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November 24, 2009 | | Comments 7

Home Warranty Insurance

Home Warranty Insurance MazeThe whole issue of Home Warranty Insurance boils down to one question: How financially safe are you as an Owner Builder?

Here are some relevant points to help answer that question:

1. Different states use different Home Warranty programs. Choice Magazine refers to the programs run in NSW and Victoria as “Junk Insurance”.

2. By and large (and you need to research this relative to your state guidelines) you do not need to purchase home warranty insurance as an owner builder. You are the principle contractor and therefore the buck stops with you. However in some states, if you wish to sell your owner built home within a specified time frame (usually 5-7 years) then you need to purchase a home warranty insurance policy to cover the house for the remainder of the period of cover.

If you’d like some guidance with your insurance obligations as an owner builder  simply pick up the phone and give us a call. We’d be delighted to help you.

And here’s some more info on the subject of risk management and what Builders Home Warranty Insurance is.

If you were to look for a good example of how Builders Home Warranty Insurance works then you should look at the situation in Queensland and how the BSA manages the process. The opposite of that is in NSW and Victoria where it is regarded by those in the industry as a “basket case”.

In reality Home Warranty Insurance is designed to protect the consumer against two major risks:

1. That their builder will go broke before completing construction of their home under contract, and
2. To protect them against major work rectification issues in the event the builder fails to rectify sub-standard work prior to the end of the warranty period (ie. 5-7 years depending on the state program).

The bottom line is that currently in NSW and Victoria the Home Warranty Insurance scheme protects the consumer against neither of these risks. The insurers simply deny all claims whilst pocketing premiums of between $2000 and $4000 on every home built in those states!

Now owner builders are exempt from purchasing home warranty insurance and their numbers are on the rise. Which means one benefit of being an owner builder is a straight up cost saving in excess of $4000. However you must be conscious of your responsibilities if you sell your home within the 5-7 year period. Make sure the work you undertake is of high quality else you will ultimately be liable along with the trades and suppliers you engaged.

For example, suppose you choose a builder and you understand that as part of your contract price there is a mandatory premium included for Builders Home Warranty Insurance. Let’s say you reside in NSW or Victoria. What happens if your builder cannot complete your home and/or your home is riddled with defects?  Well, nothing… unless of course he happens to have gone insolvent, died or disappeared! Yes, you read that correctly. Regardless if your home is literally falling down, unless your builder is dead, disappeared or insolvent then you cannot even make a claim, let alone be compensated. Your only recourse is to trundle off to court for what has turned out for many consumers to be a heart and bank breaking exercise in legal futility where the only winners are the lawyers.

In fact, even if you managed to get a claim up – what are your chances of success?  This is where the real surprises lay because in NSW the official statistics show the insurers pay a 7% claims loss ratio while in Victoria the figure is an appalling 2.5% claims ratio.  This means that for every $100 million in premiums charged by insurers, only $2.5 million is paid back in claims! Compare this to a 65% – 80% claims loss ratio for most other statutory insurance you can see why Builders Warranty Insurance is not being voted the product of the month by consumer groups!

So where does all this leave the Owner Builder? 

First of all about $2000 – $3000 better off by not having to purchase a policy and secondly as an Owner Builder you get to manage your own finances without relying on a third party builder to be doing it for you.  The key to this of course is having the right financial management tools at your disposal to empower your financial control over your own project.

Also having the correct administration and project management tools to ensure that you, as the principle contractor, manage all your risks for the long term life of the home. The management tools that are offered through a UBuild Homes process have been specifically designed to give you this control and long term peace of mind.

If you have control and knowledge then you minimise the risk so the question to ask as a potential owner builder is ‘How can I best minimise my financial risk?’.  If this question is important to you then we should talk!

If you have any questions or comments about Home Warranty Insurance and Owner Building then just add a comment to this article. Be specific about how the insurance works in your state and how it might impact you as an Owner Builder.

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  1. home warrnnty insurance 5 to 7 years ,apply on the date council approval,or completeion

  2. My understanding in NSW is that any sub-contractor I use as an owner builder, e.g. a carpenter, will have to issue me with home warranty insurance (HWI)if his/her work is valued over $12,000. So, am I right in understanding that if I choose to sell within 6 years, not only will I have to pay HWI myself but I will also have already paid possibly numerous sub-contractors for it initially if their individual contract values were over $12,000?

  3. Hi Graham, thank you for your comments.

    You are correct on your understanding based on the current Home Warranty Insurance situation as it stands in NSW, and each of the three main points you have made are as we understand it. Yes, it’s not a great situation to be in – especially as most trades will not provide you with any warranty at all because its often overlooked and not readily enforced by the regulators. The whole system needs a major overhaul – and it appears the NSW Government is currently looking into this. Indeed, the NSW Government has announced that the current home warranty insurance scheme will be scrapped on the 30th June 2010. What it will look like in the future is anyone’s guess. With regards to insurance it’s much better to have it, than not.

    Good luck with your Owner Builder project!
    Barry Armstrong :)

  4. I understand that the Victorian Government has just announced that they will “take over” or support in some way, the Building warranty Insurance in Victoria. Do you have any information, comment or timetable for a fix to the current problems with BWI in this state?

  5. I am really confused. We bought a property that was under 7 years old and covered by Home Builders Warrantyt. We are small 4 block of townhouses and had quite a few defects so contracted a professional company to compile a report. This was provided to the builder for the problems to be rectified. This was over a year before the insurance expired. He has now waited till last week and has emailed us saying, I have no oblgiation due to it being expired. ? What can i do? I have kept a paper trail of all correspon dance and cna show that he was given this prior.

    WHat is my entitlements?

  6. Hi Barry, I have read this with interest but I have an issue that has arisen that I am finding hard to clarify.
    I am about to put my house on the market, I am an Owner Builder and the project received the DA in 1999 with work starting 2000, a number of issues caused the house to be delayed but we finished the majority of the work and moved in in about 2003, without council sign off, no Occupation Cert. We are now wanting to sell the property but the insurance company have said that because the work was completed so long age the are not willing to provide insurance because if we get sign off now then the 7 year cover would start from now (effectively meaning that the building work would be 14 old by the end of this period. Is there any way around this red tape. The council is about to grant our OC.
    Thanks Darrel

  7. Thank you for your advice. I was very confused about whether I needed home warranty insurance or not. You have saved me a lot of money.

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