Home warranty insurance (also known as builders' warranty insurance, domestic warranty insurance, housing insurance and home indemnity insurance) is supposed to protect homeowners from incompetent builders. Unfortunately, it doesn't do much to protect against unscrupulous ones.

In every state except Tasmania, home builders and renovators are required to take out insurance for contracts of $12,000 or more (or $20,000 in NSW and WA).

The premiums are then added to the homeowner's costs. To cover a newly built home in NSW you'll end up paying about $1900 - but it's generally not money well spent.

Tricky business

Home building insurance is supposed to help fix construction mistakes or get your money back if you lodge a legitimate claim. Or so the theory goes. The tricky part is that every state (except Queensland) operates a "last-resort" model.

  • You can only claim if the builder goes broke, dies or disappears.
  • If the builder simply refuses to repair the shoddy work or return your money, your only option is to take them to the consumer affairs tribunal in your state, and that can be a lengthy and costly process.

King-sized legal costs

If your builder does go broke, die or disappear before the complaint is resolved and you have to resort to your home warranty insurance, it won't cover legal costs against the builder. These costs can easily exceed the amount you're attempting to recover - in one case cited by the Consumer Action Law Centre, a claim for $63,000 incurred about $90,000 in legal fees.

We called for an overhaul of home warranty insurance schemes in a submission to a Senate Economics Committee review in 2008, one of the many government inquiries into this issue over the years.

How to find a good builder

Many homeowners have found out the hard way that it's no use relying on home warranty insurance for protection.

With last-resort insurance schemes in force throughout most of Australia, you should proceed with caution when shopping around for a trustworthy builder. And because licensing is no guarantee of reliability or accountability, the best way to find a builder is through personal references from people you trust.

It's also important to know that the builder will probably be outsourcing the actual hands-on work to tradespeople, and some will be more skilled than others.

Ask the right questions

Unscrupulous builders may skimp on materials, hire low-cost tradespeople and keep a sizeable share of the contract price for themselves. Once you get a trustworthy recommendation, don't be afraid to ask a few pointed questions.

  • Do they provide homeowner contact details for recently completed jobs? Talk to previous customers and ask whether there were any disputes about the quality of the work and materials, completion deadlines or unexpected costs.
  • Who will be doing the actual work? Are the tradespeople licensed? Ask for their names and verify by checking the public register in your state or territory.
  • If the builder's licence says "only for contracts not requiring home warranty insurance" on the public register, it means the builder has not yet been approved by an insurer and can't offer home warranty insurance.
  • The builder's name on the insurance certificate should match the name on the building contract and the builder's licence - otherwise the insurer will probably knock back the claim.
  • The Building Compliance Reform Association has a search function on its website that lets you check whether builders in its database have a dodgy track record.

Victorian homeowners get a raw deal

Last-resort home warranty insurance is unfair on all consumers, but especially where Victorian home builders are involved.

The Victorian Managed Insurance Authority has reported that Victorian homeowners paid about $87.8m in home warranty insurance premiums from May 2010 to May 2011, but only $108,000 was paid out on a total of three successful claims.

Over the same timeframe, about 250,000 Victorians suffered damage at the hands of Victorian home builders.

With little prospect for change on the horizon, some Victorian homeowners have launched their own campaign to change the home warranty insurance system.

According to the Building Compliance Reform Association (BCRA), a fledgling consumer group set up to improve protections in Victoria, less than one per cent of policyholders meet the criteria for making a claim, and the rare successful claim isn't likely to cover your losses.

The BCRA says insurers in Victoria typically offer a pittance of what's asked for, such as $17,500 for a $900,000 claim. Victorians can take their insurer to the Victorian Civil and Administrative Tribunal (VCAT) to challenge the payout, but the insurer will likely prolong the process. You also won't be covered for the legal costs.

Home building disputes

One dissatisfied homeowner, Beverly Loyson, told us her experience with home warranty insurance had led to "extreme emotional and financial damage".

Loyson's building suppliers and installers refused to come back and re-do defective work. The assessment was backed up by the Victorian Building Commission (VBC) - now the Victorian Building Authority (VBA) - but the suppliers hit back, saying they'd only take orders from the builder who'd hired them.

The problem was that the home builder had gone out of business, owing the Loysons $80,000 in promised refunds and hundreds of thousands of dollars' worth of needed repairs.

Her home warranty insurance payout wasn't nearly enough to undo the damage the builder had done to her home, but she didn't have the resources to challenge the insurer in court. Loyson later found out the builder was involved in a VCAT proceeding at the time he quoted for the job and had numerous complaints and a successful warranty claim on his record.

Left in the dark

According to Loyson, these facts were known to the VBC, the VCAT and the insurance company that approved the builder's warranty insurance – but not to her.

"Many families have been financially and emotionally damaged by greedy insurers who put aside the evidence of incompetence and deliberately put families at risk," Loyson told us. "Consumers are blocked from accessing the information they need to avoid builders with a poor track record."

The builder liquidated his business with a sizeable unpaid claim against him but, according to Loyson, sold his house two years later for a tidy sum.

"Builders move their assets into other family members' names or trusts so their futures are safe and secure," she says.

"Homeowners and their life savings are just collateral damage, yet nobody seems to care as long as the building industry keeps going."

In each other's pockets

There's plenty of evidence to suggest the regulatory system in Victoria has broken down and that bad builders can easily slip through the cracks.

A 2012 Victorian Ombudsman report painted a grim picture of the VBA's operating procedures. It said oversight of builders was spotty at best and that the organisation had squandered substantial taxpayer dollars on hospitality, entertainment and travel. It also reported widespread cronyism and other dodgy practices.

Buttering up the execs

In April 2012, it emerged that the VBC had hired corporate boxes at AFL and Australian Open tennis events and invited construction industry executives to attend.

This comes as no surprise to BCRA secretary Anne Paten, who's convinced much of the building industry in Victoria is corrupt and that regulators, insurance companies and the VBA itself are teamed up against homeowners.

"The builders and the regulators play golf together, they eat lunch together, and they were behind the design of this system together," she says. "Everybody involved in the dispute resolution process – the builder, the insurance company, and the tribunal – all know each other and support each other's interests. The homeowner is left out in the cold."

A no-win situation

Paten says her home builder made major errors that called for extensive structural repairs - but when she demanded rectification, the builder told her he wouldn't be fixing anything and that she could take her case to VCAT.

That's a no-win prospect for homeowners, Paten says, since the builder's legal team can draw out the process as long as possible. "Everybody's on the builder's team and it's all about delaying and adjourning and sending you broke."

Paten became involved with the BCRA as a result of her bad experience, and says her research on behalf of the start-up has led her to conclude that about half the licensed builders in Australia are "cowboys" who shouldn't have been licensed or insured and can't be trusted.

Ineffective reform

A shakeup following the ombudsman's and other critical reports resulted in the VBC being replaced by the VBA last July, a move billed as a reform measure. But in the BCRA's view, the name change is little more than window dressing.