Home warranty insurance is supposed to protect homeowners from incompetent builders who skip town, go bust, or part ways with this world.
Unfortunately, it doesn't do much to protect against unscrupulous builders who are still in business.
In every state except Queensland, there will be no insurance payout if the builder hasn't gone missing, died, become insolvent or lost their licence due to a tribunal decision (though in Victoria loss of licence but not the other three scenarios is enough to trigger a claim).
If they're still plying their trade, it'll be up to the homeowner to track down the builder, instigate any legal action through a state tribunal system, and pay for it.
Judging by the stories we've heard, that won't be easy.
If you applied the model to a home and contents insurance policy, it would be like having to track down the crook that burgled your house instead of being able to make a claim
That's because home warranty insurance operates as a scheme of last resort across most of the country – a type of cover strictly limited to the above scenarios.
In Queensland's first-resort scheme, the Queensland Building and Construction Commission is meant to pay you the benefit if it agrees the work is shoddy and then go after the builder to get its money back.
While Victoria's scheme is not as consumer-friendly as Queensland's, it does allow homeowners to access insurance if the builder fails to comply with a court order to repair substandard work (for contracts signed after 1 July 2015).
In short, this insurance product has issues, which is probably why it's been the subject of a number of government inquiries over the years – none of which has done much to improve outcomes for homeowners.
The best way to protect yourself against dodgy builders is to know the builder your dealing with through trusted references and by talking to past customers.
Different states, different arrangements
In South Australia, ACT and the Northern Territories, home builders and renovators are required to take out home warranty insurance for contracts of $12,000 or more.
The figures are $20,000 in NSW and WA, $16,000 in Victoria and $3300 in Queensland.
The premiums (generally somewhere between 0.5% and 1% of the contract value) are added by the builder to the homeowner's costs, so you end up paying for nothing if the builder simply refuses to come back and fix the problem.
Tasmania does not currently have a state-mandated warranty insurance scheme.
This less than robust insurance product also goes by many names, depending on where you live: home building compensation insurance in New South Wales and Queensland; domestic building insurance in Victoria; residential building insurance in the Northern Territories; residential building insurance in the ACT; home indemnity insurance in Western Australia, and building indemnity insurance in South Australia.
The number of years and dollar amounts you're covered for also vary from state to state, though it's generally five or six years for structural defects and, where states distinguish between the two, a year or two for non-structural defects (though it's only seven months for structural defects and three months for non-structural ones in Queensland).
One of the ways shoddy work happens is when builders hire not-very-skilled yet more affordable tradespeople to pad their profit margins.
What happens if the builder won't make good?
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.
And if your builder does go broke, die or disappear before the complaint is resolved and you then have the right to access 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 we reviewed, a claim for $63,000 incurred about $90,000 in legal fees.
CHOICE 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. The overhaul is yet to come.
Insurance payout falls short
One aggrieved 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 Victorian Building Commission (VBC) – now the Victorian Building Authority (VBA) – agreed the work was unacceptable, but the suppliers hit back, saying they'd only taken orders from the builder who'd hired them.
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
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 Victorian Civil and Administrative Tribunal proceeding at the time he quoted for the job and had numerous complaints and a successful warranty claim on his record.
A no-win situation
Another homeowner we talked to, Anne Paten, said 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.
Everybody's on the builder's team and it's all about delaying and adjourning and sending you brokeHomeowner Anne Paten
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 said her research 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.
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.
With last-resort insurance schemes in force throughout most of Australia, you should proceed with caution when shopping around for a trustworthy builder
It's also important to know that the builder will probably be outsourcing some of the actual hands-on work to tradespeople, and some will be more skilled than others.
Doing due diligence on your builder
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. Find another builder.
- 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 any claim.