As many Australians know to their cost, building a dream home can easily turn into a nightmare.

About 28% of people employing builders encounter problems. Yet consumer protection, in the form of builders’ warranty insurance, remains notoriously flawed in most states.

Soaring claims costs have forced private insurers out of the market, but state-run schemes have struggled to provide satisfactory protection or remain financially viable.

Most schemes are accessible only as a “last resort”. This means homeowners must first exhaust all other options, including potentially costly legal battles, before submitting a claim.

In NSW the Home Building Compensation Fund – which made an underwriting loss of almost $84 million last financial year – is under review, but the insurance industry is less than impressed.

Options suggested by the review include increasing premiums, reducing coverage, moving towards a voluntary scheme or cutting administration costs – including broker commissions.

National Insurance Brokers Association (NIBA) CEO Dallas Booth told insuranceNEWS.com.au the scheme is fundamentally flawed and more drastic measures are required.

“The way the product is designed, and the pricing structure, means it doesn’t cover the risk,” he said. “The NSW scheme is a financial disaster. It has gone into deep distress, and it is extraordinary that they would suggest cutting brokers out.

“The scheme has complicated underwriting criteria that brokers help builders to understand. Nobody else does that. The Government is not recognising the true reality.

“The problems are much more fundamental. Nobody is asking what is driving these claims costs. There has been no analysis of what can be done to stop these claims occurring.

“It has to be about the quality of the building.”

In its submission to the review, NIBA suggests private insurers would do a better job.

“At the moment private insurers don’t want anything to do with it, but if it was a properly priced, viable product, then of course they would be there,” Mr Booth says.

The Insurance Council of Australia’s (ICA) submission says reform should focus on reducing the likelihood of defective building work.

It also says certain insurer-funded building work could be exempt from the NSW scheme.

In Victoria a report from former auditor-general John Doyle last year identified serious problems. The scheme is widely misunderstood, provides limited protection and is more costly than it needs to be, Mr Doyle said.

“The auditor-general’s report starkly showed some of the problems for consumers,” Consumer Action Law Centre CEO Gerard Brody told insuranceNEWS.com.au.

“The extent of the coverage is quite limited and it is a last-resort scheme. From July 1 last year there was a new trigger, if you are able to get a Victorian Civil and Administrative Tribunal order.

“That was a step in the right direction, but our view is there needs to be further reform.

“Private insurers have tried and failed. The Government needs to set up a statutory guarantee fund that people can claim on much earlier in the process.

“It needs to be much more flexible and efficient. This is people’s homes we are talking about – if there is a dispute it really affects their quality of life.”

Independent senator for Victoria John Madigan recently wrote to Premier Daniel Andrews after visiting residents of the Rangeview Estate in Diamond Creek, who have reported serious problems with their homes.

“It is unacceptable that people with seriously defective homes – with builders who refuse to fix them – are unable to make a claim on their home warranty insurance policy,” Senator Madigan told insuranceNEWS.com.au.

“This is exactly the situation this type of policy should insure against. Instead, under the current scheme, policies only provide coverage once it is established that the builder is either dead, disappeared or insolvent.

“This situation is a dog’s breakfast, with homeowners being unprotected and a government seemingly impotent or unwilling to act on this issue.”

Builders Collective of Australia National President Phil Dwyer told insuranceNEWS.com.au “the horse has already bolted”.

“People have been allowed to run rampant,” he said. “We need a holistic regime with early intervention to deal with complaints from either side in the early stages.

“There have been reviews in almost every jurisdiction, which tells you that something is very wrong.”

Mr Dwyer says Queensland has a “first-resort” scheme that works well, and a review in the NT is progressing along the right lines.

“If Queensland can do it, why can’t everyone else?”

ICA spokesman Campbell Fuller told insuranceNEWS.com.au its member companies no longer underwrite builders warranty insurance.

The only exception is QBE, which is involved with BWI in the ACT, NSW, SA, Victoria and WA.

However, it only bears the risk in the ACT. In the other states it is a government agent.

“Despite this, ICA recognises the important role the product plays in providing financial protection to consumers as they make what can often be the biggest financial investment of their lives,” he said.

“ICA supports initiatives to reform home warranty insurance schemes that make them more affordable, efficient and sustainable. This should necessarily support risk-based pricing, so the premiums builders pay are determined by the level of risk they represent.

“Most importantly, ICA believes governments and regulators should focus on encouraging best practice in the building industry to reduce the likelihood of defective building work or insolvency.”

In most states builders’ warranty isn’t working for builders, consumers or governments, and there seems to be a consensus that building industry standards are ultimately to blame.

The fear is any reform that ignores the root cause will once again fail to solve the problem.