01.What is it?
Home warranty insurance — also known as builders' warranty, building, housing or home indemnity insurance — was originally intended as a consumer safeguard to protect you from financial loss when your builder failed to complete the work or meet certain standards.
It’s still in place and mandatory. The insurance is currently compulsory in all states and territories and adds approximately $1500 to $2000 to the cost of building a new home.
Builders' warranty insurance is widely believed to provide protection against substandard building work. But it doesn’t cover all cases of incomplete or shoddy work. Claims can only be made under extreme circumstances such as the death, disappearance or financial insolvency of a builder.
Please note: this information was current as of May 2008 but is still a useful guide to today's market.
New scheme in Tasmania
Tasmania will be phasing out the mandatory scheme during the next 18 months. Tasmanian Deputy Premier Steven Kons says:
"This insurance does not provide the resolution or security that people expect. It is not the sort of insurance cover that the consumer thinks they are buying, and often leaves home owners with no option but to turn to the courts, which can be both time consuming and costly."
Replacing it will be a new statutory framework, which will include a program allowing the resolution of disputes between consumers and builders as an alternative to the courts. The Office of Consumer Affairs and Fair Trading will administer the new dispute resolution program.
NT and Queensland
The legislative requirements for home warranty insurance vary from state to state, but are broadly similar in the states where it’s privately underwritten (everywhere except in Queensland and the NT).
In the NT, only a limited form of home warranty insurance is mandatory and the territory government underwrites the risk by default, so to speak, because insurance companies have shown no interest in the small market.
In Queensland, the government underwrites home warranty risk. The Building Services Authority (BSA) regulates the industry and has overall responsibility for licensing, dispute management and home warranty insurance.
Queensland consumers get much more comprehensive insurance than people in other states. It’s the only scheme in Australia that compensates for subsidence and settlement, and it’s 'first resort' — you have access to the insurance if the builder fails to complete or rectify defective work, even if they’re still trading.
CHOICE verdict
Consumers need protection if something goes wrong with their home building contract. This means good quality insurance and access to an alternative dispute resolution scheme. The current privatised home warranty scheme, as it operates in most Australian states, appears to primarily benefit insurers and larger building companies at the expense of consumers and smaller builders.
A Queensland-style system offers much higher levels of protection for consumers as well as being easy to access for builders. Tasmania now goes as far as it can to matching the Queensland scheme.
CHOICE calls on the other states and territories to act to ensure that home building insurance and warranty schemes offer value for money, as recommended by a recent Productivity Commission inquiry.
For additional insurance for your household, please visit our home and contents insurance article for more details.