Question marks remain over whether home owners will be left out of pocket once the Government forges ahead with plans to change who is liable for defective building work.
For decades, all parties involved in a build have been jointly liable for problems. If one can’t pay, whoever is still standing – usually the local council – picks up the tab.
The Government is proposing to change the Building Act to ensure those responsible pay their share only.
While this is arguably a fairer approach, the challenge is that it effectively shifts liability on to those in the building industry, whose pockets aren’t as deep as local councils’.
Building and Construction Minister Chris Penk recognises the risk this could leave home owners exposed to, so is considering requiring builders to take out insurance and/or homeowners to get building guarantees.
As it stands, insurance isn’t widely available, so the change would largely shift the liability on to the building industry associations that provide guarantees: Master Builders and Certified Builders.
But here’s the pinch – they aren’t regulated.
Unlike insurers, they don’t need to meet solvency standards set out by the Reserve Bank.
They collect premiums from home owners and use this money to settle claims if work done by one of their accredited builders is incomplete or defective.
The associations aren’t backed by insurers or reinsurers. Home owners simply need to trust they have enough money in the kitty to pay out in the event of there being a widespread problem.
Penk is considering introducing requirements for them to meet, which would likely include “some means of demonstrating their financial solvency and ability to meet potential claims”.
Master Builders chief executive Ankit Sharma and Certified Builders chief executive Malcolm Fleming assured the Herald their actuaries had taken conservative enough approaches towards calculating risk. Hence, the public could be confident in their abilities to meet their obligations.
Sharma was more welcoming of the prospect of being regulated than Fleming, who was wary of the bar being set so high that new entrants couldn’t enter the market.
Fleming noted that if there were to be a widespread issue, it would likely relate to a product failure. In this case, the manufacturer would be liable.
He said building standards had improved a lot since the leaky building saga of the 1990s, meanwhile builders had to meet professional standards to become members of Certified Builders.
Sharma recognised a recession could also prompt a wave of claims if builders went bust and left projects unfinished. He noted Master Builders was weathering the current downturn without any issues.
This said, he accepted that if guarantees were to become a more prominent part of the system under a new liability regime, regulation was a “mature, logical next step”.
Both he and Fleming said the important thing was that regulation was proportionate to keep costs down.
Solvency issues weren’t front of mind for Gareth Lewis, a partner at the law firm Grimshaw & Co, which specialises in building disputes.
His main concern was the narrow scope of cover offered by the building associations’ guarantees - the exclusions in these products risked leaving home owners exposed.
Lewis was adamant that if the regime changed, the Government had to ensure those lumped with the liability were adequately backed.
He said heavy reliance on guarantees was insufficient.
Indeed, the cover provided by building guarantees is capped.
Sharma said unlimited cover would be uneconomic. He stressed the importance of striking the right balance between risk, cost and productivity.
Fleming suggested the Ministry of Business, Innovation and Employment might be a more appropriate regulator than the Reserve Bank. He believed the regulation it imposes on insurers would be too heavy-handed for providers of building guarantees.
Penk said Cabinet would decide on “supporting mechanisms” for the liability rule change later this year.
“We recognise that for consumer protections to be effective under a proportionate liability system, they must be resilient, particularly in the event of large-scale claims. A robust warranty system must be able to withstand major claims events, not just routine cases,” Penk said.
“We also remain committed to supporting high standards of workmanship and quality in the wider building system, to help prevent the need for major claims.”
*This story has been updated to correct the spelling of Malcolm Fleming’s surname.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.