The NSW Government is considering significant reforms to the statutory insurance scheme for residential building work in NSW, the Home Building Compensation Fund (HBCF). NSW Fair Trading has released a Discussion Paper which outlines the potential reforms under consideration and can be found here.
In this article we highlight some of the proposed reforms.
Overview of the HBCF scheme
Under the Home Building Act 1989 (NSW) (Act), builders are required to take out insurance under the HBCF for residential building work over $20,000. The sole provider of insurance under the HBCF is now the NSW Government.
The intention of the HBCF is to provide “last resort” protection for consumers undertaking home building projects. Insurance under the HBCF covers loss where a builder cannot complete building work or rectify defective building work, but only where such inability is due to the builder’s:
- insolvency; or
- licence being suspended for failure to comply with a court or tribunal money order.
Insurance under the HBCF provides a minimum cover of $340,000 and must provide cover for:
- non-completion of work for at least 12 months;
- loss arising from a major defect for at least 6 years; and
- loss arising other than from a major defect for at least 2 years.
In December 2015, NSW Fair Trading released a discussion paper, Reform of the Home Building Compensation Fund (Discussion Paper). The Discussion Paper states that the the HCBF is not financially sustainable in its current form and that insurance premiums are failing to cover the costs of claims. The HBCF lost $62 million in 2013 and $33 million in 2014.
In order to address this shortfall, the Discussion Paper puts a number of reforms for consideration. The proposals fall in to 5 potential models:
- Model 1: retain the current scheme but reduce administration costs and premiums;
- Model 2: reduce the coverage of the scheme;
- Model 3: reduce the coverage of the scheme and increase premiums;
- Model 4: revert to a voluntary scheme; or
- Model 5: combine a voluntary and mandatory scheme.
Models 1 – 3: Reforming the mandatory scheme
Models 1 to 3 all seek to retain the current mandatory scheme while making it more efficient and reducing its ambit so as to make it more cost-effective. The suggestions include both revisions to the structure of the scheme and an increase in premiums.
The most important of the proposals can be loosely grouped into two types of reforms – those that limit the scope of the scheme and those that reform the relationship between the HCBF and the licensing of buildings.
Limiting the scope of the HBCF
The options for limiting the scope of cover of the HBCF include (amongst other things):
- Reduce the coverage period for major defects: Reduce the coverage period for major defects from 6 years to 4 years.
- Replace combined cover with separate cover for non-completion and defects: Split the current $340,000 combined cover into $200,000 for defects and $200,000 for non-completion. This means that, where home owners claim solely for defects or solely for non-completion, their total compensation would be reduced from $340,000 to $200,000. However, where home owners claim in relation to both defects and non-completion, their potential total compensation could be $400,000.
- Increase the cost threshold for requiring insurance: Increase the insurance threshold to a figure above $20,000. This would reduce the number of projects requiring insurance under the HBCF.
- Limit the requirement for insurance to certain types of building work: The requirement for insurance be limited to just new residential construction works, or work involving significant structural renovations. Lower-risk works would be excluded.
- Remove cover for low-rise multi-units: The Discussion Paper postulates that the requirement of insurance for low-rise multi-units (three-storey or less) could be justified on the basis of the new, untested strata post-completion building defects inspection and developer bond regime.  NSW Fair Trading has indicated that the new regime is due to commence in July 2016, however an exact date has not yet been appointed. Our update in respect of that scheme can be found here.
The HBCF and the licensing regime
The Discussion Paper puts options for revising the relationship between the HBCF and the licensing regime, including.
- Transfer insurance eligibility into the licensing process: The financial assessments that are undertaken by HBCF prior to the issuing of insurance (to determine if a builder is an acceptable risk) be transferred to Fair Trading’s licencing process, streamlining the licencing/ prequalification process.
- Narrow the scope of activities licensed and regulated under the Act: The licensing system be improved through the removal of licences for low-risk activities (e.g. the removal of existing wood and metal fencing and cleaning work).
- Enhanced supervision requirements for licensees: Improving supervision on projects to reduce the incidence of defects would lead to a reduction in claims on the HBCF. Options to improve supervision include:
- limiting the number of projects any one supervisor can take on;
- limiting the number of companies a supervisor can simultaneously work for; and
- requiring supervisors to be one site at all times tradespeople are on site.
- Random or risk-targeted inspections of licences: Implementing an inspection process for target licensees who may be at risk of producing defective work could allow for early detection of defects and improved building standards. Fair Trading is investigating the potential for on-site inspections that would enable qualified building inspectors to attend inspections at worksites when builders apply for HBCF insurance.
Model 4: Reverting to a voluntary scheme
This is the most drastic of the suggested models. Reverting to a voluntary model of insurance would rely on private insurers re-entering the market to offer insurance. This would leave it to the builder or homeowner to decide whether to take out insurance.
Model 5: Combining of a voluntary and mandatory scheme
A watered down version of Model 4, this model suggests splitting cover between mandatory (in relation to non-completion of works) and voluntary (in relation to defective works). Under this model, the consumer would be able to purchase cover for certain types of works (e.g. high risk works) from a range of “optional extras”.
The Discussion Paper is unashamedly focussed on the cost of the current system on the NSW Government. This form of insurance (if it can be called that) has never been a financial proposition and the State Government has been chipping away at it for 15 years in a vain attempt to make it financial. The Discussion Paper does not contemplate the view that the HBCF is a public service and its relatively small loss compared to the turnover of the industry, and the stamp duty and payroll taxes generated through site registration and residential building work, justify the cost to government of the current “last resort” scheme.
NSW Fair Trading seeks submissions on the proposed reforms from stakeholders. The deadline for making submissions is 5.00 pm Friday 21 February 2016.
We encourage our clients and correspondents to review the proposed changes to reality check them and contemplate the effect that the proposals will have on their business. Your practical experience and views are important and policymakers need and stand to benefit from sound commercial reasoning. Certain reforms may affect some businesses more than others. For example, the suggestion to transfer insurance eligibility assessments to Fair Trading may make it more difficult for builders to obtain licences, with competition and price implications. So it is important that your views be aired.