The Home Building Amendment (Compensation Reform) Bill 2017 (NSW) was assented to on 27 June 2017. It introduces major changes to the Home Building Compensation Fund (HBCF) to enhance protections afforded to homeowners against incomplete and defective works. The New South Wales Government is inviting the public to have their say on the reforms, with the current round of consultation closing on 15 September 2017.
As at the end of the 2015/2016 financial year, the HBCF had unfunded liabilities of $375.8 million. The proposed reforms will overhaul the scheme to ensure financial sustainability, improve consumer protection and promote private sector competition and innovation. Some of the reforms include:
- allowing private insurance providers to enter the home building compensation market
- introducing a ‘split cover’ insurance option
- pricing premiums according to risk
- giving the NSW Government’s State Insurance Regulatory Authority (SIRA) the power to assess and approve premiums and reject premiums that are inadequate, excessive or not in line with relevant guidelines
- establishing the Home Building Operational Fund to cover administrative costs
- establishing the Home Building Insurers Guarantee Fund to protect consumers in case of insurance provider insolvency
- giving SIRA enhanced powers to issue and enforce guidelines with rules for premium setting, fees, market practices and claims handling.
What the reforms mean for builders
Cover will remain compulsory for residential building work valued at more than $20,000. The good news for builders is they may end up with a wider choice of both insurance providers and products. Currently builders can only buy one insurance product from a single NSW government provider, icare hbcf. However, the reforms will see private providers being invited to apply to SIRA for a licence to join the home building compensation market. There may also be a wider variety of products to choose from, with providers being encouraged to offer innovative and alternative products to builders such as alternative indemnity products like fidelity fund schemes, dispute assistance, quality assurance checks of work and products that cover additional risks or allow claims in additional circumstances.
Builders will also have the opportunity to choose between the current combined cover option – which requires a minimum of $340,000 in combined cover to be purchased as a single product for non-completion and defects within the statutory warranty period – and a new split cover option, which separates the cover into two products, each with a minimum of $340,000:
- construction period cover (for incomplete work and associated defects); and
- warranty period cover (for any defects which arise once the work is complete).
What the reforms mean for consumers/homeowners
The reforms will enhance protection for homeowners, who will now know the cost of their home building compensation cover, as it will be mandatory for builders to disclose this in their building contract. The new split cover option means the total cover for homeowners is doubled to a minimum of $680,000, as builders who purchase split cover will need to buy a minimum of $340,000 worth of each of construction period cover and warranty period cover before starting work or accepting payment. Finally, premiums are set to be priced according to risk in order to provide an incentive for builders to reduce risks, which will subsequently protect homeowners.
The current round of consultation is on eligibility and premium standards. The NSW government has released a home building premium guidelines discussion paper on how premiums should be calculated and assessed and a home building eligibility guidelines discussion paper on how building contractors should be assessed for eligibility for insurance.
Consultation on eligibility and premium standards will close on 15 September 2017.
Further consultation on business planning, prudential regulation, claims handling, provider licensing and market practices will take place from September to November, followed by consultation on regulations from October to November. New guidelines and regulations will be finalised and implemented in early 2018.