Shuusuke Yamazaki 1. 1 Mitsui Sumitomo Insurance Co.,Ltd, Chiyoda-ku,Tokyo, Japan. shuusuke.yamazaki@msins.com

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1 Description of Japanese mandatory housing warranty insurance including the background of establishment of warranty insurance system and the current status of utilization Shuusuke Yamazaki 1 1 Mitsui Sumitomo Insurance Co.,Ltd, Chiyoda-ku,Tokyo, Japan. shuusuke.yamazaki@msins.com 1. Background of Establishment of the Act for Execution of Housing Defect Warranty Liability In 2005, the structural calculation forgery was revealed in one apartment which was sold by one medium size developer, and the consumer who bought the apartment suffered a huge loss, and it became a nation-wide issue in Japan. To deal with the defective home issue, the act promoting housing quality was established, and for all new residential housing the liability of a ten year warranty was mandated to the builders and suppliers of new homes. Therefore, the cost for repairing defects were expected to be borne by the seller of the apartment, and the consumer should not bear any cost. However the seller of the apartment went bankrupt, the liability was not redeemed and the buyers were not protected. Because of the structural calculation forgery, the acts promoting housing quality is not sufficient protection, and it is revealed that the law may not function if the builders or the suppliers do not have enough financial backing. Therefore the new law called the act for execution of housing defect warranty liability was established in 2007 to secure all warranty liability. 2. Overview of the Act for Execution of Housing Defect Warranty Liability This law is intended to secure financial resources to back up the 10-year defects warranty liability against the builders and sellers of new homes as stipulated in the act for execution of housing defect warranty liability. In this law, the obligation is imposed on the builders and suppliers of new homes. Either of the two following options are required in order to meet this obligation: (1) In order to ensure the fulfillment of the warranty against defects, the builders and suppliers of new homes must deposit the security deposit in accordance with the number of units of new housing delivered in the past decade. (2) If you have entered into a satisfactory Housing Defect Warranty Liability Insurance contract with an insurance company specified by the Ministry of Land, Infrastructure and Transport, a reduction in the amount of the deposit is permitted. Therefore the builders or suppliers of new homes must make a cash deposit to the legal affairs bureau or enter into a satisfactory insurance contract. The violation of these obligations will be punished. 1

2 3. Overview of Measures to Secure Resources Required The structure of the measures to secure financial resources consists of many players. The first players are the builders and suppliers of new homes. These players are required to make cash deposit to the legal affairs bureau or enter into satisfactory insurance in order to ensure the 10 years of defect warranty liability. For the deposit option, the amount of the deposit must be in accordance with the balance of the number of units of housing delivered every six months. For the satisfactory Housing Defect Warranty Liability Insurance option, it is necessary to enter into the insurance every time you deliver new homes from a specified insurance company. In this structure, a dispute resolution organization exists. In the event of a dispute between the buyer and the builder or seller of new residential housing to which Housing Defect Warranty Liability Insurance is attached, either the buyer or builder of new homes can use a system that manages dispute resolution from the point of view of consumer protection. More specifically, it is possible to participate in arbitration, if the buyer or seller apply to the "designated dispute resolution (Bar Association)." Costs for this dispute process is only 10,000 yen (approx. 100 USD) in principle. Remuneration to the dispute settlement committee, appraisal and local research cost will not generally be charged. The insurance company is supposed to respect the results. In this structure, a non-life insurance company backs up the insurance company specified by the Ministry to provide Housing Defect Warranty Liability Insurance. The Insurance companies specified by the Ministry do not have enough insurance business experience and financial strength. The non-life insurance companies calculate the premium for the risk of a defect, and assume the risk through the insurance companies specified by the Ministry. The insurance companies specified by the Ministry are responsible for the inspection of housing, and the nonlife insurance companies are underwrite the risk of defects. In addition, if there is gross negligence or willful misconduct in the defect, the non-life insurance companies cannot back up the risk. Therefore a relief fund is prepared, and the relief fund is available to provide back up the coverage for the defect caused by gross negligence and willful misconduct. 4. Scope of Defect Warranty Liability The scope of the defect warranty liability which are required by law is major parts for structural strength, and parts preventing rainwater ingress. The defect liability period required by law is 10 years. "Major parts for structural strength" are parts which bear the vibration, water pressure, and the weight of the housing. For example, foundation of housing, pile foundation, walls, pillars, roof trusses, foundation, diagonal bracing, floor slab, roof plate, horizontal plate. "Parts preventing rainwater ingress" are the roof, wall, doors, windows, and the drain pipe which exist in the roof, in the wall and in doors to eliminate the rainwater. 2

3 The definition of these parts is stipulated in the law. 5. The Amount of Cash Deposit to the Legal Affairs Bureau Builders and suppliers of new homes may select the cash deposit as an option to secure resources. However, since it is necessary to deposit cash in accordance with the number of units sold, it is an option for the builders and suppliers who can afford it. The deposit amount criteria is within the range of 20 million yen (approx. 0.2 million USD) to 12 billion yen (approx. 120 million USD) depending on the number of new homes supplied in the past. For example, for a seller of 50,000 units in the past 10 years, 50,000 units 16,000 yen +340 million yen = 1.14 billion yen (approx million USD) of cash deposit is required. Deposit amounts are set by the amount of money that can withstand even the series loss which does not occur frequently by taking into consideration defect statistics, and expenses required for repairing defects in the past. The deposit amount increases with the increase of the number of units of new homes supplied. But by the concept of the law of large numbers, with the increase in the number of units supplied, the reliability of the probability also increases, and an amount required equivalent to 1 unit is reduced. For this reason, depending on the number of units of housing, deposit amount is determined. 6. Overview of Housing Defect Warranty Liability Insurance For the builders and suppliers of new home, there is a choice to apply for the Housing Defect Warranty Liability Insurance other than to deposit option. The policy holder and the insured will be the builders and suppliers of new homes. The housing warranty insurance company do the inspections of housing first, then assume the insurance. If an insured event occurs, the housing warranty insurance company will pay for the claims to the builders or the suppliers, whomever insured. If the builder or the suppliers have gone bankrupt or if the defect is not repaired, then the buyer of new home can claim for insurance directly to the housing warranty insurance company. The content of insurance is as follows. The scope of insurance is the costs for repairing "the major part for structural strength" and "the parts preventing rainwater ingress and other costs such as investigation costs that go along with the repair, temporary housing, moving expenses, etc. The policy period is 10 years. The deductibles is 100,000 yen. For builders and suppliers of new homes, payment will be reduced by 80%. If the buyer of the new home claims for insurance, the reduced payment will not be applied. The rough indication of insurance premium varies depending on the housing warranty insurance company, but one per dwelling unit, is 7-80,000 yen (approx. 700 to 800 USD). The insurance amount is 20 million yen (approx. 0.2 million USD) per dwelling, but can be set at a higher amount if requested. 7. The Pre-registration of Housing Defect Warranty Liability Insurance In order to use the Housing Defect Warranty Liability Insurance, the builders and the suppliers of new homes must register to the housing warranty insurance company in advance. The purpose of 3

4 this registration is to check the scale of the builders and the supplier of new homes, and whether or not the builders and the suppliers are not anti-social elements. The fee for registration is decided by the housing warranty insurance company respectively. 8. Site Inspection by the Housing Warranty Insurance Company An important feature of this insurance is that the housing warranty insurance company will visit the construction site and an inspection is performed when assuming the insurance. Since special knowledge of building technology is required, the housing warranty insurance companies designated by Ministry of Land, Infrastructure and Transport handles this insurance. The inspection procedure is as follows. First of all, the housing warranty insurance company accepts an application for insurance, then construction starts. After construction of basic bar arrangement is completed, inspectors of the insurance company perform the first inspection. If construction of structure has been completed the second inspection will be performed. The number of inspection is basically twice, but in the case of high-rise apartment the number of inspection increases according to the number of storeys. After passing the inspection of the housing warranty insurance company, the insurance period starts from the date of delivery of housing. 9. The Breakdown of Insurance Premiums The cost of Housing Defect Warranty Insurance consists of inspection fees and the insurance premium. For inspection fees and the insurance premium, each housing warranty insurance company has to receive approval from the Ministry. For one single-family house the cost of insurance including inspection fee is about 74,000 yen (approx. 740 USD). For an apartment building the cost is about 45,000 yen (approx. 450 USD) per unit. The cost for only the inspection fee, is about 26,000 yen in single-family housing and about 5,000 yen per unit for the apartment building. The premium is divided into pure premium and loading premium, but about 48,000 yen in total for the single family house, and about 40,000 yen per unit in the apartment building is required. The inspection fee consists of a management fee, the cost of site inspection and transportation costs. The additional premium includes fees for claim handling, cost of selling insurance, and the cost for dispute settlement system. 4

5 The pure premium is a reinsurance premium corresponding to the risk of defects to pay in nonlife full line insurance company such as Mitsui Sumitomo Insurance, and Sonpo Japan. 10. Direct Insurance Claims by the Buyer of New Homes In this insurance scheme direct claims may be made to the housing warranty insurance companies by the buyers of the new homes. If the builder or the supplier of new homes does not repair the defect, even after a considerable period of time, the buyer can make a direct insurance claim, for example, if the builder or the supplier of new homes went bankrupt, or are missing or dead. In the case immediate relief is needed, it is possible to be shorter than normal waiting period. Normally, if the original builder or the supplier repairs the defect, the claim amount to be paid to the builder or the supplier is 80% of the losses. The remaining 20% is retained by the original builder or the supplier. But if the buyer make a direct insurance claim, the claim amount to be paid is100 percent of losses to the extent of the insured amount. In a sense, this insurance is the combination of defect liability insurance, and performance bonds. This type of insurance is not common and very different from other Japanese insurances. 11. Corresponding to the Defects Caused by the Gross Negligence and Willful Misconduct of the Builder and the Supplier of New homes In normal insurance, gross negligence or willful misconduct is not covered. It is same with this insurance if the builders and the suppliers are present. We do not need to help the builder or the supplier in this case, but we need to provide relief to the victim of the defect. So in this insurance, if the direct insurance claim was made by the buyer, provided that buyer has no gross negligence or willful misconduct, the housing warranty insurance companies pay the claim to the buyer. For the losses caused by the gross negligence or willful misconduct of the builder or the supplier, it will be paid by the relief fund through the housing warranty insurance company. If the relief fund is not enough, an interest-free loan will be made to the relief fund from another fund. 5

6 12. Correspondence of Insured Event If a defect occurs on the insured new home the defect will be reported by the builder or the supplier. Then the housing warranty company will do an assessment, and insurance will be paid to the builder or the supplier. Procedures are as follows: (1) If a defect is reported that is considered to be an insured event such as "rain leakage or "the house is tilted" the builder or the supplier will consult with the housing warranty insurance company and submit the notification form. (2) The housing warranty insurance company assess the notification and will conduct an on-site survey. During the on-site survey the housing warranty insurance company will check the repairs required and the most suitable method of repairing and the claim amount. (3) The housing warranty insurance company will determine whether the defect is applicable to insurance on the basis of the on-site survey. Then the housing warranty insurance company notifies the result to the insured. After receiving the assessment result from the housing warranty insurance company, the builder or the supplier will start the repair work. When they finish the repairs they report with photos and a fixed amount of the cost to repair. After checking the documents submitted by the builder or supplier, the housing warranty insurance company pays the insurance money. 13. Actual Use of Cash Deposit and Defect Warranty Liability Insurance It is possible to browse the website of the Ministry data, and see which measure is being selected by the builder or supplier. If you look based on the number of units of housing, insurance is slightly higher than the deposit, but the ratio is roughly half and half. On the other hand, 99% of the builder or the supplier of new homes are using the insurance if you look at the number of operators. 14. Conclusion Five years have passed since the act for execution of housing defect warranty liability was enacted in 2008 and it is now under discussion by the Ministry whether an amendment is needed. Speaking from the point of view of non-life full line insurance company, the use of cash deposit now being chosen by the large builder or suppliers, increases the stability of the risk portfolio of the defect warranty liability insurance. 6