High-rise developers set to profit from home warranty insurance exemption

By Sergio Capelli.

Key Points:
NSW has introduced the Home Building Amendment (Insurance Exemptions) Regulation 2003, which came into effect on 31 December 2003. If a contract for construction were executed prior to 31 December 2003 and yet the building work did not commence until on or after that date, the contractor may be eligible for a refund of its home warranty insurance premium.

New South Wales has fallen into line with all other Australian states in exempting multi-storey residential buildings from the home warranty insurance requirements.

Under the Home Building Amendment (Insurance Exemptions) Regulation 2003, which came into effect on 31 December 2003, multi-storey residential buildings are defined as buildings of more than three storeys and containing two or more separate dwellings.

Residential building work involving repairs and/or maintenance to multi-storey buildings will not be exempted, as only new constructions fall within the Regulation. If a contract for construction were executed prior to 31 December 2003 and yet the building work did not commence until on or after that date, the contractor may be eligible for a refund of its home warranty insurance premium. The NSW Office of Fair Trading (OFT) is currently receiving written requests for refunds and is arranging for inspectors to visit project sites to report on the status of the project. For more information on the refund process please contact OFT's Home Warranty Insurance Hotline on 1800 678 588.

It is expected that the amendment will increase the number of building contractors able to tender for high-rise residential developments. Previously the difficulties in procuring home warranty insurance had reduced the number of contractors who could bid for residential projects. An indication of the extent of the crisis in the insurance industry was provided by figures from the Master Builders Association, which estimated that by mid-2003 fewer than 42 per cent of licensed builders in NSW were eligible for insurance, compared with 75 per cent in 2001.

Since the collapse of HIH in early 2001 many home builders have struggled to obtain insurance. The now defunct insurer previously accounted for more than 50 per cent of the home warranty insurance market not only in NSW, but across Australia. When Dexta exited the market in December 2002, Royal & Sun Alliance became the largest provider of home warranty insurance, handling an estimated 80 per cent of business.

A repercussion of the dearth of insurers has been the spiralling of approval times, with some builders claiming waiting periods of up to six months for insurance approval. In an insurance climate of drought, it is unsurprising that the Government has issued press releases evincing its intention to attract insurers to the home warranty insurance market in implementing reform.

According to the OFT, in the wake of the new Regulation it is already in receipt of a number of applications for approval to sell home warranty insurance. However, it may be some months before these applications are decided. Acceptance of these applications would prove the recent legislative action sufficed to broaden the market, whereas rejection would suggest the need for further reform.

The amendment has received a mixed reception, one of the recognisable assertions among the cacophony of responses being that it is too little too late. However, those poised to benefit include developers, builders and purchasers, all of whom are likely to find at least some profit in shorter development programs, reduced project risk and reduced costs.

This new Regulation is the first move by the NSW legislature to implement the recommendations of the NSW Home Warranty Insurance Inquiry, released in a final report on 30 September 2003. The Inquiry, conducted by Mr Richard Grellman, Chairman of the NSW Motor Accidents Authority, considered six reform options, with five of the six options including a recommendation for the exclusion of high-rise developments from the home warranty insurance scheme.

The final report of the Inquiry expresses the widely held view that high-rise constructions are commercial projects and the risks involved are materially different to those of individuals who are building a home. In particular, the consumer protection provided by the home warranty scheme is of little relevance to developers.

In releasing the report, Minister for Commerce, John Della Bosca, announced the NSW Government's in-principle acceptance of the Inquiry's seven primary recommendations, outlined as follows:

1. A home warranty insurance scheme board and advisory council. The board would have responsibility for licensing, enforcement, dispute resolution and the regulation of insurers.
2. A system to regulate insurers. In addition to APRA reporting requirements, insurers would be required to submit annual filings on premium calculation, claims costs and profit margins.
3. The creation of an Industry Deed, to assist the re-entry of insurers and allow for the exchange of key data.
4. An independent builders' licensing function within the NSW Office of Fair Trading.
5. Strengthening building licensing processes and the enforcement of licence conditions. This consumer protection element would include financial testing, based on the Queensland test.
6. Monitoring of the new dispute resolution mechanisms by the scheme board.
7. Excluding high-rise developments from the scheme, including mandatory certification for the construction of high-rise projects by approved certifiers only.

The home warranty insurance exemption for multi-storey residential constructions appears to be a positive move for contractors and developers. It is also a representative example of the Home Warranty Insurance Inquiry's final recommendations which are geared toward enhancing the current scheme in preference to a raft of largely more radical reforms that were proposed in the course of the Inquiry.

Thanks to Anne Davis for her help in writing this article.

For further information, please contact Sergio Capelli.