30 Aug 2019

Certified Builders Association's insurance policy drops builder insolvency cover

7:21 am on 30 August 2019

The Certified Builders Association (NZCB) has quietly dropped a key part of their insurance policy that backs homeowners if their builder goes bust.

construction worker on construction site

The policy still covers structural and non-structural defects for 10 years, the NZCB says. Photo: 123rf.com

NZCB said it had no choice after the underwriter of the policy - Lloyd's of London - told them it was either that, or have its members' premiums skyrocket.

Chief executive Grant Florence said upping the premiums for its Halo policy was not an option, with builders and consumers already under financial stress from building materials and compliance costs.

The change took effect for policies taken out after 1 August, but Mr Florence said he did not expect it to be a major issue as insolvency claims were rare for NZCB members and completion cover was still in place for other events.

"The cover's still there if a builder dies or if a contract is cancelled, or for example if a builder is legally incapacitated."

The policy still covered for 10 years structural and non-structural defects.

Mr Florence said without the insolvency cover homeowners could do other things to protect themselves.

"They can make sure they've got a contract in place and also making sure that the payment schedule that they agree to minimises the risk if a builder does go under before the work's completed."

He said progress payments were "the ultimate protection".

Despite downplaying the magnitude of the policy change, Mr Florence said the NZCB was searching for a second underwriter.

"We're very active on that now. The reasons why we put this Halo in place was that we wanted to give peace of mind to homeowners and our efforts will continue to do that, to find that, so that we're able to bring this back to the market."

Another membership organisation - Registered Master Builders - continued to offer insolvency cover.

Chief executive David Kelly said it was crucial peace of mind for clients.

"Mercifully, it doesn't happen hugely in the scheme of things, but when it does happen, in our view it's the most devastating thing that can happen to a consumer."

"Our board met within the last two weeks and are very clear that we will continue to offer cover for insolvency because they regarded it as fundamentally important."

The Certified Builders Association, Master Builders and Stamford Insurance are the three main bodies, according to the Ministry of Business, Innovation and Employment (MBIE), that offer building insurance for homeowners.

Stamford director Duncan Colebrook said consumers expected insolvency cover, and his firm would continue to offer it, but the industry could do more to move the risk away from homeowners.

"The preferred method would be to put a deposit in a trust that nobody can touch until the end of the build, and then possibly the purchasers make staged payments based on certified works during construction."

He said this meant homeowners would not pay too far in advance, and it would not allow the builder to use their deposit to fund other projects.

But Mr Kelly said while that would mitigate the risk to a degree, it would not be practical.

"That's not so easy because the builder needs the cashflow as the project proceeds ... it's not really the solution in my view and it wouldn't cover the situation of the insolvency of the builder."

The change in the NZCB's policy comes as MBIE considers whether to make it a requirement that all new builds and significant alterations have a guarantee or insurance product in place.

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