In most Australian jurisdictions, Victoria being a case in point, residential builders are required by law to carry home warranty cover for the construction of residences.
The Building Act 1993 proclaims the Ministerial orders that dictate the terms and contents of the “insurance policies” for the residential sector (insurance is in quotation marks because warranty cover is not typical insurance cover).
Most insurance policies provide insurance protection and indemnification to the person who pays for the insurance cover.
Take the case of lawyers we are required by law to carry professional indemnity (PI) cover as a prerequisite to holding a practicing certificate – no PI, no practicing certificate. If a claim for negligence is lodged, the client or the consumer sues the lawyer, who then claims indemnity from the insurer, which 99 times out of 100 is forthcoming.
If a liability is established on account of solicitor negligence, the insurer pays out the entire liability (save for any excess) and also pays for the defence of the case. This type of insurance cover is typical of most types of insurance. Car insurance although not PI cover, is similar; you pay your insurance premium and you are then indemnified for losses sustained in car accidents, not only to your own car but damages to other cars if you are the driver at fault.
Conventional insurance in terms of both what and whom it covers is a profoundly different creature to home warranty cover that the residential builder is required to pay for and obtain.
The builder is not indemnified by the insurer; in fact he or she is anything but indemnified. The natural persons behind the building company are ordinarily required by the insurers to sign personal guarantees or counter indemnities to indemnify the insurer for any payments the insurer makes to the consumer in the event that the builder loses a lawsuit and can’t pay for the losses sustained by the consumer.
These counter indemnities, in keeping with the true nature of personal guarantees, mean the signatory (typically the registered builder, co-directors and sometimes the wife) put their assets on the line often, not the least of which is the matrimonial home.
So it could be argued that the insurer insures the owner and in an abstract sense, the signatories to the counter indemnity “insure” the insurer, as ultimately those indemnifiers foot the insurer’s bill.
The warranty cover insurance product is indeed unusual if not unique and it would be fair to say not the flavour of the month in certain quarters.
So what precisely does this “insurance “cover and what are the triggers?
Indemnity can only be triggered if:
- the builder “dies, becomes insolvent or disappears,” hence the term last resort insurance
- the builder has been deregistered and cannot lawfully finish the building work
- arectification order has not been complied with and the domestic building contract has been terminated
- incapacitation of the builder
The policy has to indemnify the owner for:
- loss consequential upon non-completion of the work
- loss emanating from defective building work or work that is not in accordance with the section 8 warranties of the Domestic Building Contracts Act
- work that does not meet the quality of work thresholds specified in the contract
- conduct that contravenes trade practice regulation
- loss of deposits paid
- costs of alternative accommodation, removal and storage costs for a finite period of time
The stipulated beneficiary of the insurance cover is the home owner.
If the owner, however, pays the builder sums that are greater than what should have been paid under the contract, insurance policies may exclude indemnification for overpayments.
Developers can also be excluded from the class of persons having a right to claim indemnity from the insurer if there are exclusions within the policy to that effect.
Another exclusion that is a real handbrake is that policies may “limit claims…for non-completion of domestic building work to an amount that is not more than 20% of the contract price under the insurable domestic building contract.”
In keeping with the nature of last resort insurance cover, the claimant can’t lodge a claim for defects or incomplete works with the insurer unless the building concern has disappeared or is insolvent. The claimant is compelled to sue the builder in the Victorian Civil and Administration Tribunal in the case of Victoria and the NSW Civil and Administration Tribunal in the case of NSW residential building disputes.
If the case doesn’t settle, the claimant will be compelled to run the case to conclusion of trial and can only visit a successful judgement upon the insurer if the builder ‘goes belly up.’ The claimant (the consumer) will have to fund the entire litigation out of his or own pocket, and that will have a deleterious impact upon their financial resources.
Some cautionary notes
The insurance policies need to be read carefully to ensure that one is au fait with the scope of the indemnity and the exclusions.
The insurance gazettes change regularly so one needs to ensure that the policy is married with the gazettes.
At the moment, the figure for which all domestic building contracts are required to have the insurance is for more than $16,000.
The policy may limit the liability of the insurer to not less than the aggregate amount of $300,000 for all claims in respect of any one home, including reasonable legal costs and expenses incurred by the insured (not being the builder or owner builder) associated with the successful claim against the insurer.
The consumer needs to realise that one can’t go the insurer directly absent insolvency or disappearance of the builder.
The road to insurance indemnity is long and windy, and may take a full blown cradle to grave litigation culminating in a judgement against the builder and insolvency. This will require a large war chest, extraordinary patience and resolve and a very hardy constitution, because the stress of protracted litigation is horrible.
One needs specialist legal advice as this is no place for general practitioners.
Builders, when you sign up counter indemnities, get legal advice so you know what you are signing up for. Realise that you are putting everything on the line.
Above all, it is critical to engage a construction lawyer skilled in the intricacies of deciphering the insurance policies in terms of the scope of the cover and the exclusions and limitations. The insurance gazettes, since they were initially proclaimed in the early 1990s, have been amended a great many times, as have warranty polices that have purported to comply. It is thus very important to ensure that regard is had to the germane insurance instrument and policy that pertains to the time upon wchih the claim was lodged. To reiterate, this takes skill as there is a lot at stake.