NSW set for action on 'junk' insurance

Kelly Burke Consumer Affairs

October 30, 2009

THE NSW Government is ready to take over the privately run mandatory home building insurance scheme, in an attempt to avert a crisis in the industry.

The Senate heard yesterday that more than one in four builders would be working illegally or forced out of business by the end of the year.

The deputy leader of the Australian Greens, Christine Milne, told Federal Parliament that, by Christmas, 25 to 30 per cent of builders would be in dire straits.

''The law says there has to be mandatory last-resort home warranty insurance,'' she said. ''The law says it has to be in place or they cannot build. But they will not be able to adhere to the law because they have no more securities to offer … they will either go broke or have to build illegally.''

The impending crisis has been triggered by the departure of two of the five providers of the insurance, Lumley and CGU, earlier this year. Builders are set to lose their eligibility for cover by December at the latest.

Compulsory home builders' warranty insurance is loathed by builders and home-owners alike and derided by consumer advocates as ''junk insurance''.

Many state and federal inquiries have heard horror tales of homeowners spending years in tribunals and courts and spending hundreds of thousands of dollars in legal fees just to access the insurance, while the defects to their homes, some which were rendered uninhabitable, remain unrectified.

Builders have given evidence of their businesses failing because of hundreds of thousands of dollars - even millions - in assets being tied up in deeds of indemnity, bank guarantees and securities, so the insurer bears none of the risk and is in effect using the builder as a reinsurer.

The NSW Government and its successive fair trading ministers have been lone voices in defending the private insurance, which all state governments except Queensland and Tasmania compel builders to take out on behalf of their clients for all work valued over $12,000.

A construction law expert, Rob Riddell, told the Herald last year that if the scheme was made voluntary, ''nobody would buy it - it's that bad.''

The Herald understands the NSW Government is considering taking over the scheme to avert the crisis but, in contrast with the government-runQueensland scheme, it will remain an insurance of last resort.

This means that policyholders would not be able to make a claim unless they could prove their builder had died, disappeared, became insolvent or, after going through a lengthy process in the Consumer Trader and Tenancy Tribunal, secured a compensation order that the builder ignored

The Minister for Fair Trading, Virginia Judge, declined to comment. A spokeswoman would only say that the Government was ''monitoring'' the situation.

In March the Financial Ombudsman said the home-builders' warranty insurance was the worst performing insurance product operating in Australia. Almost half of all claims were rejected in 2007-08, compared with an average across all personal and commercial insurance of just 2 per cent.

http://www.smh.com.au/national/nsw-set-for-action-on-junk-insurance-20091029-hnqm.html