Builders’ warranty – minor product, major pain
The withdrawal of Lumley Insurance and CGU from the builders’ warranty insurance market has again thrown the spotlight onto an already controversial product.
The debate over the relative merits of builders’ warranty cover has now moved well beyond the trade media and into the business pages of the mainstream newspapers. After all, builders’ warranty may be relatively small beer in the insurance business, but its impact on builders’ ability to keep working has emerging political significance.
Since state schemes were privatised in the 1990s, builders’ warranty has evolved into a policy of last resort in all states except Queensland and Tasmania.
Plenty of consumers across Australia have issues with the limitations inherent in the cover. The Financial Ombudsman Service found 45% of all builders’ warranty claims were rejected in the year to June 2008.
For Lumley and CGU, the builders’ warranty market didn’t hold much long-term appeal. Lumley says the product contributed less than 2% of its total premium income.
Nevertheless, their departure by January 1 will leave an estimated 25% of builders applying for cover with the diminishing list of remaining insurers.
Now the building industry is stepping up the pressure. A group representing some of the nation’s largest home building companies convened in Melbourne last week to hold crisis talks about the exit of Lumley and CGU.
The availability of cover is a critical issue for them because builders’ warranty insurance is compulsory in every state except Queensland and Tasmania.
The builders pass the cost of the cover on to their customers, who can trigger the policy if the builder dies, disappears or becomes insolvent should the project remain unfinished or defects become apparent.
The departure of Lumley and CGU leaves QBE, Vero and Calliden as the remaining providers in the market beyond January 1. Underwriting agency Winsure Insurance has also announced plans to enter the market.
QBE and Vero have indicated they will consider new applications from builders provided they meet the eligibility criteria.
But builders say it’s not as easy as all that. Builders Collective of Australia President Phil Dwyer told insuranceNEWS.com.au the problem lies with the security his members are required to provide in order to access the cover. “Builders often underwrite the risk”, he says.
Now that Lumley and CGU have announced they will exit the market, builders claim the remaining insurers will be tempted to demand even more security. Because builders’ warranty is a long-tail cover, the affected builders may be liable to two insurers – both their old and new providers.
They have good reason to be cautious and demanding. The building industry has a scandalous history for the number of its members who have used such ploys as phoenix companies and empty company bank accounts to avoid their responsibilities to their customers. The insurers have good reason to set strict eligibility criteria and will usually demand high levels of security before agreeing to cover.
It’s hard to determine just how many builders are being asked for security, and for how much – the estimates vary enormously, depending on who you talk to. While QBE declined to comment on the issue, a Vero spokesman told insuranceNEWS.com.au security is “not a primary focus”.
What is clear is that major builders have begun to consider what a restriction in cover would mean for their bottom line. If they can’t access builders’ warranty insurance, they will be legally prevented from building.
And some will struggle to meet the insurers’ terms, having already committed substantial funds to their outgoing insurer.
Given the recent stimulus measures handed to the housing industry, the Federal Government is unlikely to allow the flood of new homes to slow to a trickle because of what is quite likely to be seen as insurers’ unreasonable demands.
In May Financial Services Minister Chris Bowen ordered another review of the product, just months after a Senate inquiry recommended only modest changes.
With all this going on, it appears likely that this little corner of the insurance industry is set to remain in the spotlight for some time to come.
The debate over the relative merits of builders’ warranty cover has now moved well beyond the trade media and into the business pages of the mainstream newspapers. After all, builders’ warranty may be relatively small beer in the insurance business, but its impact on builders’ ability to keep working has emerging political significance.
Since state schemes were privatised in the 1990s, builders’ warranty has evolved into a policy of last resort in all states except Queensland and Tasmania.
Plenty of consumers across Australia have issues with the limitations inherent in the cover. The Financial Ombudsman Service found 45% of all builders’ warranty claims were rejected in the year to June 2008.
For Lumley and CGU, the builders’ warranty market didn’t hold much long-term appeal. Lumley says the product contributed less than 2% of its total premium income.
Nevertheless, their departure by January 1 will leave an estimated 25% of builders applying for cover with the diminishing list of remaining insurers.
Now the building industry is stepping up the pressure. A group representing some of the nation’s largest home building companies convened in Melbourne last week to hold crisis talks about the exit of Lumley and CGU.
The availability of cover is a critical issue for them because builders’ warranty insurance is compulsory in every state except Queensland and Tasmania.
The builders pass the cost of the cover on to their customers, who can trigger the policy if the builder dies, disappears or becomes insolvent should the project remain unfinished or defects become apparent.
The departure of Lumley and CGU leaves QBE, Vero and Calliden as the remaining providers in the market beyond January 1. Underwriting agency Winsure Insurance has also announced plans to enter the market.
QBE and Vero have indicated they will consider new applications from builders provided they meet the eligibility criteria.
But builders say it’s not as easy as all that. Builders Collective of Australia President Phil Dwyer told insuranceNEWS.com.au the problem lies with the security his members are required to provide in order to access the cover. “Builders often underwrite the risk”, he says.
Now that Lumley and CGU have announced they will exit the market, builders claim the remaining insurers will be tempted to demand even more security. Because builders’ warranty is a long-tail cover, the affected builders may be liable to two insurers – both their old and new providers.
They have good reason to be cautious and demanding. The building industry has a scandalous history for the number of its members who have used such ploys as phoenix companies and empty company bank accounts to avoid their responsibilities to their customers. The insurers have good reason to set strict eligibility criteria and will usually demand high levels of security before agreeing to cover.
It’s hard to determine just how many builders are being asked for security, and for how much – the estimates vary enormously, depending on who you talk to. While QBE declined to comment on the issue, a Vero spokesman told insuranceNEWS.com.au security is “not a primary focus”.
What is clear is that major builders have begun to consider what a restriction in cover would mean for their bottom line. If they can’t access builders’ warranty insurance, they will be legally prevented from building.
And some will struggle to meet the insurers’ terms, having already committed substantial funds to their outgoing insurer.
Given the recent stimulus measures handed to the housing industry, the Federal Government is unlikely to allow the flood of new homes to slow to a trickle because of what is quite likely to be seen as insurers’ unreasonable demands.
In May Financial Services Minister Chris Bowen ordered another review of the product, just months after a Senate inquiry recommended only modest changes.
With all this going on, it appears likely that this little corner of the insurance industry is set to remain in the spotlight for some time to come.