Article

The Home Building Act 1989 (NSW) (“HBA”) has recently been amended following assent to the Home Building Amendment (Insurance) Act 2009 (NSW) (“the Amending Act”) on 19 May 2009.

The various changes to the HBA deal with clarifying issues in respect of insurer liability and available cover for loss suffered by an insured homeowner under the home warranty insurance scheme.

Objectives of the Amending Act

The objectives of the Amending Act are to provide certainty in respect of liability to insurers by:

• clarifying existing grounds of liability under a home warranty insurance policy and how to determine the minimum amount of cover required

• providing that a home warranty insurance policy only extends to cover a loss that becomes apparent and is notified to the insurer within the period of the insurance, or if the loss becomes apparent during the last 6 months of the period of insurance, that it is notified to the insurer within 6 months of the loss becoming apparent, and

• clarifying existing regulation-making powers to authorise reductions in liability.

Background

Since the beginning of the home warranty insurance scheme on 1 May 1997, insurers were not allowed to reduce or deny their liability if a claim was notified to them within 6 months of the insured becoming aware of the cause of the claim.

It had previously been assumed that cover under an insurance contract was only available to homeowners who became aware of the insured loss and notified the insurer during either:

• the period of insurance specified in the insurance contract, or

• a minimum period prescribed by s103B of the HBA.

The Supreme Court decision in Strata Plan 57504 v Building Insurers’ Guarantee Corporation [2008] NSWSC 1022 (“Strata Plan 57504”) highlighted the fact that although s103B of the HBA specified a minimum period of insurance cover, there was no limit on when a claim could be made as long as the loss was incurred during a period of insurance.

In that case, McDougall J stated that a policy of insurance complying with the provisions of the HBA “must provide indemnity to the beneficiary for any loss sustained by the beneficiary arising from a breach of a statutory warranty, where that loss was sustained within seven years from completion of the work.”

As a result of the decision in Strata Plan 57504, it was possible that an insurer could be found liable for losses arising well beyond the insurance period and in fact, at any time during the life of the building.

Some of the effects of the Supreme Court decision on the home warranty insurance industry include:

• home warranty insurance providers being left without a clear limit on their liability for claims and therefore facing potentially large-scale losses (the Office of Fair Trading estimates that there would have been more than 650,000 home building projects covered by the scheme since 1997)

• rising concern regarding the indemnities provided by the Crown to homeowners who were insured by insolvent HIH and FAI insurance group, and

• approved insurers warning the Office of Fair Trading that they may withdraw from the home warranty insurance market. According to the Insurance Council of Australia, this in turn could lead to increased premiums as a result of increased capital adequacy requirements.

Key amendments

The Amending Act codifies what was widely accepted as the coverage of home warranty insurance prior to Strata Plan 57504 by:

• confirming which losses are insured

• clarifying that a home warranty insurance contract does not provide open-ended coverage, and

• clearly setting out the period of cover under insurance contracts.

Section 103C(2)(a) has been amended to allow Regulations to be made with respect to the reduction of liability as well as limitations on liability. In light of this new section, new Regulation 58A says that an insurer may reduce its liability under an insurance contract if the insured has failed to take action to enforce a statutory warranty, the breach of which results in loss. This reduction in liability is limited to the amount that fairly represents the extent to which the insurer’s interests were prejudiced.

Regulation 60(4) of the Home Building Regulations 2004 (NSW) provides that an insurance contract must provide the minimum amount of cover as provided from time to time by the HBA. Some insurers used almost these exact words instead of specifying an amount and therefore the minimum cover could potentially increase whenever the prescribed minimum amount increased.

Section 102(3A) of the Amending Act deals with this issue by setting the minimum coverage for an insurance contract as the minimum amount prescribed at the time the contract was entered into (including any rights under Part 3A of the Act which deals with resolving building disputes and building claims).

A significant change under the Amending Act which closed the door opened by Strata Plan 57504 is the new section 103BA. This section provides that a home warranty insurance policy only extends to cover a loss that becomes apparent and is notified to the insurer within the period of the insurance, or if the loss becomes apparent during the last 6 months of the period of insurance, that is notified to the insurer within 6 months of the loss becoming apparent.

Sections 102(3A) and 103BA extend to:

• a contract of insurance entered into before the commencement of that section

• a claim under any such contract of insurance, and

• proceedings on such a claim (including commenced but not determined) (section 83 of Part 15),

but do not extend to the following:

• a claim that was paid in full before the commencement of that section

• any agreement made before the commencement of that section to settle a claim

• a decision of an insurer made before the commencement of that subsection that cannot be the subject of appeal due to Regulation 65

• the amount that person is entitled to recover under a contract of insurance where that amount was paid before the commencement of that subsection under the indemnity provided by Division 2 (Insurance claims indemnified by State) of Part 6A, or

• any final determination of legal proceedings made by a court or tribunal before the commencement of that subsection (sections 82 and 83 of Part 15).

Retrospective application

The committee considering the Amending Act was concerned with the retrospective application of sections 102(3A) and 103BA. However, if they had not applied these sections retrospectively:

• insurers would be severely adversely affected

• home building insurance premiums would be likely to increase, and

• insurers may have withdrawn from the market.

Furthermore, the retrospective action of s103BA simply re-establishes the situation as it was understood prior to Strata Plan 57504.

Additional amendments

Additional amendments include the following:

• An insurance contract must include a provision deeming the suspension of a contractor’s licence under section 42A (failure to comply with an order to pay money) constitutes insolvency of a contractor for the purpose of application of the policy to any unsatisfied loss (section 99(3)).

• A claim in respect of this loss is limited to a loss that would have been covered by the contract in the event of the contractor’s insolvency (section 99(4)(a)).

• The amount of the claim is not limited to the amount of the building claim order (section 99(4)(b)).

• A building claim order does not limit a beneficiary’s right to appeal against a decision of the insurer (section 99(4)(c)).

• The building claim order does not limit an insurer’s right of recovery against the contractor in respect of the loss to which the claim relates (section 99(4)(d)).

• The amendments to section 99 are limited to insurance policies entered into after the commencement of the amendments and insurance contracts entered into after this time using any existing stock of insurance contract form is deemed to include the provision at section 99(3)) (Schedule 4, Part 15 section 81(1) and (2)).

• A contract of insurance covers loss only if: