that of individuals) the number of cases against TA's and the long tail legal liability incurred by councils, would increase substantially.

This would, to be equitable, have to include the ability to take legal recovery action against territorial authorities for inadequate consenting and oversight.

This lack of personal responsibility is a big problem. "But you, council, didn't stop me from building a shoddy, leaking building! I was technically able to comply with the law and still deliver a bad product, therefore it's your fault!!!"

Imagine if we tolerated such an attitude towards the CGA for various other products of poor quality. The "it's your fault, you didn't prevent me" defense.

shouldn’t the insurance company do the inspections?

I would rather sue an insurance company than take on my local council. The latter will use my rates to employ the most formidable legal team to fight and delay my claim. Insurance companies are no angels but they have a reputation to worry about whereas Auckland council doesn't give a ****. Every day I give thanks that my house for all its age is not a leaky home.