Debunking the myths around building insurance
As Paul Cott explains, there are a lot of misconceptions surrounding builders warranty insurance which a lot of home owners and others still ‘labour under.’ some of the ‘rules’ discussed in this article may vary from state to state but overall the principles apply across the country.
If you are a builder, you will generally need to take out what is called ‘builders warranty insurance’ with respect to domestic constructions; that much is reasonably well-known.
What may not be so well-known however, or is known but its full implications are often not considered, is that it exists primarily or even solely for the benefit of the home owner rather than the builder who takes it out. It is the type of insurance that is only required to be taken out in certain specified circumstances.
In Victoria, for example, it is very much a required ‘beast’ for residential jobs when the cost of the works exceeds $16,000 (this figure can change from year to year) in value.
If the property is sold, then for six years after the property was built, the purchaser is covered by such insurance. For those of you keen to know the situation here for owner-builder situations, varying as it often does for owner-builders in the law, your legal situation will be discussed in a further article in due course.
Owner-builders are required however, under Section 137B of the Building Act 1993 to provide Warranty Insurance for building work they have carried out on their property if the value of the work was $16,000 or greater for the remainder of the six year period.
As for monetary value, such insurance is limited and critically, by the fact that the maximum level of coverage, (which can vary over the course of time) is $300,000. It used to provide a maximum level of coverage of $200,000.
Critically, and this is the ‘kicker’ for this type of insurance, domestic builder’s warranty insurance provides protection to a consumer for unfinished works and/or defective works, if the builder has died, the builder becomes insolvent, or the builder has disappeared. It is not the type of insurance that provides some level of ‘all cases’ or general coverage.
What should a home owner do to obtain further coverage, above and beyond what this type of insurance covers and in light of the limitations just stated or the ones about to be set out?
There is a possibility that another type of insurance product suitable for the particular circumstance exists. In addition, and separately from insurance, if you are an owner reading this, faced with an issue of defective or incomplete building works, the builder has to fix or complete works, pursuant to the building contract in any event. VCAT and/or one of the new dispute resolution bodies being introduced in Victoria (again possibly the subject of another article, if you need to or want to know, it is recommended advice is sought) may be the appropriate ‘contractual enforcement’ avenue necessary in the particular case you may have.
A positive thing to note after some of the ‘bad news’ given is that such insurance products can cover out of pocket expenses such as removal and storage costs that may be incurred due to the home owner being unable to live in the home for a time, loss of a deposit and costs such as temporary fencing.
In respect of defective works, there are two broad types of defects covered: structural and non structural defects. Even in regards to each of these broad categories, there can be limitations on coverage. For example, it may only cover 2 or 6 years after the work is completed or the building contract is terminated.
In the case of incomplete works, the limitation is coverage for only up to 20% of the contract price. Speak to your insurance broker, your lawyer or other suitable professional about these issues.
It is basic proposition and it probably nearly always happens, but as a builder, you have to provide a copy of the policy of insurance or the certificate of insurance to the home owner and this should occur before you accept a deposit or any other type of payment connected with the project.
Another area of insurance that I will touch on briefly is protection works insurance.
A call to an insurance broker and a request for ‘protection works insurance’ may yield no results to the uninitiated as there is actually no specific policy called ‘protection works insurance’ per se. The legislative provisions don’t specify or allow for it as such either.
But it is the insurance that is actually required to be in place before works are being done on one property which are works done in order to protect the adjoining property owner. It is designed to protect adjoining property owners and the public for damage that may occur in the protection works being done and it is taken out by the builder rather than the adjoining owner so it is in that sense unusual.
However the owner, not the adjoining owner, has the obligation to ensure such insurance is in place before the works start and the owner and builder should agree on the insurance to be arranged.
‘Protection works insurance’ can also give protection against liability for other types of expenses incurred as a result of the protection works such as legal expenses incurred because the owner sought legal advice as to their rights and entitlements as a result of the works. It provides protection for 12 months after the works are finished.
As always when you are dealing with an area that you as a builder and or home owner are not familiar with, advice should be sought from a professional, whether that be an insurance broker, lawyer or an accountant.
Nothing beats, at the first instance, though, reading through the policy wording and certificate of insurance carefully. If you have any queries it is best to obtain the advice just mentioned.
Money spent as soon as an issue arises can save far bigger sums down the track should a problem escalate.