Warning signs emerge regarding viability of building guarantee schemes

MBIE’s Building System Legislative Reform Package includes a proposal to require compulsory guarantee and insurance products (GIPs) for residential new builds and significant alterations. In August 2019 MBIE published a summary of the public submissions on its Reform Package. 76% of submitters supported the proposal to require GIPs, although some submitters expressed doubts that the insurance market would be prepared to support the proposal and others suggested Government involvement by way of a backstop cover.

The reservations expressed by some of the submitters has been borne out in recent news reports in New Zealand and Australia which cast doubt as to whether building guarantee schemes of this type are financially viable.

The Sydney Morning Herald recently reported that the New South Wales Government paid out more than $200 million in one year to prop up a home warranty scheme with further increases expected. The scheme enables owners of homes and apartment buildings of 3 levels or less to make an insurance claim in respect of defects if the builder becomes insolvent, dies, disappears to has their license suspended. The premiums are paid by builders but over time these have been insufficient to meet claims. In 2010 the NSW stepped in to cover unfunded claims and it has since amassed more than $639 million liabilities. There is no warranty scheme for apartment buildings above 3 levels as both private insurers and the government pulled out due to the risk in 2003.

More recently the Stuff website reported two private guarantees offered by New Zealand building companies, the Stamford Insurance 10-year new build guarantee and the New Zealand Certified Builders’ Halo 10-year guarantee, have lost their underwriter and cover will end when the policies expire in December 2019 and January 2020. This has led to some calls for a mandatory nationwide warranty of the type being investigated by MBIE.

In view of New Zealand’s record of poor building work over the last 30 years the prospects of private insurers providing long term cover, whether for private guarantee schemes or industry wide compulsory guarantees, appears to be slim. That leaves the Government as the only funding option, but there is unlikely to be much appetite for taxpayers to foot the bill for the indeterminate liability it would face. If and when the reputation of the New Zealand’s building industry improves insurance cover may become available but that is unlikely to be for some time.

In the meantime, a more productive focus for regulatory reform is likely to be the strengthening of the processes within building consent authorities to ensure everything possible is being done to avoid defective building work in the first place.

Grimshaw & Co are experts in all aspects of building defect law. Email Gareth Lewis on gareth.lewis@grimshaw.co.nz for assistance.

You could potentially still have EQC cover on an “as is where is” house.

In Christchurch there are a number of people who have purchased an “as is where is” property, being an unrepaired earthquake damaged property. A lot of these properties cannot be insured for further earthquake damage, and are at risk should a further earthquake event occur in Canterbury.

However, it may be possible to insure these properties with the inclusion of an earthquake exclusion clause (this will obviously depend on the property and the level of damage and advice would be required from an insurance professional). If the property can be insured with an earthquake exclusion, it is likely that there will still be EQC cover for the dwelling up to the maximum of $115,000 (including GST) if there was another earthquake. This may seem strange, but it is because of the specific wording of the Earthquake Commission Act.

The Act that Governs EQC, the Earthquake Commission Act 1993, provides that a person has EQC cover for natural disaster damage for their residential building if they have a valid contract of fire insurance for the period of time that the fire insurance policy is in place (s18). A contract of fire insurance is defined as:

a contract whereby any property is insured against physical loss or damageby fire (other than natural disaster fire), whether the contract includes other risks or not; but does not include any contract of marine insurance or any contract of reinsurance. (s2)

Therefore, a fire insurance policy on an “as is where is” property with an earthquake exclusion, would still be sufficient to qualify the property for EQC cover up to the $115,000 cap. This may be beneficial if further Earthquakes strike the Canterbury region.

While there would be cover for the dwelling, Land damage may not be covered as the section covering land damage (s19) requires the dwelling to be insured for Natural disaster damage, and this may not be covered because of earthquake exclusion. However, we recommend anyone in this situation seek expert advice.

We record that the above information may depend on the contract wording, and recommend that you seek legal or the other necessary professional advice if you are in that situation or before you enter into any insurance policies/contracts.

Ridgecrest NZ Ltd v IAG - The Supreme Court considers how an insurance policy responds to multiple events during one policy period.

In Ridgecrest NZ Ltd v IAG the Supreme Court held that an insured party that has suffered losses over multiple events during one policy period, can recover up to the maximum insured limit for each event and is not limited to a single maximum amount. However, the insured party cannot claim for the same loss twice and is limited to the overall cost to replace the building. This means that in certain circumstances insured parties who have suffered from damage caused by more than one event, the sum of which is greater than their maximum policy entitlement, may be able to recover more than their maximum policy limit. If you have a claim that is the result of multiple events and exceeds your maximum policy entitlement we suggest you seek legal advice on how the Ridgecrest decision may have affected your claim.