Info Note BS08 Home Indemnity Insurance (Owners) Updated 07/10

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1 info note Info Note BS08 Home Indemnity Insurance (Owners) Updated 07/10 What is Home Indemnity Insurance? Home indemnity insurance protects property owners against financial loss if the builder is unable to complete residential building work or meet a valid claim for faulty workmanship because of death, disappearance or insolvency (i.e. inability to meet outstanding debts). What is the law? If residential building work worth over $20,000 is undertaken on your behalf, the Home Building Contracts Amendment Act 1996 requires your builder to take out indemnity insurance. In most instances, the insurance policy must cover the residential building work during the construction period and for six years from the date of practical completion. This is the date from which the residence, extensions or renovations are capable of being used for their intended purpose. Owner Builders will not be required to take out indemnity insurance before they can build, but must do so if they sell within seven years of obtaining an Owner Builder licence from the either the Local Government Authority or the Builders Registration Board. Why do we need this law? In the past some property owners have lost money when their builder has not completed the work they have paid for, or has been unavailable to meet warranty obligations. This has tended to decrease confidence in the building industry and make some consumers wary of undertaking residential building work. In summary the law will: Provide an increased level of financial protection to consumers who build, extend or renovate a dwelling; and Promote confidence in the residential building industry. How will I know if my builder has taken out insurance? To start your building work, the builder must obtain approval (a building licence) from your Local Government Authority. The builder will not be able to get this building licence unless proof is provided to the Local Government Authority that indemnity insurance has been taken out. Your builder must give you a copy of the insurance certificate BEFORE: undertaking any residential building work for you; or you pay a deposit; or you pay any other money payable under your residential building contract. Who pays for the insurance and who will own the policy? The builder must pay the insurance premium and will allow for this cost in quoting you a contract price.

2 2 The policy will be in your name (as the property owner). If you sell your residence within the six year insurance period, the benefit of policy will pass to any subsequent owner(s). See section: What if I use a professional builder and wish to sell my property within the six year insurance period? Who provides the insurance and can I choose the insurer? Indemnity insurance is provided by a number of private sector insurers who must be approved by the Minister for Fair Trading. The builder normally selects the insurer. Your insurance certificate will give you details of the company providing the cover. Check with them if you have any questions or concerns. Is all residential home building work over $20,000 covered? All residential building work must be covered. This is defined to mean: The construction of a new dwelling. The extension or renovation of an existing dwelling. Placing of a dwelling on land. Construction, extension or renovation of multi unit grouped homes or high rise developments. Construction or carrying out of work associated with any of the above. Such work includes pergolas, fences, swimming pools, landscaping and similar work. IF YOU ARE Building only a pergola, fence, or swimming pool, arranging landscaping, or for similar work to be done in or around an existing dwelling, and you are not undertaking any residential construction work or placing a dwelling on land, - the law does not require indemnity insurance to be in place. This is the situation even if you are paying more than $20,000 for the work. Signing a cost plus contract with your builder - that is one where the total price for the work is not stated - the builder will need to take out indemnity insurance prior to the building licence being issued, but the cover will apply only to the six year period following practical completion. Placing a dwelling on land and this is the first time it has been erected - the cover must include the cost of the residence as well as placement. Relocating an existing dwelling to a new site - indemnity insurance does not have to cover the original fabric of the dwelling. It is required to cover only work connected with the relocation and any new building work undertaken. What is the minimum monetary cover? Can I ask for increased cover? The new law sets out the lowest level of indemnity insurance cover the builder can provide. The policy must require the insurance company to pay up to $100,000 or the value of the contract work, if it is less than that amount. This does not mean that you will get $100,000 if you make a claim. This is the maximum amount that the insurance company must agree to pay out while the policy is in force. If you wish to obtain additional cover you may negotiate with the builder s insurer for a higher level of cover. Whatever your total cover, the law requires insurers to pay no more than $13,000 for loss of deposit. Again you can negotiate for a higher level of cover if you consider this necessary. The insurer will be allowed to charge a $500 excess which means you or your successors in title may have to pay the first $500 of any claim. What does the policy cover and how long does it last? Your indemnity insurance policy will help to ensure that your residential building work will be finished at no additional cost to you if your builder dies, disappears or becomes insolvent. This component of the policy does not apply to cost plus contracts. The policy must also cover claims made within a period of six years from practical completion of that work.

3 3 What if I decide to take out an owner builder licence? If you take out an owner builder licence you will not need to engage a professional builder to carry out your residential building work. It may be suggested to you that you can reduce costs by taking out the building licence yourself, that is, becoming an owner builder. Be wary of such a suggestion as builders who suggest this to you may do so because they are unable to secure indemnity insurance on your behalf. If you do decide to take out an owner builder licence, you will not need to take out indemnity insurance to obtain your licence from the Local Government Authority. However if you obtain that licence on or after 1 February 1997 and sell or otherwise dispose of your residence within seven years of taking it out, you must obtain indemnity insurance to cover subsequent owners. The policy must cover the new owner(s) for the remainder of the seven year period. You must also provide the purchaser with a valid certificate of insurance before you enter into a contract to sell. You should disclose to your licensed real estate agent or sales representative (or to prospective purchasers if you are selling privately), that the property contains work for which an owner builder licence was obtained. If you, as an owner builder, fail to take out indemnity insurance and/or to provide the certificate to the purchaser before you sell your property, you are liable to prosecution and a maximum fine of $10,000. For information about which insurers provide this type of cover, contact Insurance Enquiries and Complaints Ltd (for address and contact number see section: Further Information). If you cannot obtain insurance you will not be able to sell your residence within seven years of obtaining your owner builder s licence. You should note that existing laws already require that if you wish to sell within three years of obtaining your owner builder licence, you also have to obtain permission from the Minister for Fair Trading. The Builders Registration Board can tell you how to apply for this. What if I use a professional builder and wish to sell my property within the six year insurance period? You can sell at any time. But if your builder obtained a building licence for this work from the Local Government Authority on or after 1 February 1997, you should disclose to your agent or sales representative (or to any prospective purchasers if you are selling privately), when the dwelling was built, extended, or renovated. If your builder obtained a licence after 1 February 1997, proof of insurance will be required. If I am buying a property - how do I know whether home indemnity insurance should be, or is, in place? If you are using a licensed real estate agent, the agent or sales representative should tell you the age of the dwelling, whether any additions or renovations have been carried out, the date at which any building work took place and whether insurance is, or should be, in place. The agent or representative should also inform you whether the work was carried out by a professional (usually a registered) builder or an owner builder. If you are not buying through a licensed agent or sales representative, you should ask these questions yourself. Some dwellings built within the last six years will already be covered. Many builders already promote indemnity insurance to their customers. You should check whether a policy exists and obtain details. There is no legal requirement for insurance to be in place, unless a building licence is issued by a Local Government Authority on or after 1 February If the vendor used a building and Local Authority approval was obtained after that date, insurance should be in place to cover the six years from practical completion. This is the date from which the residence, extensions or renovations are capable of being used for their intended purpose. This insurance will protect you if the builder fails, because of death, disappearance or insolvency, to meet claims made within the six year insurance period.

4 4 If the property was constructed, extended, or renovated by an owner builder and the building licence was taken out on or after 1 February 1997, the owner builder must take out insurance cover before entering into a contract to sell. The insurance policy must cover the remainder of the seven years from the issue of the owner builder licence and will protect the subsequent owners if the owner builder dies, cannot be found or becomes financially insolvent and is unable or unavailable to meet a claim made while the insurance policy is in force. Your real estate agent, sales representative, (or the vendor, if you are not using a licensed real estate agent), should inform you if an owner builder has undertaken work for which a building licence was obtained on or after 1 February When buying a property which may have been built, extended or renovated after 1 February 1997, whether by a builder or an owner builder, you may wish to ask your settlement agent or conveyancing lawyer to ensure that proof of insurance is provided at settlement. In any event, a settlement agent/conveyancer who finds that indemnity insurance cover appears to be applicable but is not in place, should advise you accordingly. If you receive such information you should seek legal advice prior to settlement. What if my builder can t obtain insurance or fails to take it out? Builders will be able to obtain insurance provided that they can satisfy an insurer that they have a sound business and apply appropriate standards of workmanship. If your builder cannot obtain insurance and therefore cannot undertake your building work, you will need to engage another builder. From 1 February 1997, a builder who does not take out indemnity insurance can be prosecuted and fined up to $10,000. If you find that insurance is not in place when you need to make a claim, you should refer the matter to the Building Disputes Committee (for address and contact number see section: Further Information). What if I make a claim and the insurer disputes it? You should contact Insurance Enquiries and Complaints Ltd for advice on dispute resolution arrangements. Where can I get further information? The Home Building Contracts Act 1991 sets out what is legally required of builders and owners entering into a contract for residential home building work. Copies of this Act, which now includes the provisions covering indemnity insurance requirements, can be purchased from State Law Publisher, Ground Floor, 10 William Street, Perth This Act requires that before you sign a contract for home building work you are given a copy of the Notice for the Home Owner which summarises the main requirements of the Act in plain English. This Notice is being revised to include reference to the indemnity insurance requirements. Make sure your builder gives you a copy of the Notice and read it carefully. If you are unsure about how the new law covering indemnity insurance affects your situation, or for enquiries about the laws covering residential home building work and dealings between owners and builders, contact the Builders Registration Board or the Department of Consumer & Employment Protection. You may also contact one of the industry associations whose address is given in this leaflet.

5 5 PROPERTY OWNER S CHECKLIST Owners When you employ a builder to carry out residential building work worth more than $20,000 should know that: the builder must give you a certificate of indemnity insurance before undertaking any work under the building contract you are not required to give the builder any money payable under the building contract (including a deposit) until you get that certificate the policy must cover the residential building work for claims made within six years of practical completion you must provide proof of insurance if selling your property within the six year insurance period. Owner Builders When you obtain an owner builder licence from your Local Government Authority and then wish to sell your property within seven years of that licence being taken out, you: must tell your Real Estate Agent or prospective purchaser that your residence was built, extended or renovated by an owner builder must take out indemnity insurance prior to entering into a contract to sell or otherwise dispose of your property. This must cover the remainder of the seven year period must provide the purchaser with a valid insurance certificate cannot sell if you are unable to obtain indemnity insurance. FOR YOUR INFORMATION Builders Before carrying out residential building work worth more than $20,000, Builders must: contact their insurer and arrange indemnity insurance cover provide a copy of the insurance certificate to the Local Government Authority in order to obtain a building licence give the owner the insurance certificate before asking for any money or performing any work under the contract Real Estate Agents/Sales Representatives Before listing a property for sale and in checking pertinent facts, should: ask the vendor to disclose whether a Local Government Authority building licence was obtained on or after 1 February 1997 to build, extend, or renovate the residence and if so determine whether a builder was engaged or an owner builder licence was taken out be satisfied that insurance is in place if required ensure that an owner builder who is required to take out insurance prior to entering into a contract to sell has done so. Settlement Agents/Conveyancers Before finalising settlement where a building licence may have been issued on or after 1 February 1997, should: enquire of the owner or, if necessary, from the Local Government Authority whether a building licence covering the property was issued on or after 1 February 1997 to a builder or owner builder and if so obtain proof from the owner or, if necessary, from the Local Government Authority that insurance is in place to cover the remainder of the six year insurance period (seven years from the issue of a building licence where an owner builder has been involved) inform the purchaser of the existing insurance details for future reference advise the purchaser and/or vendor in writing to seek legal advice before settlement if insurance is required but is not in place.

6 6 FURTHER INFORMATION Department of Consumer & Employment Protection For further advice on these new laws contact the Ministry: Advice Line: (08) Housing Country Callers: (free call) TTY: (08) (for hearing impaired) Other Useful Contact Numbers: Builders Registration Board/Building Disputes Committee Suite 101, 18 Harvest Terrace West Perth WA 6005 Tel: (08) Housing Industry Association Limited 22 Parkland Road Osborne Park WA 6017 Tel: (08) Fax: (08) Master Builder s Association of Western Australia Havelock Street West Perth WA 6005 Tel: (08) Insurance Council of Australia Ltd Level 9, Septimus Roe Square 256 Adelaide Terrace Perth WA 6000 Tel: (08) (Policy and Industry Issues) State Law Publisher Ground Floor 10 William Street Perth WA 6000 Tel: (08) Several of these organisations have other publications relating to the building industry. For copies, contact the above numbers. THE STATUTORY ROLE OF LOCAL GOVERNMENT Section 7 of the Home Building Contracts Amendment Act 1996 amends the Local Government (Miscellaneous Provisions) Act 1960 by inserting the following section: Local government not to issue building licence unless indemnity insurance held 374AAA. satisfied that - A local government shall not issue to a person a building licence under section 374 unless (a) (b) a policy of insurance is in force in respect of the work under Division 2 of Part 3A of the Home Building Contracts Act 1911; or a policy of insurance referred to in paragraph (a) is not required in respect of the work. It is suggested that to discharge their statutory obligation under this provision, building surveyors should require a copy of the certificate of insurance for a building project to be submitted prior to the issue of a building licence. Where insurance is not required the building surveyor should obtain and file a statement from the applicant to that effect. The building surveyor should note on the project envelope or other record to identify that an original copy of the insurance certificate has been obtained and is filed, or is stated in writing as not being required for the project under the Home Building Contracts Amendment Act The Department of Consumer & Employment Protection is able to provide further explanation of the responsibilities of Local Governments and those of builders and property owners.