The Home Building Amendment (Compensation Reform) Bill 2017 was introduced to Parliament on 24 May 2017 and was soon passed without amendment on 20 June 2017.
The Act, now assented, introduces major changes to the Home Building Compensation Fund (HCBF) and the protections afforded to consumers against incomplete and defective works.
Prior to the reforms, builders were required under the Home Building Act 1989 to obtain insurance under the HCBF in relation to any residential building work conducted in NSW which is valued in excess of $20,000.
However, Minister for Finance, Services and Property, the Hon. Victor Dominello stated that the scheme resulted in a government monopoly of insurance services which was “old-fashioned” and “unsustainable”.
Accordingly, the Act introduces a range of key reforms in an attempt to implement a “modern, fit-for-purpose home building compensation scheme.” Such reforms include:
- private providers will now be permitted to offer Home Building Compensation insurance;
- insurers will be able to offer split cover for defects and non-completion, with homeowners entitled to $340,000 of cover for each product. This means that homeowners will now have available a minimum of $680,000.00 in relation to the defective and incomplete work. This split cover option is an alternative to the standard combined cover product which was exclusively offered under the old scheme;
- a shift towards risk-based pricing where premiums better reflect a builder’s individual level of risk, thereby minimising the occurrence of lower-risk builders subsidising higher-risk builders;
- increasing premiums gradually to ensure that the scheme remains financially viable;
- removing of broker commissions which will consequently eliminate approximately 15% of current policy costs; and
- permit the introduction of new insurance products which will enable homeowners to purchase top-up cover.
NSW Fair Trading is also replaced by the State Insurance Regulatory Authority (SIRA) as the body responsible for regulating the insurance scheme and the licensing of private insurers.
The reforms do not however change any of the threshold requirements for obtaining insurance or the mandatory insurance coverage periods.
Following the collapse of FAI and HIH, home warranty insurance became a last resort scheme limited to situations where the builder had died, disappeared or become insolvent. The scheme was then limited to defects which came to light during the period of insurance and then the scheme was abolished for residential buildings over three storeys. This resulted in homeowners having to jump through hoops in order to make an insurance claim as a result of defective and/or incomplete work.
The reforms to the HBCF will give homeowners much needed relief. In particular, as the Australian construction industry accounts for a disproportionally high number of insolvent companies, the amendments to the HBCF will provide homeowners with greater protection in relation to the costs of completion should the builder become insolvent. The reason being that homeowners will now have access to a minimum cover of $340,000 for incomplete work as well as $340,000 for defective work. Previously, the costs of completion were capped at 20% of the contract price which often left homeowners with a shortfall especially if the builder become insolvent early during the construction.