Home warranties look to Aussie model
Compulsory home warranties appear poised to ease the fears of new home buyers.
The Government will again be considering changes to the liability regime for negligent home building and an Australian-style mandatory home warranty system, after dropping the idea in 2011.
But there are still challenges to overcome, including an insurance industry reluctant to underwrite such a scheme.
The Minister of Building and Construction, Maurice Williamson, told a Parliamentary appropriations hearing it was "disgraceful" that new houses do not already come with such warranties.
Williamson said the current regime of joint and several liability, which has left home owners billions of dollars out of pocket as a result of the leaky-building debacle, does not work because it encourages "overly risk-averse behaviour".
Joint and several liability means any one party to a building project can be held entirely responsible for its failure and the cost of fixing it, if they are the "last man standing".
During the leaky building fiasco, many builders and architects simply either went bankrupt to avoid liability or used poorly capitalised single-person companies to shelter themselves from such costs, leaving local councils or sometimes minor contractors liable to carry the costs of building failure.
"This is seen as unfair and, in the case of local authorities, effectively provides ratepayer-funded social insurance," Law Commissioner Wayne Mapp wrote in NZ Lawyer last year when releasing an issues paper on liability.
Williamson has asked the Law Commission to report on whether a proportionate liability regime should be introduced as in Australia to calculate liability. The Law Commission said its report has been delayed. The earliest it can be expected was the end of November.
While he has not referred a mandatory home warranty system to the Commission, he told the committee that if New Zealand were to move to proportionate liability, a mandatory warranty scheme would be needed.
Mapp wrote that under proportionate liability, if a defendant is absent or insolvent, their share cannot be recovered from the other contractors or participants in the project, hence the need for a mandatory warranty system.
"The construction industry through its industry associations, for instance the Construction Industry Council (CIC), has been a strong protagonist to move to a proportionate system," Mapp said.
In a submission to a Building Amendment Bill last year, the CIC indicated it did not think reforms to date had gone far enough to rebuild consumer confidence in the industry.
"The CIC has been cognisant of the original intentions of the building sector reforms that were promoted at the outset.
"However, the CIC finds it difficult to assess the bill's likely impact and the prospect of its success in achieving the stated objectives," it wrote.
At the same time, councils also submitted in favour of a mandatory warranty system.
Others, though, have reservations.
Warwick Quinn, chief executive of the Registered Master Builders Federation, said his organisation is favouring a market-led approach where it is compulsory for builders to disclose whether they can offer a warranty.
Quinn said mandatory warranties created their own problems and the Law Commission was looking at the federation's proposal as well.
Ten years ago in New South Wales, he said, building came to a stop when the underwriter of the compulsory warranty scheme, HIH Insurance, went broke.
Also, there are many projects, such as deck building, where a warranty may not be needed.
"We say let the market decide and consumers choose," he said.
Alternatively, consumers could insure themselves as in Queensland.
In 2010, the Insurance Council also had reservations, saying the industry worldwide is cautious about building warranties.
John Lucas, insurance manager of the council, said last week that many such schemes had found themselves in trouble overseas.
Because the causes of defects in leaky homes are numerous and hard to detect, he said, it's difficult to prove liability.
"These factors drive up the costs and make it difficult to offer insurance at a reasonable level."
One thing that may allay industry concerns somewhat is the new licensed building practitioners scheme.
He said the council would have to poll members again, to see if their views had changed since 2010.
Williamson said the Law Commission had taken particular note of the Australian system, where schemes for compulsory home-warranty insurance were imposed in each state.
Under the Closer Economic Relations agreement with Australia, considering a trans-Tasman model would be "prudent".
"The warranty schemes are typically backed by a state guarantee or are run by a state agency," he wrote.
"The commission does not consider it would be possible to shift to a full proportionate liability regime, without a robust builders' warranty system being put in place."
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