Recent changes to the Home Building Act, 1989 and Home Warranty Insurance

Recent changes to the Home Building Act, 1989 and Home Warranty Insurance David Andrews and Colin Grace Grace Lawyers Pty Ltd a legislative scheme intended to provide significant rights to consumers in an attempt to redress the notorious problems arising from shoddy work performed by bankrupt builders Introduction Justice McDougall of the Supreme Court describing the Home Warranty Scheme: Waterbrook at Yowie Bay Pty Ltd v. Allianz 1. The Home Building Act, 1989 ( the Act ) and the Home Building Regulations ( the Regulation ) have undergone significant change in the last decade. We have seen the introduction of a private insurance scheme from 1 May 1997 and then on 1 July 2002 the introduction of perhaps the most contentious amendment, the Last Resort scheme. This paper will examine a recent amendment to the Act and Regulations brought about by the Home Building Amendment (Insurance) Bill 2009. In view of the pace of legislative change at the moment, the writer expects this paper will need to be constantly reviewed. 2 Background On 19 December 2008, the Home Building Amendment (Claims) Regulation 2008 commenced operation. This regulation introduced a new clause 63A into the Home Building Regulation 2004. 1 [2008] NSWSC 1407 (11 December 2008) 2 This paper reflects the law as at 4 September 2009 1

The regulation amended the previously understood position that a claim on the Home Owners Warranty ( HOW ) Insurance only needed to be submitted within the period of cover provided by the HOW Insurance. In respect of HOW Insurance under the First Resort Scheme, this was 7 years from the date of completion of the residential building work, and in respect of HOW Insurance under the Last Resort Scheme, this was 6 years from the date of completion of the residential building work for structural defects and 2 years for general defects, but only where the HOW Policy responded because the builder was insolvent, dead or had disappeared. Clause 63A provided that a claim under a contract of insurance must be made no later than 6 months after the beneficiary first becomes aware, or ought reasonably to have become aware, of the fact or circumstance under which the claim arises, or no later than 6 months after the end of the period of cover, whichever is the earlier. The new clause 63A applied to all claims made after 19 December 2008, and not to existing claims. The effect of clause 63A was felt immediately in the Strata Industry and imposed an incredibly onerous task on Owners Corporations and Community Schemes. Strictly applied, the clause had the potential to enable insurers to refuse many claims for failing to lodge a claim within time. Home Building Amendment (Insurance) Act 2009 On 19 May 2009, the Home Building Amendment (Insurance) Bill 2009 ( the Amending Act ) commenced. Clause 63A referred to above has been repealed and replaced with section 103BA in the Home Building Act, 1989. For those beneficiaries that have had claims denied because of the operation of clause 63A a complicated period of grace has been provided, allowing such claims to be lodged. The new provisions are discussed below. 2

Section 103BA The new section 103BA removes the harsh effect of clause 63A, but is not without its difficulties. It applies to all contracts of insurance entered into before or after the commencement of the section. The section is set out below: 103BA Limitations on policy coverage claims made and notified policy (1) A contract of insurance provides insurance cover in respect of loss only if: (a) (b) in the case of cover for loss arising from non-completion of work the loss becomes apparent and is notified to the insurer within the period of insurance, or in any other case: (i) (ii) the loss becomes apparent and is notified to the insurer within the period of insurance, or the loss becomes apparent during the last 6 months of the period of if insurance and is notified to the insurer within 6 months after the loss becomes apparent. (2) a loss becomes apparent when a beneficiary under the contract first becomes aware (or ought reasonably have become aware) of the loss. (3) In this section: loss means loss indemnified by a contract of insurance. period of insurance means the period for which a contract of insurance provides cover. In view of the new section 103BA, there are now four requirements of beneficiaries under Last Resort HOW Policies: 3

the beneficiary must notify the Insurer of the claim, as has always been the case, within 6 months after becoming aware, or the date on which it ought reasonably have been aware, of the claim: Clause 63 of the Regulation; the beneficiary must notify the insurer of a loss in relation to general defects within 2 years of the date of completion; the beneficiary must notify the insurer of a loss in relation to structural defects within 6 years of the date of completion, or where the loss becomes apparent during the last 6 months of the period of insurance notify to the insurer within 6 months after the loss becomes apparent. The date of awareness is not necessarily the date of receipt of an expert s report. Awareness of the Strata Managing Agent, Building Manager or Executive Committee of loss will be imputed to the Owners Corporation: The Owners Strata Plan No. 58068 v. Fair Trading Administration Corporation 3. When eligible to make a claim, formally make a claim in accordance with the Claims Handling Guidelines issued by the Office of Fair Trading and the requirements of the relevant insurer. In respect of Firs Resort HOW Policies, the beneficiary must notify the insurer of a loss within 7 years of the date of completion. 4 The combined effect of clause 63 and section 103BA is to generally required beneficiaries to notify the relevant insurer of the loss within 6 months becoming aware, or the date on which the beneficiary ought to have reasonably been aware, of the claim. Although section 54 of the Insurance Contract Act, 1984 (Cth) may come to the aid of a beneficiary who fails to comply with the time limits prescribed in clause 63, it will not assist a beneficiary who fails to give notice of loss in accordance with section 103BA. The following issues arise from the new section 103BA. 3 [2009] NSWSC 850 4 The relevant Policy should be considered to determine the period of cover 4

Who can give notice? The Amending Act and Regulations are silent as to who can give notice to the Insurer of loss. Arguably then, an Owners Corporation, Executive Committee, Building Manager or Strata Managing Agent (all of whom have functions under the Strata Schemes Management Act) can give notice of the loss. As a matter of standard practice, Grace Lawyers gives notice of loss on behalf of the Owners Corporation and all lot owners within the scheme. Degree of notice What is the degree of notification of the loss required to be provided to the insurer? Clause 63 (which set out the current notice requirements for a claim) requires very little particulars of the loss (if any) to be provided to the insurer. Section 103BA appears to impose an additional requirement of providing details concerning the loss, although the section is vague to say the least. The standard form of notification suggested by the Office Fair Trading requires only a brief description of the defect 5. It appears no assessment of the cost of rectification is required. In The Owners Strata Plan 51673 v. Fair Trading Administration Corporation 6 [2009] NSWSC 816, the Supreme Court referred to the concept of a systemic defect. In that case, the Owners Corporation contended that a defect which had manifested itself outside of the period of cover was covered by the Insurance on the basis that the same defect had been notified within the period of cover. The Court considered the nature of the defect, and agreed with the Owners Corporation. Failure to provide notice of the loss within the period of cover will result in insurance cover not being provided for that loss. Example A claim for alternative accommodation (being a loss indemnified under a contract of insurance) arising out of remedial works being undertaken following a successful HOW Insurance claim may not become apparent until 5 www.fairtrading.nsw.gov.au/pdfs/tenants_and_home_owners/home_warranty_insurance_notification_of_a_loss_form.pdf 6 [2009] NSWSC 816 5

after the period of cover expires. If that loss has not been notified within the period of cover (and conceivably could not be because it is not known), then the HOW Insurance will not provide cover. Accordingly, notice of loss should broadly describe the defective work complained of (particularly to capture potentially systemic defects such as water penetration and cracking), and should itemise every head of compensation that may be claimed (even if remote at time of notice being given). Last Resort Schemes How does this section apply to a beneficiary covered by the Last Resort Scheme of HOW Insurance (which operates from 1 July 2002). The amendments to the Act raise an interesting question in respect of Last Resort Schemes of Insurance. Previously, a beneficiary of a Last Resort Scheme of Insurance was not able to lodge a claim with the HOW Insurer until such time as the builder was dead, insolvent or had disappeared. An Insurer would usually reject a claim submitted to it unless one of these triggers was activated. The section now creates the possibility that a loss notified within the period of cover can be the subject of a claim made after the period of cover, notwithstanding that the Builder does not die, become insolvent or disappears until after the period of the cover has lapsed. Whether a formal claim must be submitted within the period of cover is unclear, and until clarification or judicial interpretation, beneficiaries should continue to take action against builders as soon as possible (see further below) to allow the possibility of claim being submitted within the period of cover. In the context of the foregoing, the issue now requiring judicial interpretation is the definition of loss in section 103BA. Loss is defined in section 103BA as meaning a loss indemnified by a contract of insurance. There are two interpretations of what loss is under the contract of insurance: 1. The loss is the loss measured by the amount that the beneficiary is unable to obtain as compensation from the builder because of the death, insolvency or disappearance of the builder; or 6

2. The loss is the cost of making good the defective work arising from a breach of the statutory warranties. Helpfully, in Kopriunjak v. Vero Insurance Ltd 7, the Tribunal found that loss under a HOW Policy was the cost of making good the defective work. The Tribunal stated: From the home owner s perspective loss or damage occurs when the builder defaults. To assert that loss occurs only when the builder cannot be made to pay is a possible though unlikely meaning to ascribe to the text. It is at odds with common sense and the commercial realities of home owners warranty insurance. If, as appears to be suggested above in Kopriunjak, that the loss is the cost of making good the defective work arising from the breach of Statutory Warranty, then the beneficiary can provide notice under section 103BA and preserve its rights. The Insurers may possibly argue that a beneficiary does not suffer a loss until the builder is dead, insolvent or has disappeared, and consequently cannot give notice of loss to invoke the operation of section 103BA. Section 103C The Amending Act has also amended section 103C of the Home Building Act, 1989 by allowing the Government to now introduce regulations providing for limitations on and reductions in liability of insurers. This amendment was obviously required for the introduction of clause 58A (discussed below). The potential impact of this amendment is frightening, as the Government may now introduce regulations reducing the liability of HOW Insurers with very little public scrutiny. Clause 58A Although clause 63A has been repealed, the Government has introduced a new clause 58A into the Home Building Regulations which is likely to cause considerable 7 (Home Building) [2008] NSWCTTT 1520 7

confusion and litigation. Notwithstanding the use of the word may, it is deemed to be included in every contract of insurance 8 and is therefore retrospective, applying to all contracts of insurance, old and new. It is set out below: 58A Reduction of liability for failure to enforce statutory warranty (1) An insurance contract may contain a provision to the effect that the insurer may reduce its liability under the contract or reduce any amount otherwise payable in respect of a claim because of a failure by the beneficiary to take action to enforce a statutory warranty from the breach of which the insured loss arises, but only to the extent of an amount that fairly represents the extent to which the insurer s interests were prejudiced as a result of the failure. (2) A provision included in an insurance contract under this clause does not limit the operation of any provision included in the insurance contract to the effect of a provision required to be included by clause 63. The Law Society of NSW strenuously opposed the introduction of this clause. The Minister s explanation of clause 58A stated: A homeowner needs to actively enforce their rights. They cannot sit back and simply do nothing, waiting for a builder to die or go out of business before making an insurance claim. The bill also makes it clear that an insurer can reduce their liability if a homeowner fails to enforce a statutory warranty. The following issues arise from clause 58A: It is retrospective. How does this apply to beneficiaries covered by the First Resort scheme of insurance who have lodged claims on the HOW Insurance but not taken any action against the builder, principally because they did not need to at the time? Arguably insurer s now have a clear means to reduce their liability. The section effectively converts the First Resort scheme of insurance into Last Resort. 8 Part 15, Schedule 4, Home Building Act, 1989 8

How do you measure what is a failure? This leaves it to the insurer to decide, in its own self-serving assessment, whether a beneficiary has failed to take action. What does enforce mean? It appears to require legal action to be commenced. Seeking a Rectification Order through the Office of Fair Trading, or attempting to engage the builder in discussions concerning the rectification of defective work may be insufficient 9. The concept of alternative dispute resolution has effectively been abandoned. The problem is, of course, exacerbated by the fact that a claimant in the Consumer, Trader and Tenancy Tribunal cannot commence proceedings until such time as a complaint is made and dealt with by the Office of Fair Trading (i.e. seeking a Rectification Order), and this process can take a considerable period of time. Should a beneficiary be penalised in these circumstances? Does enforced mean taking action against a developer as well? Even if the Builder is insolvent? To what extent will an insurer be able to reduce its liability? Obviously, the increased cost of rectification is the simplest example of insurer s interest s being prejudiced. However, what if the insurer alleges the beneficiary could have recovered the whole of its claim from the builder (or developer) at a particular point of time? Is it the beneficiary who has to prove the insurer does not suffer any prejudice? The response by the Government is that clause 58A mirrors the provisions contained in section 54 of the Insurance Contract Act, 1984. To some extent it does. Perhaps the purpose of clause 58A is to provide clarity that an insurer can reduce its liability for failure of a beneficiary to take enforcement action. In any event, the clause places a positive obligation on beneficiaries to enforce the Statutory Warranties in a timely manner. 9

Conclusions Whilst clearly some changes are required to the present HOW Insurance Scheme, it seems evidently clear that the approach by the Government is to take one little step at a time. Recent decisions in the Supreme Court are likely to result in further changes to the Act. For example, the decisions of the Court of Appeal in Allianz v. Waterbrook [2009] NSWCA 224 and Suncorp Metway Insurance Limited v. Owners Corporation SP 64487 [2009] NSWCA 223 (a discussion on which is beyond the scope of this paper) greatly impact upon the rights of consumers and Insurers. The extent of litigation concerning the Act and the HOW Insurance will only increase, and it appears that the Supreme Court is willing, on one view, to become involved in this increasingly complex legislative regime. As observed by Justice McDougall in his observation at the commencement of this paper, the intent of the HOW Insurance is obvious, but are the rights of the consumer real or just illusory? ****** Grace Lawyers Pty Ltd 2009 9 The Office of Fair Trading ( OFT ) web-site suggests that seeking a rectification order is enforcement. Based upon the Insurers previous interpretation of the word enforce in section 18E of the Act, the author of this paper considers that the OFT position may be wrong. 10