Insurers are staying well clear of builders’ warranty cover. The collapse of a major home building group shows why

By Bernice Han

In March Melbourne-based Porter Davis went bust, rattling an already rattled building industry that is now going through one of its worst boom-to-bust cycles in recent years.

The collapse of the country’s 12th largest homebuilder – the latest in a string of failures in the past several months – has again exposed long-running unresolved issues that deter insurers from offering builders’ warranty insurance (BWI), which is known also as home warranty insurance.

The void left by insurers has forced governments to play an anchor role in the BWI market. In New South Wales (NSW), Victoria and Queensland they are the main insurer.

If governments did not step in homeowners would have no recourse if their builders were to die or become insolvent, leaving them with either half-completed houses or a finished project with defects that need repairing.

At first glance insurers’ aversion to BWI makes no sense, considering the value of the building and construction industry to the Australian economy. The industry directly accounts for about 10% of GDP and in the 2021/22 financial year the value of completed residential works comprising houses and high-density homes completed is worth around $68.9 billion, with renovations a further $12.7 billion.

Figures from Master Builders Australia (MBA) show some 933,000 new dwellings with a combined value of $339.1 billion will have been constructed in the five-year period to 2026/27.

Shoddy workmanship and the use of dodgy materials – leading to claims blowouts during the period when insurers were still actively offering BWI – only partially explain insurers’ near-total absence despite efforts to encourage their return, especially in NSW.

“In order to encourage private insurers to return to the home warranty insurance market, action must be taken to reduce the underlying risk of the scheme,” National Insurance Brokers Association (NIBA) Chief Executive Phil Kewin tells Insurance News.

Improving building standards is only one piece of the puzzle, he says. “Earlier identification of builders at risk of insolvency would reduce the number of impacted consumers and by extension the liability of the scheme.”

At present businesses are already required to provide a significant amount of financial information to the Australian Securities and Investments Commission (ASIC) on a regular basis.

“NIBA sees no reason why this information could not be leveraged to feed predictive data models to identify builders at risk of insolvency and intervene where necessary.

“Given that the high risk of the market was one of the main reasons cited for the exodus of private insurers, NIBA does not envisage private insurers re-entering the market until these issues are addressed.”

The lack of compliance with regulations is another critical factor that has driven insurers away.

In the case of Porter Davis, the liquidators discovered the builder had taken deposits from hundreds of customers before obtaining the mandatory BWI. In Victoria a builder must acquire the insurance before taking a deposit or any other money for residential works of $16,000 or more.

“There are too many loopholes for builders to get out of their accountability and out of their responsibility, which is causing a lot of these problems,” Strata Community Association NSW President Stephen Brell tells Insurance News.

“The quality of construction needs to improve [with] more accountability for builders needing to be brought into the equation. That would entice insurers back into the market because they have some sort of assurance that things are a lot better.”

However, MBA Chief Executive Denita Wawn denies non-compliance is prevalent in the industry. “I’m not aware from regulators that it is a systemic problem,” she tells Insurance News. “Nevertheless we are of the view that every builder has to comply with all the laws that they are required to, which is particularly important when it comes to consumer protection.”

Darren Love, whose building inspection firm Darbecca carries out thousands of checks a year for homeowners in Victoria and Queensland, says compliance in Victoria is weak because enforcement is weak, and taking customer deposits before acquiring the BWI is “a widespread practice”.

He says “the mechanisms” are not in place to ensure insurance is taken out, although he has repeatedly contacted the industry watchdog, the Victorian Building Authority (VBA), to report instances.

The VBA says in the past five years 24 builders have been disciplined for breaching BWI requirements.

Mr Love says he can see why the state insurer, the Victorian Managed Insurance Authority, has been the main BWI provider in the state for the past 12 years.

“Everything is about risk, and in Victoria the only organisation that’s prepared to take that risk with builders is the Government.”

The Victorian Government has said it will compensate customers who lost their deposits to Porter Davis, and a spokesman for the VBA says the regulator is currently investigating the builder for potential breaches of the legislation.

The state has also announced plans to “strengthen domestic building insurance requirements”, acknowledging “the liquidation of Porter Davis exposed a concerning practice of builders not taking out the required insurance when accepting deposits”.

“Given that the high risk of the market was one of the main reasons cited for the exodus of private insurers, NIBA does not envisage private insurers re-entering the market until these issues are addressed.”

BWI is mandatory across the rest of Australia, except for Tasmania, which plans to reintroduce the insurance following the release of draft laws for consultation in January. The island state scrapped its warranty scheme in 2008 due partly to rising premiums and the removal of insurance capacity from the market.

The extent of insurance protection differs among the jurisdictions, and given the present state of the building industry there is a genuine wariness of possibly adverse claims fallouts on the warranty schemes.

The short-lived boom from the pandemic, driven largely by a massive $2.52 billion federal HomeBuilder program to support the industry through covid lockdowns, burst as builders ran into a perfect storm of supply disruptions, shortages of materials and a lack of available tradespeople. The surge in costs isn’t covered fully by the fixed-price contracts that builders have signed with customers.

“Builders are under unprecedented pressure financially,” Liberal MP and former Speaker of the House of Representatives Andrew Wallace tells Insurance News.

“When you have builders under unprecedented financial pressure they will go broke. So you will have a raft of incomplete houses that need to be completed and the home warranty kicks in. This problem is only going to get worse.”

Latest ASIC data shows a sharp rise in the number of construction insolvencies. While the data does not break down between commercial and residential, the figures underscore the financial fragility of home builders.

Justice Connect, a not-for-profit legal help service, says it has seen a jump in demand for advice about domestic building issues like insurance since the pandemic.

“Before Covid-19, it was defects,” Principal Lawyer Tim Meehan tells Insurance News. “Now, in addition to defects it’s around issues accessing insurance, delays, and negotiations with builders to resolve delays.

“The importance of insurance, including when it should be taken out, isn’t always clear to the homeowner due to the complexity of building contracts and agreements. As a legal service, we’re often stressing that it is crucial for homeowners to seek legal information and advice as early as possible.”

Mr Wallace, a former construction barrister whose external review of Queensland’s building legislation and building certification almost a decade ago led to major reforms in the state, says the warranty schemes are in need of remediation to provide better consumer protection.

He says the Queensland BWI scheme, built around the “first resort” concept, is one that the rest of the country should consider.

A first resort warranty scheme is generally regarded as offering a greater level of protection. Under this model homeowners report claims directly to the insuring body rather than taking civil action. Assistance is available in more circumstances than just death or disappearance of the contractor.

For example, if the building work is incomplete or defective, the consumer is able to claim and the insuring body assists the consumer in getting rectification from the builder. If this is not possible the insurance is triggered.

“Queensland is the gold standard and I encourage all of the states to adopt it,” Mr Wallace says.

However, a “last resort” model is more affordable, and Tasmania has opted to get into line with all the mainland states with the exception of Queensland.

“A last resort model is considerably cheaper for the consumer,” a Tasmania regulatory impact statement says. “The cost of first resort models are higher due to higher claim frequency and greater involvement of the insurer in supporting the consumer dealing with the builder.”

Queensland is currently reviewing its warranty scheme to improve it further, and a policy response is expected before the end of the year.

In NSW efforts are also underway to reform the state’s BWI scheme. The Home Building Compen-sation scheme was historically under-funded from July 2010 when it became government-operated. It has been the subject of reforms, premium increases and government support since 2017 to move it to a sustainable financial footing.


Builders’ warranty schemes across Australia

Across mainland Australia builders’ warranty insurance is compulsory. However the scope of protection and claims triggers vary, and Queensland is the only jurisdiction with a first-resort scheme.

Here’s an overview:

New South Wales: State insurer icare is the only provider ever since private insurers left the market more than a decade ago.

The Home Building Compensation Fund scheme is regulated by the State Insurance Regulatory Authority (SIRA) and is compulsory for residential works of $20,000 or more.

The policy provides a maximum per dwelling of $300,000, if issued before February 1 2012 and $340,000 for all other policies.

Victoria: The state government is the main domestic building insurance (DBI) provider via the Victorian Managed Insurance Authority.

It’s compulsory for all domestic projects valued at over $16,000 and must be acquired by builders before they accept deposits or any other money from customers.

Homeowners are covered for up to $300,000 in policies issued on or after July 1 2014.

Queensland: The “first-resort” Queensland Home Warranty Scheme is mandatory for residential building work of more than $3300.

The scheme covers consumers for loss suffered if a contractor (or individual where fraud or certain representations are made) fails to complete a contract or fails to rectify defective work, subject to certain limitations.

Premiums start at $194.25 and are reviewed at least every 12 months. Standard insurance cover is up to $200,000 or $300,000 with optional additional cover. Structural defects are covered for six years and for incomplete work it’s generally two years.

South Australia: The SA Government Financing Authority, through its insurance division, has underwritten building indemnity insurance (BII) since 2013 through reinsurance agreements with insurers operating in the private sector.

Builders performing work that requires development approval and has a value of $12,000 or greater are required to take out building indemnity insurance (BII) on behalf of the homeowner for each and every contract.

BII protects up to a maximum amount of $80,000 for policies issued on or before June 30 2017 and $150,000 for policies issued on or after that date.

Western Australia: Home indemnity insurance (HII) is provided by government-approved private insurers. Builders must take out HII on behalf of homeowners for residential works valued at $20,000 and above.

In changes announced last October, maximum insurance payouts have doubled to $40,000 for lost deposits and $200,000 for incomplete or defective works.

Australian Capital Territory: Licensed builders must obtain complying residential building work insurance or a fidelity fund certificate from an approved fund scheme before commencing any building work over $12,000. The legislation provides that a fidelity fund certificate or homeowners’ warranty insurance policy provides maximum coverage of $85,000.

Northern Territory: Residential building cover has been provided in the form of fidelity fund certificates since the Home Building Certification Fund (HBCF) stopped issuing new policies on December 31 2012.

Fidelity Fund NT was set up in 2013 and the Master Builders Fidelity Fund is currently the only provider in the NT. Registered builders must apply to the fidelity fund for an annual level of cover and obtain a Fidelity Fund NT certificate for every new house, unit up to three storeys, or extension worth more than $12,000.