Fund touted to protect against shonky builders

Leaky-building experts are urging the Government to introduce a fidelity fund or warranty scheme to protect home owners from fly-by-night builders and developers.

Experts predict that about 89,000 homes will leak within 15 years of being built, costing $23 billion.

It is estimated that tens of thousands of the owners are unable to fix their homes because they do not have enough money for repairs or legal action. Often, the building companies involved have been shut down to avoid liability.

A review of the Building Act launched last week by Building and Construction Minister Maurice Williamson asks whether all building contractors should have surety (financial backing for their warranties) in case they cannot fix defects themselves.

The review says typical surety providers include insurance companies, banks, fidelity funds and warranty associations or companies.

It warns that if the Government wants compulsory surety, it might have to set up a default provider for builders who cannot get cover.

Home Owners and Buyers Association president John Gray said the best way to protect owners was a fidelity fund for the whole building industry.

It could collect the millions of dollars paid in levies to various bodies - such as the Building Research Association, the Department of Building and Housing and the Building and Construction Industry Training Organisation - to spend on training, standards and consumer education.

If a house failed, those responsible would have to fix it or risk losing their licence to work.

If they were no longer in business, the fidelity fund would pay for the work and reclaim the cost from the guilty party if possible.

Mr Gray said this would end the "last man standing" dilemma, which often forced councils to accept legal responsibility for the entire cost of fixing a leaky home because the builders had liquidated their companies.

Prendos director Philip O'Sullivan, who raised the alarm over leaky buildings in 2002, said he preferred a not-for-profit warranty company, based on the British National House Building Council.

Like a fidelity fund, a warranty company would take responsibility for fixing leaky buildings and work to improve industry standards. It could either take over the consent process from councils or pay them to do the work. It would set up an approval system for building products, which had often been found wanting in the leaky building crisis.

Unlike the fidelity fund, it would be voluntary for home owners to belong and private firms would be free to compete with it.

Both men admitted the Government would probably have to underwrite either scheme for the first few years, in case it faced massive claims without enough reserves to pay out.

But both argued against allowing insurance companies to run the market, citing poor performance in the United States and Australia.

Last year, a state commission in Victoria found the builders warranty insurance industry paid out on only 20 per cent of claims.

Insurance Council chief executive officer Chris Ryan said he thought most insurers would be wary of re-entering the New Zealand market at this stage, as the leaky-building crisis made it so hard to quantify the risk, but the Government was right to leave it as an option.

HOME OWNERS' RIGHTS
As suggested by a review of the Building Act

* A compulsory written contract between the home owner and the main building contractor.
* Building contractors must tell home owners whether they have financial backing (eg insurance) to support their warranties.
* The review also asks whether this financial backing should be made compulsory.