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.
- A small ray of hope: Victoria has recently taken steps to improve outcomes for homeowners. Contracts signed after 1 July 2015 allow homeowners to access insurance if the builder fails to comply with a court order to repair substandard work. In 2014 the state government bumped up the minimum contract value requiring home warranty insurance from $12,000 to $16,000, while also increasing the claim limit by 50% to $300,000.
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.
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 that bad builders have been able to slip through the cracks in Victoria.
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
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.
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.
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.