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Home Warranty Insurance Scheme

By Sandy Naidu | July 14, 2008

Home Warranty Insurance is also known as builders’ warranty or home indemnity insurance. This is a mandatory insurance in all states. A builder who is renovating or building a new home has to take this insurance. The builder takes the insurance and passes on the cost of this insurance to the client. Before the construction begins, the builder hands over the insurance certificate to the client.

What Does This Insurance Cover?

This insurance provides clients protection against substandard building work and incomplete building work. There are however quite a few loopholes. This insurance has a ‘last resort’ clause in it (except in Queensland). This means it only covers people when a builder has died, disappeared or become insolvent. In Queensland though, it covers substandard or incomplete work, even if the builder is still trading.

This insurance was introduced to protect the consumer…But in reality in most of the states it does not seem to be fulfilling its role. A recent Senate inquiry revealed that the insurance companies collected $225 million dollars in premiums but paid out only $16 million in claims. The ‘last resort’ clause was probably the main culprit behind such few claims.

The Recent Beechwood Homes Saga

Beechwood Homes collapsed in mid May and went into receivership. Around 700 home owners were affected by this - 300 had begun building and the remaining 400 had paid deposits but no construction had begun.
At this stage none of them could make a claim from their home warranty insurance - because the builder had not become insolvent (last resort clause). There was a lot of confusion during this period. A lot of clients believed they were covered by insurance but later realised that the mandatory insurance might not help them at all.

Fortunately in the third week of May, Beechwood Homes became insolvent and 300 who had begun their building found that they were now covered by the insurance. For the remaining clients, my understanding is that they are not covered by the insurance and they might lose out what they spent up until then.

I should also mention that a lot of contractors and sub-contractors who worked for Beechwood Homes lost heaps…They were owed a substantial amount of money by the collapsed company.

There was huge media coverage about home warranty insurance after Beechwood Homes Collapse. There is a lot of anger about this insurance - and rightly so. Here is an insurance policy which is mandatory but has too many clauses. It gives false impression of protection for clients but in a reality only protects very few clients.

What Should You Do?

If you are an owner builder or renovator then:

1. Be aware of the loopholes of this insurance.

2. Don’t rely on insurance - be defensive and be cautious from the start.

3. Only employ licensed builders.

4. Do reference checks before employing the builder.

5. Don’t pay them too much in advance - make progressive payments.

6. Document and make sure both parties sign on everything - when you are spending so much money you have to manage it like a real project. You can’t just instruct what needs to be done…You have to document it and make sure there is clear understanding.