HELPING YOU UNDERSTAND THE HOME OWNERS WARRANTY INSURANCE.
So, what is Home Owners Warranty Insurance (HOWI)?
This is probably the most misunderstood and confused insurance in building a new home, and we want to try and demystify it in this blog for everyone’s benefit.
So let’s just stop for a second and consider the definition of insurance, or insuring yourself. It basically means you’re expending a small amount of cost (time, effort, money, etc) ahead of time to protect yourself from a large amount of cost (harm, damage, loss, etc) if something goes wrong later on. There’s probably oodles of ways of looking at it, but the essence is the same – you’re guaranteeing yourself against future loss.
But when we apply this concept to a home owners warranty insurance, it takes on a different hue, because the insurance we’re talking about has to be obtained by the builder on behalf of the home owner – it’s someone else providing a guarantee against your potential loss. And this potential loss is the result of your builder doing 1 or 2 of 3 things while building your home – disappearing, dying, or going bankrupt (apparently a builder can’t do all 3 things at the same time).
So the potential loss is that you’ll end up with a half built home on your hands with no-one to finish it. Which is a fairly serious position to be in actually, because it’s not just a matter of ringing up another builder and getting them to come and finish it off – they’ll need to get an understanding of the specifications and plans. And what permits have been issued. And what materials are already on site and what’s not. And what quality or method the home has been constructed to up to that stage. And new permissions from the authorities because of a change of builder. Etc etc. It’s quite involved and tricky.
Next, let’s quickly explore why and how this insurance came about. Since time immemorial, people have died, businesses have gone bust, and some people have even disappeared, including builders. But in the last few decades, governments have become more and more involved in the plight of their citizens, and one of them is the situation of builders leaving their customers in the lurch, mostly due to bankruptcy. It was a source of heartache and disruption not only to people’s lives but to their dreams.
So the government finally said enough is enough, and they introduced legislation which forced every builder to buy insurance on behalf of their customers. And it was then enforced to the extent that a builder couldn’t even get a building permit until the insurance was in place.
Of course, it pushed up the cost of a home a little bit, but the theory was that if something did go horribly wrong, the customer (not a home owner at that point, because they didn’t actually own a home, only half or quarter of a home!) could pull out the insurance document, ring the number on it and claim the costs involved in getting someone else in to finish building their home.
And it generally worked. But 2 things happened – the insurance companies started to pull out because builders kept going broke and they (insurance companies) were making big losses, and 2, the rates started going up and up – because builders kept going broke! So the government got closely involved in the insurance to keep the scheme running and stabilise the rates. And that’s about where it’s stayed the last 10 or so years.
It’s been a contentious insurance, because the 99% claim they’ve been penalised due to the incompetence of the 1%, and the more of these incompetent people that have gone bust, the higher the rates paid by the remaining 99% that have done nothing wrong. And it’s a fair comment – as a general rule, the builders (or builders-that-were) that have caused the problems, have been slack and negligent and should never have been in the industry to start with. Anyway, it’s an insurance that’s broadly been successful in its intent, and from what we can see, it’s here to stay for the long run.
In practice, the builder initially gains accreditation with the insurer as sound enough to build homes without risk to the insurer, and then purchases individual policies for each customer after the home building contract is signed. It costs the builder anywhere between $1,500 to $3,500 per contract, depending on the value of the home and various other factors. The customers name and other contractual details are listed on the policy, and it forms part of the building permit application.
The insurance expires when the occupancy permit (the permit from the building surveyor that allows you to move into your new home) has been issued, which is generally at practical completion.
The HOWI does not insure things like theft, storm damage, builder negligence for quality, time delays, third party or public liability insurance, etc. There are other insurances that a builder has that cover many of these things, and they’ll often form part of the building contract and bank loans, but they’re completely separate from the insurance we’re discussing. HOWI is a stand-alone very specific insurance that only lasts a few months and is very seldom used – and we trust you never have to use it!
Keen to find out more?
Reach out to us. We’re here to help.