Marsh Pty Ltd. Victorian Competition and Efficiency Commission. Following the Release of the Draft. Report July 2005

Who offers different approaches to the proportion of premiums between public liability and defective work?
What is the minimum amount of premiums that a plumber can get?
How much does the annual cost of insurance cost?

Transcription

1 Les Beattie Senior Account Executive Marsh Pty Ltd ABN Lonsdale Street MELBOURNE VIC 3000 GPO Box 1229L MELBOURNE VIC Fax Submission by Marsh Pty Ltd to the Victorian Competition and Efficiency Commission Inquiry into Regulation of the Housing Construction Sector and Related Issues Following the Release of the Draft Report July 2005 Prepared By: Les. D Beattie Marsh Pty Ltd

2 We submit this brief report as a follow up to our original submission of 4 March 2005 and in response to the Commissions request for information sections and of the draft report July Request for Information The Commission invites inquiry participants to comment on the benefits and costs of mandatory plumbing insurance for housing construction. We now provide the Commission with an example of the costs associated with the construction of a new dwelling, prior to a commentary on the benefits provided to both the plumber and the consumer. As the cost of the insurance has been the subject of debate we schedule standard rates (effective from 31 May 2005) offered by one of the insurance providers. These rates are based on the number of employees on tools (management, office staff and other employees are not included when calculating premiums). The premiums are applicable to typical domestic plumbers and do not include any allowances for specialist plumbing activities such as gas type B, industrial or air conditioning. This is not to say that these activities would or could not be covered but would need individual underwriting and possibly some adjustment to standard premiums. The same considerations would apply to plumbers who have an adverse claims history. Premium Costing Examples The following annual premiums are inclusive of Victorian stamp duty and GST and are for the minimum requirements as set out in the Ministerial Order: One on tools Two on tools Three on tools Four on tools $ per annum $ per annum $ per annum $ per annum We stress that these premiums do not necessarily represent the most competitive in the market however provide an average mean of the premiums readily available and suitable for the following example: 2

3 Premium Cost Allocation Example For our example we have used the four on tools premium and have assumed that a plumbing firm of that size would have an annual turnover of approximately $500,000. We have also based this example on an average size dwelling of average quality, we have assessed all plumbing works to be no more then $30,000. In this example we have assumed the same plumbing firm have been retained to do all the plumbing requirements of the dwelling. We have used the figure of $30,000 after consulting with the Plumbing Industry. The cost of $30,000 represents 6% of the firms annual turnover. Annual Cost of Insurance (In accordance with Ministerial Order Public Liability and Defective Work) $ A) Insurance Cost of Example dwelling 6% of above $ B) Cost of compliance certificates (say $21.40 each ) $ C) Total Cost (A + B) $ Comments Each of the Insurers offering this class of insurance have a different approach to the proportioning of the premium between public liability and defective work exposure. Some Insurers openly share this split of premiums with the Insured, others only provide a total premium. For this example we have elected to use 35% of the total premium as the proportion allocated to the defective work. Whilst in our opinion this percentage is on the high side, it approximates the actual amount used by the Insurer in this example. We have also allocated 100% of the cost of the 3 compliance certificates whilst it is possible that only one may be issued covering all the various plumbing works. Total cost of premium (for example dwelling see A above) $ D) 35% of premium allocated to defective works $ E) 100% Cost of compliance certificates (say $21.40 each ) $ F) Total Cost (D + E) $ As the defective warranty is for 6 years from the date of the completion of the plumbing works the cost per year of the Insurance is: $

4 Even without mandatory insurance the community would expect all trades including plumbing to have adequate public liability insurance. In our example we have allocated 35% of the premium to the defective workmanship then it follows that the remaining 65% relates to the public liability section of the cover. G) Total premium cost for example dwelling $88.83 H) Less 35% for Defective Work Premium $31.08 I) Cost for Public Liability ( G H ) $57.75 We submit to the Commission that these premiums represent the true competitive nature of the insurance industry and do not represent an unreasonable burden in respect to the overall cost of a new dwelling. Having analysed the cost of the Plumbers Insurance we must now look at the benefits provided by the mandatory insurance. During the period late 1996 to early 1997 when the Plumbing Industry Commission was rolling out the changes effective 24 March 1997 (including mandatory insurance) there was a large amount of hostility amongst plumbing practitioners. Having been involved in this roll out we obtained enough knowledge to form the view that a large number of plumbers were either not insured for public liability or had policies that were deficient either in coverage or the limit of indemnity. Many policies were below the now minimum 5 million dollar indemnity limit. It is reasonable not to expect plumbers to be experts in such matters as public liability insurance and terms such as completed operations liability -or- goods sold. The first and sometimes less obvious benefit from the Ministerial Order for mandatory insurance for the licensed plumbers was that the Insurers had to agree to a wording that was designed for plumbers and provided coverage that individual plumbers would not be able to negotiate. There are a number of conditions and exclusions usually proposed by the Insurers under their standard shelf policies that do not meet the requirements of the Ministerial Order. Today licensed plumbers have never before been as well protected by insurance and accordingly consumers today have the comfort of knowing that all licensed plumbers have public liability insurance that is specially designed and meet minimum standards of protection. 4

5 In respect to the warranty cover, as detailed in the Department of Sustainability and Environment and Portfolio Agencies submission, April 2005 part C2 input from the Plumbing Industry Commission, We consider the warranty cover apart from modest changes in 2002 has stood the test of time and remains comprehensive and affordable. Whilst it is not our intention to go over all the issues associated with the domestic builders warranty insurance we identified that the report highlighted that the builders warranty insurance noted the following Limited Coverage (now last resort) The stringent eligibility requirements for builders to access insurance Counter indemnities required by underwriters Delays in obtaining covers In contrast the plumbers insurance Has full coverage and remains intact since 1997 apart from the warranty period being reduced from 10 years to 6 years in 2002 and who could argue against this change? Also in 2002 there were changes to the limits required in respect to non domestic insurance. Again the reduction provided a more equitable solution for plumbers. The building owner also has the right to go direct to the Insurer to make a claim. Whilst there is some filtering of disputes by the Plumbing Industry Commission this cover cannot be considered as a last resort insurance. The eligibility for insurance is substantially less stringent than for builders. Whilst each proposal is underwritten there is no requirement to provide financial information apart from questions relating to bankruptcy and insolvency. The Insurers do ask questions in respect to the types of plumbing, previous claims and disciplinary action. These are types of questions you would expect to be prudently asked when applying for this type of Insurance. The vast majority of plumbers would be automatically eligible for this insurance. There are no counter indemnities required by the Insurers and this is a traditional insurance contract. There are no delays in obtaining this insurance most plumbers can access coverage over the telephone with a certificate of currency as required by the Plumbing Industry Commission as evidence of insurance being issued immediately upon acceptance and payment of the premium. There are now at least five Insurers that offer this coverage 5

6 Insurers Suncorp (Including GIO & AMP) Zurich QBE CGU Lumley s Request for Information The Commission invites inquiry participants to comment on the benefits and costs of mandatory plumbing insurance for air conditioning and mechanical services installed in commercial, industrial and high-rise residential buildings. May we begin by addressing the statement by The Air Conditioning and Mechanical Contractors Association Victoria that appeared on page 191 of the draft report. [plumbing] insurance does not in any practical way provide additional benefits or protection to the customer, as it only warrants the standard of workmanship and not the product. (sub.4, p9) It is correct to say that the insurance does cover the standard of the workmanship and not the product. It is exactly what the insurance is designed to cover. It is the manufacturers responsibility to provide warranties in respect to their own products. Could you imagine the outcry if it was left to the licensed plumbers to provide such coverage? In our earlier example of the insurance cost of the plumbing works of a typical dwelling we used 35% of the total premium as the estimated cost of the defective workmanship insurance component. In our estimation it is likely that the cost of the defective workmanship component for commercial / industrial plumbers including air conditioning installation would be substantially less than the warranty cover for domestic properties. Given the period of cover is 6 years (some 5 years more than the standard contract conditions referred to) this in itself is a strong argument for the retention of this cover for all plumbing and air conditioning installations. Another statement made by The Air Conditioning and Mechanical Contractors Association of Victoria that warrants a comment is the following: The companies will carry professional indemnity insurance where they undertake design work We support this comment and indeed any company that undertakes design work should carry professional indemnity insurance. The coverage under the plumbers insurance is in respect of defective work not defective design. It is appropriate to add that Domestic Builders Warranty insurance is not required 6

7 for high-rise residential buildings therefore the only real protection available to building owners in respect to the air conditioning of these high-rise apartments is the plumbers insurance. All in all there appears to be some misunderstanding about the purpose of the plumbers warranty cover. It is not to cover the professional responsibilities of the designers, nor to cover the responsibilities of the manufacturers but to cover the responsibility of the plumbers in respect of their standard of work. We also refer to our original submission, particularly page 2 whereby we stated that contract works insurance policies do not generally cover faulty workmanship, thus creating a gap in protection without the plumbers defective workmanship cover. Blue Scope Steel Limited Within Blue Scope Steel s submission it is stated it is extremely rare for Blue Scope Steel to receive any complaints around the installation of our products. In this regard we refer you to the submission by the Department of Sustainability and Environment and Portfolio Agencies April 2005 page 85 C2.3 Disputes. We see this so significant we have taken the opportunity to repeat part of it here. C2.3 Disputes What are the main causes of plumbing disputes, and to what extent do current regulations contribute to this? Drawing on analysis of PIC Investigations section data for complaints in financial year , the main classes of plumbing work behind the formal complaints were: Roofing 29% Draining 19% Water 15% Gasfitting 15% Sanitary 15% Mechanical Services 9% All classes 3% PIC staff with long experience in addressing consumer complaint confirm that roof leaks and other roofing problems are clearly the predominant cause of consumer complaint about plumbing works. 7

8 Since 1997 we have had many discussions with both the Master Plumbers and Mechanical Services Association of Australia and the Plumbing Industry Commission in relation to metal roofs, their installation repairs and maintenance. A number of the claims we have been involved in are quite complicated and have required a great deal of expertise and knowledge of plumbing standards to resolve. Our view is whilst Blue Scope Steel manufacture quality products, consumer complaints re roofing are the most common amongst all plumbing complaints and consumers require a source of quick resolution which is currently provided by the Plumbing Industry Commission. We are often asked our views in relation to charging building owners an administrative fee to cover the plumbers administrative costs associated with the issuing of compliance certificates. It is our view that the building owner (consumer) should not be charged anymore then face value of the certificate currently $ We express surprise at Blue Scopes Steel s estimation of the cost of the certificates to the consumer which are not in accord with our own experiences. Plumbers Choice Finally we would like to address comments contained in the submission by John Baglin of Plumbers Choice. It is my understanding that builders insurance currently covers the plumbing done in new homes and renovations. Plumbers are also required to insure their workmanship; duplication of insurance adds to the cost of works We have demonstrated elsewhere in this submission the difference between the domestic builders warranty insurance and the plumbers mandatory insurance, the differences are substantial. Surely consumers are entitled to the extra benefits provided by the plumber insurance and plumbers entitled to the additional protection (given the true cost of the plumbers mandatory insurance once broken down to individual contracts refer page 3 & 4 ). Insurance cover for plumbers has risen dramatically over the last few years and this is perhaps best demonstrated by the fact that the period of cover was recently decreased from ten years to six years with no discernable reduction in the annual premium cost of the insurance policy. Again, elsewhere in this submission we have touched upon the reasons for the reduction in the warranty period to six years. As the mandatory insurances were first introduced in 1997 there is currently no statistical information for a full ten year period. Plumbers have suffered the same insurance increases as all other industries however the trend has now reversed with Insurers actively canvassing this class of business with most premiums approximating those available in

9 It has recently been announced by the Plumbing Industry Commission that plumbers need to consider purchasing insurance cover after retirement. This cost will be passed on to consumers. The need for plumbers to purchase run off cover for public liability (not warranty) has always been there (as it is commercially prudent for all trades). It has nothing to do with the mandatory plumber insurance requirements. The PIC should be commended for bringing this issue to the attention of all licensed plumbers. Summary The mandatory insurance for licensed plumbers consists of two main sections 1 Public Liability 2 Defective workmanship In respect to public liability by mandating minimum standards and conditions the government are not only protecting the general public and consumers but also providing plumbers a competitively priced comprehensive product that would not generally be afforded to them. Defective workmanship insurance should not be looked upon in isolation it needs to be considered as integral part of the PIC s risk management role. PIC s auditing function, its inspection function and its ability to take and to filter plumbing complaints all have a most positive effect on the ability of the Insurance industry to provide the warranty policy that is required by the Ministerial Order. This industry and consumer focused product is unique and will only survive in its current comprehensive form and competitive pricing structure, by plumbers maintaining a reasonable claims experience and the continued involvement of the Plumbing Industry Commission. Les D Beattie Senior Account Executive 25 August