Underwriting Guidelines

Home Warranty Insurance Fund Underwriting Guidelines Effective from 1 December 2013 This document has been prepared by: Home Warranty Insurance Fund New South Wales Self Insurance Corporation ABN: 97 369 689 650 PO Box A2615, Sydney South NSW 1235 Tel: (02) 9228 5906 Fax: (02) 9228 3870 E-mail: homewarranty@sicorp.nsw.gov.au Website: www.homewarranty.nsw.gov.au Please contact the Home Warranty Insurance Fund if you have any questions regarding this document. Printed copies for this document are uncontrolled.

DOCUMENT DETAILS Document Details Document Title Underwriting Guidelines Version V-5 Effective Date 1 December 2013 File Location G:\SICORP\Home Warranty\Underwriting\documents & forms Owner Home Warranty Insurance Fund REVISION HISTORY Version Date Author Draft Approved Revision Notes 1.0 1 July 2010 Finity Consultant Draft 1.1 19 August 2010 Finity Consultant Draft Crown Solicitors Compliance 2.0 31 August 2010 HWIF Manager Approved BEAT Rating Criteria 2.1 29 September 2010 HWIF Risk Manager Approved 7.1 Name of Application Forms 3.0 16 September 2011 HWIF Underwriting Manager Approved Significant revisions based on 12 months trading 3.0 1 October 2011 HWIF Manager Approved V3.0 Revisions approved 3.1 1 Nov 2011 HWIF Manager Approved 6.3 Major builder segment 11.1 Securities 3.2 1 February 2012 HWIF Manager Approved Consequential changes on commencement of Home Building Amendment Act 2011 4.0 15 Nov 2012 HWIF Manager Approved Significant revisions based on two years of trading 5.0 1 Dec 2013 HWIF Manager Approved Revision approved by HWAIF Underwriting Committee on 12/11/13

Table of Contents 1. Introduction 6 1.1 Guidelines Purpose 6 1.2 Home Warranty Insurance Fund Objectives 6 1.3 Builder Eligibility 6 1.4 Form of Insurance Cover Offered Certificate of Insurance 7 1.5 Decision-Making Framework 7 1.6 Rating Tools 8 2. Builder Eligibility Assessment 9 2.1 Construction Work Types 9 2.2 Builder Segments 9 2.3 Eligibility Assessment Non-Financial 13 2.4 Eligibility Assessment - Financial 17 2.5 Other Underwriting Issues 22 2.6 Assessing Turnover and Project Limits 23 2.7 Benchmarks of the Financial Strength 26 2.8 Other Risk Factors 26 2.9 Fatal Characteristics 27 2.10 The Rating Category 28 2.11 Addressing Weaknesses 29 3. Underwriting Requirements for Certificates of Insurance Including 31 Pricing Issues 3.1 Applications 31 3.2 Specific Underwriting Issues 31 3.3 Developers 33 3.4 Underwriting of New Multi-Unit Projects 34 3.5 Speculative spec Construction 35 3.6 Architect/Designer Managed Projects 35 3.7 Architect Tendered Construction 36 3.8 Project Management 36 3.9 New Multi-Dwelling and High Value Constructions (>$750,000) 36 3.10 Proof of Funding 37 3.11 Cost Plus Contracts 37 3.12 Contract Variations 38 3.13 Retrospective Cover 38 3.14 Certificate Referral Requirements 38 3.15 Cancelled and Amended Certificates of Insurance 41 3.16 Subsequent Applications Involving the Same Parties and/or Site 43 3.17 Fraudulent Certificates of Insurance Receipt of Information 43 4. Underwriting Reviews and Builder Monitoring 44 4.1 Programmed Periodic Eligibility Reviews 44 4.2 Demarcation of Responsibility Major Builders 46 4.3 Restrictive Conditions 47

4.4 Triggered Special Eligibility Reviews 47 4.5 Builders Subject to Intensive Monitoring 49 4.6 Eligibility Profile Changes 50 5. Premium Pricing 51 5.1 Builders Subject to Flat Rate Pricing 51 5.2 Multi-Dwelling Projects Pricing 51 6. Securities 52 6.1 Requirement for Securities 52 6.2 New Eligibilities Following Dissolution of Partnerships, Trusts or Companies 54 6.3 Evidence and Value of Securities 54 6.4 Group Entities & Group Trading Agreements (GTA) 55 6.5 Review of Securities 55 6.6 Release of Securities 56 6.7 Expiry of Securities 56 7. Declinature, Cancellations, Suspensions and Modifications of Eligibility 57 7.1 General 57 7.2 Suspended Eligibility 59 7.3 Cancelled Eligibility 59 7.4 Modification of Existing Eligibility Profile and Terms 60 7.5 Communication 60 7.6 Escalation and Disputes 60 8. Risk Management 61 8.1 Active Monitoring of Risks 61 9. Distribution and Advocacy 62 9.1 Reserving 62 9.2 Credit Terms and Application of Premiums to Policies Intermediary Responsibilities 63 9.3 Change of Intermediary and Insurance Agent Protocol 63 10. Underwriting Committees 66 10.1 Insurance Agent Underwriting Committee 66 10.2 HWIF Underwriting Committee 66 11. Other Special Underwriting Considerations 68 11.1 Kit Homes 68 11.2 Marketing Groups and Franchises 68 11.3 Tax File Numbers 68 12. Building Contract Review Program ( BCRP ) 69 12.1 Underwriting Considerations 69 12.2 Outline of BCRP Eligibility and Certificate Process 70 12.3 Overview operation of Building Contract Review Program 70 12.4 Services to Insurance Agents (and/or Intermediaries) 72 12.5 Summary Reporting 73 12.6 Services to the HWIF 73 12.7 Periodic Reviews of Builders and Exiting the Program 74

13. Owner-Builders 75 13.1 Period of Insurance 75 13.2 The Type of and Cost (Value) of the Work 75 13.3 Owner-Builder Works 76 13.4 Owner-Builder Work Contracted to a Licensed Builder or Licensed Trade Contractor 77 13.5 Owner-Builder Applications 77 13.6 Owner-Builders - Standard Documentation Checklist Requirements 77 13.7 Availability of Final Occupation Certificate 78 13.8 Owner-Builders Inspection Report Requirements 78 13.9 Declining an Owner-Builder Work Application 79 14. Customer Service 80 14.1 Standards 80 15. Complaints Against the Insurance Agent 82 15.1 Complaints Management System 82 15.2 General Insurance Code of Practice - Buying Insurance 82 15.3 What is a complaint? 82 15.4 What is a dispute? 83 15.5 HWIF Complaints and Disputes Procedures Guideline 83 Appendices Appendix A - Scope of Insurance Cover 85 Risks Covered 85 Statutory Warranties 85 Losses Indemnified 86 Making Application for Home Warranty Insurance Cover 86 Key Definitions 87 Appendix B - Market Practice Guidelines 88 Effect of Eligibility 88 Requirements for assessment of Eligibility 88 Decision to issue a Certificate to a Builder 88 Requirements for assessment of Owner-Builders 89 Conditions 89 Guarantees and indemnities 89 Appendix C - Home Building Act 1989 - Key Definitions 90 Appendix D - Asset and Liability Discount Values 97

1. Introduction 1.1 Guidelines Purpose The material in this Guideline has been prepared to provide builders, insurance intermediaries and professional advisors with a key reference source and guidelines for underwriting home warranty by the Home Warranty Insurance Fund (HWIF). The HWIF is the trading name for the NSW Government s home warranty insurer the NSW Self Insurance Corporation (SICorp). SICorp underwrites and administers the HWIF, which holds the NSW Government s home warranty insurance assets and liabilities. In this guideline, a reference to the HWIF includes a reference to SICorp. 1.2 Home Warranty Insurance Fund Objectives The home warranty insurance scheme is an integral component of the Government s consumer protection strategy for homeowners having building work undertaken in NSW. Home warranty insurance provides specific safety net protection where a builder is unable or unwilling to fulfil their contractual obligation to a homeowner. This includes where the contractor does not begin or complete work under a building contract and/or return and rectify defective work because of death, disappearance or insolvency [including licence suspension for failure to comply with a compensation (money) order of a Court or the Consumer, Trader and Tenancy Tribunal in favour of the homeowner]. It also protects successors in title to an owner-builder where the owner-builder is unable to rectify defective work (that has not been excluded from insurance) because of death, disappearance or insolvency. The objectives of the Home Warranty Insurance Fund are to: 1. Provide a home warranty scheme that meets the minimum requirements for a licensed builder under the Home Building Act 1989. 2. Proactively protect homeowners by identifying unacceptable risks and taking appropriate action. 3. Ensure that builders are able to take on a level of work (and have access to home warranty insurance cover) commensurate with their capacity to do so. 4. Minimise unnecessary disruption to the NSW residential construction industry and ensure a consistent approach to the underwriting of home warranty insurance without consideration of market influences. 5. Manage the risk of loss to the HWIF (and, therefore, the Government and people of NSW), with the scheme run on a financially prudential basis that is ultimately to be not-for-profit. 6. Contribute to the improvement in standards within the NSW residential construction industry. Insurance Agents may receive advocacy from builders or their Intermediaries, which are considered in a manner consistent and compliant with this Underwriting Guideline. Appropriate advocacy by Intermediaries does not include attempting to influence decisions of Insurance Agents by reference to the overall business relationships between the Intermediary and Insurance Agent. 1.3 Builder Eligibility Eligibility is the term used to describe the entitlement that a builder has to apply for a Certificate of Insurance for specific projects and under what conditions. Builder Eligibility conditions take account of the following major criteria: builder s capabilities builder and key manager s financial history key manager s previous home warranty claims history Page 6 6

builder s financial backing and the level of external fianancial support offered on behalf of the builder by directors or related entities or third party-related indemnifiers should there be financial stress on the business. All Eligibilities have an appropriate Eligibility Profile in accordance with this including: annual turnover limit and individual job type contract limits. The Eligibility Profile may also include relevant conditions: maintaining capital levels maintaining specified security levels utilising a Building Contract Review Program service provider the frequency of financial reporting and other requirements as may be appropriate from time to time. Annual turnover is where each certificate of insurance issued reduces the annual limit available for purchasing certificates for a period of 12 months. The contract value associated with a certificate of insurance only replenishes the annual turnover limit available after this 12-month period. It is the absolute intent of annual turnover limits to provide a control that limits purchasing of policies by a builder over a 12 months period. An under construction limit can be applied to manage intensively monitored risks or to reduce existing risk, with written approval from the HWIF. The Insurance Agent undertakes an underwriting assessment for each builder upon receipt of an Eligibility Application. Eligibility Approval following the builder assessment process to approved builders. The approval summarises the builder s Eligibility conditions for accessing home warranty insurance cover for specific projects (i.e. by maximum annual insurable turnover and type of construction etc.). The Eligibility Approval also lists circumstances, which may lead to the cancellation of Eligibility. There is one form for a builder to make an application for Eligibility. 1.4 Form of Insurance Cover Offered Certificate of Insurance The HWIF offers a Project Specific form of home warranty insurance cover whereby each insurable residential building contract (or dwelling) proposed to be undertaken by a builder requires an individual policy (contract of home warranty insurance), as evidenced by the issue of a Certificate of Insurance. Cover for an individual project, is processed on application from an eligible builder or owner-builder using the appropriate application form. There are three (3) Project Application forms: Licensed Builder All Work (other than Multiple Dwelling Projects) Licensed Builder Multiple Dwelling Projects (i.e. two (2) or more dwellings) and Owner-Builder - All Work (as per the owner-builder permit). Applications may be rejected for individual projects or have specific conditions applied if they do not satisfy underwriting criteria (refer section 2). Refer also to section 13 for information on dealing with applications by owner-builders. 1.5 Decision-Making Framework To achieve an appropriate level of consistency a framework is provided in which decisions are to be made. This seeks to standardise the consideration given between Insurance Agents and within Insurance Agents, notwithstanding the extent of experience and skill applying. Page 7 7

The Eligibility decision framework consists of two (2) aspects: 1. A financial assessment (objective) utilising standardised parameters of the respective financial elements. 2. A qualitative assessment (subjective) of other relevant factors within guidelines. 1.6 Rating Tools 1.6.1 Builder Eligibility Assessment Tool (BEAT) Small and Medium Builders BEAT will consider financial and non-financial factors including: time in business extent of any adverse history net tangible assets profitability and working capital. BEAT benchmarks the builder against industry ratios and provides an indicative rating of the home warranty risk with strengths and deficiencies identified. This report can be a catalyst for useful business planning discussions with insurance and financial advisors. 1.6.2 External Credit Rating Agency Major Builders The HWIF may appoint an appropriately skilled and experienced external commercial credit rating agency to assist, where considered appropriate, in the financial assessment of Major Builders (and any other builders or classes of builder that may be referred to the HWIF from time to time), including possible related entities. Corporate Scorecard Pty Ltd is the appointed agency at the date of this version of the Underwriting Guideline. The intent of this rating agency engagement is to obtain an independent view of the credit worthiness of a builder to support the decision by HWIF. The rating report will not be provided to the Builder but the relevant BEAT report will capture any concerns upheld by HWIF. Direct contact with builders is often needed by rating agencies for additional clarification or related party financial statements to complete this assessment. The builder s Insurance Intermediary will be made aware of all such requests. A summary of the information required by the rating agency are set out in the Eligibility Fact Sheets for the relevant builder size which are available on the HWIF website which are intended to be consistent with this Guideline. HWIF reserves the right to carry out major builder assessments in-house or require medium builders to be externally credit rated. Page 8 8

2. Builder Eligibility Assessment 2.1 Construction Work Types Below is a list of the current work types that builders can seek eligibility approval to carry out. The coding is based on that originally contained in the specifications Guideline for reporting of data to NSW Fair Trading. (Note new C02 category since October 2011) Code C01 New single dwelling construction Table 1. Construction Types Work Type C02 Multi dwelling alterations/additions (i.e. majority of work is structural) any number of storeys and including duplexes, triplexes, terraces, villas, townhouses or multi dwelling units C03* New multi dwelling construction (three [3] storeys or less) - duplexes, triplexes, terraces, villas, townhouses etc. or multi dwelling unit construction (e.g. blocks of units, flats etc.) C04 Single dwelling alterations/additions (i.e. majority of work is structural) C05 Swimming pools C06 ** C07 Renovations (i.e. majority of work is non-structural) - single and multi-dwelling Other not included above *The C03 category DOES NOT include the construction of free-standing dwellings on individual sites without any shared services or structural components (e.g. common walls, roofing etc.) and which will not be subject to strata title or community title on occupation. ** The C06 category may include the following structural contracts, which are considered renovations for premium purposes (i.e. coded as C06 contracts), even though a six (6) year period of insurance may be deemed to apply: the erection of prefabricated patios, garages and sheds bathroom and kitchen renovations that may include projects involving window replacement and water proofing membranes replacement of roof coverings without alteration to roof structure timber decks (including timber slatted balconies) and pergolas landscaping where retaining walls do not exceed 25% of the contract price solar panels driveways and other paving. 2.2 Builder Segments Whilst home warranty insurance is effectively a generic product in the sense of the protection it affords beneficiaries, the HWIF has in place several customised Eligibility conditions targeted at various segments of the residential construction industry as listed below. In the below segment categories, turnover covers residential and non-residential work undertaken in and outside of New South Wales and includes: The business turnover of related entities under the same management control or ownership; The business turnover of entities under the control of the same parent entity; and Budgeted construction costs for jobs under project management agreements. Note: The definition of related entity and control is to be interpreted in the broadest context so as to cover all business activity, assets, equity and/or liabilities with common director or shareholder interest or control to the building operations being assessed. Where in this Guideline there is a reference to New Builders, Small Builders, Medium Builders, Major Builders, Major Project Home Builders or Non-Reviewed Builders, it is a reference to builders fitting the following criteria. Page 9 9

2.2.1 New Builders New Industry Entrant The application for New Builder Eligibility is for residential contractors/builders who fall within the following criteria: have not previously contracted direct with homeowners have not undertaken any speculative constructions have not previously operated their own building business (including being a Director/Key Manager of a building company) past insolvents and their associates may also be placed in this segment as a condition of granting Eligibility. Note: Trust structures will not be approved for New Builders. Conditions to apply to Eligibility, except in exceptional circumstances where the New Builder is able to demonstrate to the Insurance Agent a reasonable justification to exceed the conditions, should be: The builder must utilise the services of a Building Contract Review Program service provider for all contracts of $50,000 and more. Profiles permitting the construction of new dwellings should be limited to maximum of two (2) concurrent dwellings with each job to be confirmed and signed-off by the homeowner or certified by the Building Contract Review Program service provider. Maximum Insurable Turnover $1 million in value over a 12 month period. The following Types of Construction are not generally available to New Builders: speculative dwellings, unless the Insurance Agent is satisfied that the land purchase and construction will not place an excessive financial strain on the New Builder Architect/Designer tendered and managed projects multi-unit developments high-rise rectifications Developer projects. The facility will be reviewed at expiry of an initial 15-month period to determine ongoing Eligibility and any change/increase in maximum insurable turnover. Following an acceptable review of financial performance and practical experience the Insurance Agent may elevate a builder from the New Builder to the Small Builder segment. 2.2.2 Small Builders Existing builders with a NSW HWIF approved turnover over $1.5 Million & do not meet the Non Reviewed or New Builder segments. This application for Eligibility is for builders with an annual business turnover of less than $3 million. The principal(s) of a Small Builder is required to have traded as a licensed builder for at least 12 months, or more than three (3) years experience as a manager or supervisor with another licensed builder in the building construction type sought or at least equivalent other suitable and relevant experience, or satisfied the Growth Matrix requirements. Refer to the Growth Matrix, from table 8 as a basis of consideration for acceptance. 2.2.3 Non reviewed Small Builder Existing builders (holding a full unrestricted NSW builders licence) with a NSW HWIF approved turnover up to and including $1.5 million with standard construction values (as set out in Table 3). Or Is a Specialist Contractor: Where the NSW Licence confirms that the applicant is a specialist contractor with a NSW HWIF approved turnover up to and including $500,000. Page 10 10

A full Periodic Eligibility Review (PER) will not be conducted where a builder; has a total business turnover limit that does not exceed $1.5 million, or $500,000 if a specialist contractor (including group activity); does not have an adverse trading history (e.g. previous insolvencies, past home warranty claims, outstanding Consumer, Trader, Tenancy Tribunal (CTTT) Orders, complaints, notifications) including key managers, is contracting within the standard construction values permitted in Table 3 has been contracting residential building work for over 12 months; and where the directors have no other Eligible entities. Notwithstanding the above, the initial assessment of an application for Eligibility of a builder fitting the above criteria will be in accordance with that for the Small Builder segment. 2.2.4 Medium Builders Existing builders with an annual business turnover of over $3 Million and are not major builders. The principal(s) and/or key management personnel of a Medium Builder need to be able to demonstrate that they have: traded as a licensed builder for at least two (2) years in the Small Builder category and have adequate financial performance, or more than three (3) years experience as a manager or supervisor with other small and medium licensed builders in the building construction type sought or at least equivalent other suitable and relevant experience, or satisfied the Growth Matrix requirements from table 8 as a basis of consideration for acceptance. 2.2.5 Major Builders The following types of builders are considered to be major builders for assessment and review purposes: a) Project Home or residential alterations and additions builders with an annual business turnover of $15 million or above b) Swimming pool or renovation builders (Construction types C05 and C06) with an annual business turnover $30 million or above. c) Commercial or multi dwelling builders with an annual business turnover of $30 million or above d) Medium Project Home builders, who request an increase in turnover of 50% or more e) High value prestige home builders, with an annual business turnover of $30M or above The principal(s) and/or key management personnel of a Major Builder need to be able to demonstrate that they have either: traded as a licensed builder in the small and medium category for at least five (5) years adequate financial performance over a three (3) year period, or more than five (5) years experience as a manager or supervisor with other medium and major licensed builders in the building construction type sought at least equivalent other suitable and relevant experience satisfied the Growth Matrix requirements from Table 8 as a basis of consideration for acceptance. For the purposes of home warranty insurance, a builder considered to be a major project home builder where the builder is a project home builder with an annual business turnover, or approved HWI limit of $15 million or above. These builders predominantly generate sales through display homes. Page 11 11

Table 3. Standard Construction Values by Builder and Construction Type Building Construction Type New Builder (inexperienced) [must be subject to Managed Builder Program) Small Builder (incl. New licence with 5 yrs expiry) Medium Builder Major Builders Non Reviewed Small Builders New single Construction $350K $600K $600K $1M New Multi-Unit (4 or more Units) No (on application) (on application) (on application) No Multi-Unit Rectification No (on application) (on application) (on application) No $600K New multi-unit, duplex or villa (3 or less units per site) Structural alterations and additions (non Multi-Unit) Swimming Pools $200K $250K $400K $400K No $350K $350K $500K $1M $350K $50K (for pool specialist only) $75K $100K $100K No Renovations (non Multi-Unit) $50K $150K $200K $200K $100K Multi-Unit Alterations and Renovations No (on application) (on application) (on application) No Notes: 1. These construction amounts are the standard generally allowable for the category concerned, but may be adjusted up or down by the Insurance Agent, based on the builder s construction history and experience. Builders are free to apply for more or less than the standard. 2. Builders will be granted an Eligibility profile consistent with their history, skills and experience and need not be granted Eligibility for all construction types. 3. Where builders are seeking higher than the standard limit, applications must be supported by an appropriate construction history and experience demonstrated through references from a structural engineer, architect or similar. References are to detail the address of the work, construction value, date completed, scope of work, licensed builder s role and the principals and key management personnel involved. The Insurance Agent will be satisfied that the references support the builder s competence within the proposed work/limit. 4. A referral requiring up to 20% profile construction limit increase on successfully completed projects is permitted without professional references. 5. Annual indexation of completed projects is to apply. The annual indexation rate applicable is the greater of 5% or the Australian Consumer Price Index 6. Where builders are members of a group (as defined in the Corporations Act 2001), considerations of turnover limits to be included in builder profiles should apply to the entire group. 7. The experience required for a New Builder to gain immediate Small Builder status includes three years experience as a manager or supervisor for a previous builder employer relevant to the building construction type sought or other suitable and relevant. Page 12 12

The builder must demonstrate previous experience in: managing contracts with home owners engaging and supervising a wide range of subcontractors satisfying the specifications and building codes on projects completion of projects on time and to budget. Participation in the Building Contract Review Program (BCRP) will satisfy the requirements for experience after three (3) similar projects are satisfactorily completed. 2.3 Eligibility Assessment Non Financial 2.3.1 Information Required for Eligibility Assessment Table 4 sets out a summary of the basic information required to apply for and to be assessed for Eligibility, by builder industry segment. Further detail of the information requirements and how Eligibilities are assessed is included in section 2.4. Table 4. Information Required by Builder Segment Information Required New Builder Small Builder (including Non- Reviewed builders) Medium Builder Major Builder Business details/history (including Management Yes Yes Yes Yes Structure) Builder Licence Information Yes Yes Yes Yes Source of Financial Information Provided Yes Yes Yes Yes Costing System Used No No Yes Yes Proposed Construction Turnover Yes Yes Yes Yes Proposed Construction Type Yes Yes Yes Yes Details of Principals and Private company applicants Yes Yes Yes Yes Building Qualifications Yes Yes Yes Yes Building experience supporting construction type, limit and turnover Principals history in building or other businesses (including adverse issues) Yes Yes Yes Yes Yes Yes Yes Yes Current securities held over business Yes Yes Yes Yes Profit and loss financial statements prepared by external accountants for the previous three (3) financial years. Builder in-house interim financial reports prepared by internal accounting packages and certified by the principals N/A Preferred Yes Page 13 13 Yes (including interim statements as required) N/A Yes Yes No

Information Required New Builder Small Builder (including Non- Reviewed builders) Medium Builder Major Builder Tax returns in place of financial statements for previous three (3) financial years Yes Yes No No Audited financial statements N/A N/A N/A Preferred Statement of financial position of principal/s working director/s or shareholder/s Statement of working capital (including for medium and major only details of aged debtors and creditors) Yes Yes Yes Yes No Yes Yes Yes Declarations and to disclosure Yes Yes Yes Yes Work in progress report No Yes Yes Yes Turnover sought Yes Yes Yes Yes Group Structure (and all related parties including No No Yes Yes shareholding) Display Home Information No No Yes Yes Business Operational Plan* No No Yes Yes Budget to Actual income and expenses No No No Yes Related Party Financial Statements (if connected by some substantive financial transaction) No No Yes Yes 2.3.2 Work in Progress Reports A Work In Progress Report (WIP) sets out the following all for incomplete building contracts: name of homeowner site address commencement date current stage of works estimated completion date contract value balance of progress payments outstanding estimated cost to complete (for identifying cash flow concerns) 2.3.3 Management Issues For Medium and Major Builders, an assessment of the capabilities and depth of any applicant s management team and its structure is to be undertaken. The higher the profile sought, the greater the management capability required including: an assessment of succession planning in the organisation (for Medium and Major Builders) to ensure continuation of the business in the event of death or disability of key personnel * In general terms the Business Operational Plan is to assist HWIF understand the nature and maturity of the business as well as the future plans of the principals. HWIF does not require a formalised business plan. The Business Operational Plan will include current and anticipated sales volumes, market segments and regions targeted, staff organisational chart, CV s for key managers, group corporate tree with shareholder details, and back office structures and systems to support the proposed turnover levels. Page 14 14

the nature of building controls and quality assurance systems in place. Other management and officers for consideration for overall evaluation of capabilities, degree of influence and time in current positions qualifications, time with company and depth of experience include: Ownership: corporate officers and shareholders,. Key personnel: executive management, project managers, licensed supervisors, estimators, internal accounting staff, sales management and marketing managers. The assessment process should emphasise the company s management and control of the following functions: job selection and marketing estimating and scheduling construction productivity purchasing cost accounting cash flow management philosophy where appropriate. 2.3.4 Accounting Systems and Job Costing Systems Accounting and Job Costing systems used by a builder need to be understood, reflect the size and sophistication of the operation, level of building activity and type of construction undertaken. Smaller builders may utilise Guideline job costing and internal record systems, or may use an off the shelf record keeping systems. Nevertheless, many businesses prepare financial statements for budgeting, financing, tax and GST purposes through external accountants. Some small businesses will only have their record keeping transaction file reviewed annually by an accountant at tax time. Most Medium and Major Builders are expected to have an internal accounting system to understand their current cash flow and account for the profitability of each job at the different stages of the contract. Major Builders may use specialised electronic job costing and record keeping systems, and have the ability to produce management reports at regular intervals. They will generally have reporting processes in place to monitor individual projects. It is expected that the builder has an internal accountant/financial controller who is well versed in all aspects of the building industry. The internal or external accountant should be contacted if there are any discrepancies or queries with the accounts, internal loans, loans between parties within a group structure, excessive director loans or drawings. Public companies, major proprietary companies, registered schemes and all disclosing entities are required to prepare an audited financial report. All companies that prepare audited financial statements should provide them as part of their insurance application. 2.3.5 Common Directorships with Eligible Entities and Group Structures If there are related entities that are licensed in NSW or are recorded on BEAT, then the application cannot proceed until the following is implemented. A group assessment must be conducted The applicant must select one Insurance Agent to conduct the required group assessment In order to apply through a different Insurance Agent, the applicant must first cancel or switch the Eligibility If Insurance Agent switch is required, this is coordinated through HWIF The applicant entity must indemnify the first entity, as a condition of any terms offered to the new applicant entity Insurance Agent must advise HWIF of the outcome of the assessment It is critical to identify related eligible entities and conduct group assessments through one Insurance Agent. Page 15 15

2.3.6 Adverse History History is viewed as a sound indicator of the potential for the future and is thus to be thoroughly considered in terms of risk. However, it should also be noted that the past may have been a learning process and thus that applicants may be able to demonstrate that they have redeemed a previous position. The onus should be on the applicant. 2.3.7 Claims CTTT/Court Orders and Builders Licence Incident Record Past home warranty claims paid by insurers, including HWIF, are a fatal characteristic for builder eligibility where key managers, directors, principals or shareholders (including all financial or management interests) had an association with the business giving rise to the claims. Builders will be given the opportunity of providing explanation for consideration but where there is evidence of significant defective work or incomplete projects giving rise to claims there is to be limited leniency. All past claims are investigated whether emanating from the first resort period or arising from a prior business failure under the last resort scheme. Similarly, orders against the builder (or an associated entity or former associated entity) made by a court or the Consumer, Trader and Tenancy Tribunal (CTTT), are also be taken into account. An order that has not been complied with will be considered a fatal characteristic for builder eligibility until remedied satisfactorily. The events giving rise to a tribunal order are considered in determining the competence of the key managers. The proportion of matters being referred to the Tribunal compared to the total volume of building activity may be an indication of a builder experiencing financial difficulty or exhibiting signs of adverse quality controls. The existence of tribunal actions is not necessarily considered to be a fatal characteristic as disputes will occur from time to time. NSW Fair Trading investigations are considered the same as CTTT matters. In most building entities, particularly small builders, the nominated supervisor should be deemed a key manager of the business. As such, any adverse track record of the nominated supervisor is to be investigated and appropriately mitigated, prior to the application proceeding. There are exceptions to this rule where the directors are sufficiently experienced in their own right. 2.3.8 Trade Credit History Extended Trade Credit terms negotiated with suppliers where the builder s financial information is sound should not be viewed adversely. All negative reports or credit checks are to be reviewed. Any identified behavioural issues that may affect risk should be fully investigated and where necessary, lead to a rejection of the application unless satisfied with the outcome of the investigation or the situation is rectified. 2.3.9 Association Membership Where absence of membership can be ascertained to be because of cancellation or suspension by the Association, the Eligibility or certificate should not be granted while ever that membership status remains. 2.3.10 Previous Insolvencies Previous insolvencies can go to the heart of a risk currently presented, whether they are of the builder or direct associates for example partners, directors. Consideration of past insolvency risk of any direct or related entity should consider the circumstances of the insolvency and the history subsequently. There should be an expectation of at least 10% ANTA (Adjusted Net Tangible Assets) or deeds of indemnity (with at least 5% entity ANTA) if such a builder is to be favourably considered for future Eligibility. Page 16 16

If prepared to accept the new risk, one avenue to pursue would be to place the applicant into the New Builder segment, only, allowing them to be assessed in that category and have New Builder conditions applied to them, until they are further assessed at New Builder review time. 2.3.11 Qualifications and Experience A builder s level of experience is a very important component of the underwriting process when assessing projected levels of construction, builder segment upgrades and job profiles. For example, where: the principal(s) of a New Builder has less than three (3) years experience as a manager or supervisor with a licensed builder for the building construction type sought or a single dwelling house builder is seeking an upgrade to multi-unit developments Builders will need to demonstrate they have the necessary experience and ability to undertake the project limits sought (or have the appropriate access to that experience such as an experienced manager/supervisor). Industry Association and Professional Institution Membership are to be taken into account for training, compliance, development and technical building standards. External trade qualifications should be assessed. Building history, including the three (3) largest residential construction or other building projects the builder has been involved in, and references from those sources should be utilised. Tertiary qualifications or specific training in the areas of accounting, business management and estimating should be regarded. The qualifications and experience of the key personnel should reflect the professional standing of the trading entity. 2.4 Eligibility Assessment Financial 2.4.1 Financial Reports In applying for Eligibility, in addition to the declaration/s in the Application form, and in all Eligibility reviews all-corporate building entities (i.e. companies and trusts) are to provide the last three (3) years financial reports either as: Externally prepared financial statements, or Accountant and director certified internal financial statements. Note: Tax returns are not sufficient to conduct an assessment for Medium or Major Builders. All builders are to provide evidence of the assets and liabilities declared, including the assets and liabilities of related entities and principal(s). The Insurance Agent will take reasonable steps to verify that the assets exist; are owned by the entity stated; the valuation is reasonable; and the liabilities are complete and accurate. Declaration made by the principals (individuals in a partnership, directors in a company, and trustees of a trust) that all information provided (including financial statements) is true and accurate to the best of their knowledge. 2.4.2 Medium and Major Builder Financials The financial statements (Balance Sheet and Profit and Loss accounts that are accountant prepared including Notes to the Accounts) are central in determining a risk rating for the builder. Tax returns are not sufficient to conduct an assessment. The risk rating is established by using the criteria, the methodology and assessment model described. Any corporate structures must be clearly defined in the application and all other related documentation that Insurance Agents will need to understand the group structure must be provided. Such applicants must provide a corporate tree showing all related parties and ownership structures (directors and shareholders). Page 17 17

The currency of the annual financial reports is a significant factor in determining the reliability of the assessment that can result from the rating tools. The latest 30 June annual financial reports are required for the past three (3) years (or all years of trading if, less than three [3] years). Where a previous entity traded, the total of three (3) years annual financial reports can include the previous trading entity (i.e. two (2) years trading as a sole trader and one (1) year as a company would satisfy the three (3) year requirements). The latest annual reports are to be no older than nine (9) months at the time of assessment. Where an application or review is relying on accounts that are older than nine (9) months, interim management accounts no more than three (3) months old are required in addition to the annual accounts. For corporate structures, the same requirements for financial reporting will apply to all related entities that have balance sheet related loans with the builder that affect the ANTA or current ratio of the builder and where group treasury arrangements are practised. HWIF reserves the right to seek its own independent accounting investigation of any company or group that in the opinion of the agent or HWIF represents excessive risk. Builders in growth or showing adverse cash flow and equity are most likely to meet this requirement. 2.4.3 Small Builder Financials - Partnerships and Sole Traders It is required to establish three (3) years trading history where the entity has traded for three (3) or more years. Financials of previous trading entities controlled by the principals, directors or shareholders can be included in this requirement. Where an entity has traded for less than three (3 years) all completed trading years financials must be provided. The financial reports required include: The three (3) most recent tax returns or accountant prepared financial statements (latest not more than 12 months old), not the taxation assessment notices. Current Statement of Personal Assets and Liabilities (in the form set out in the Eligibility Application Form). Work in progress summary. 2.4.4 Small Builder Financials - Companies and Trusts The financial statements (Balance Sheet and Profit and Loss accounts that are accountant prepared signed off and details including Notes to the Accounts) are central in determining a risk rating. Financial reports required include: Up to three (3) years most recent accountant prepared financial statements. Where accounts are more than nine (9) months old an interim position that is no more than three (3) months old at the time of assessment is required. Interim accounts can be printouts from internal accounting systems. Tax returns are not sufficient to conduct an assessment. Internally prepared interim financial statements are acceptable. Current Statement of Personal Assets and Liabilities (in the form set out in the Eligibility Application Form). Work in progress summary. Where a previous entity traded, a total of three (3) years annual financial reports can include the previous trading entity (i.e. two [2] years trading as a sole trader and one [1] year as a company would satisfy the three [3] year requirements). Any corporate structures must be clearly defined in the application and the Insurance Agents will need to understand the Group structure. Such applicants may need to provide a corporate tree showing all related parties and ownership structures (directors and shareholders). Note: Directors extracts must be conducted on all applicant directors and nominated supervisors where common directorships with eligible entities and group structures are involved. Copies of Trusts Deeds are required for Trust corporate structures. Page 18 18

2.4.5 ANTA Calculations ANTA is the acronym for Adjusted Net Tangible Assets and is designed to represent the net fire sale position of tangible assets less third party liabilities. ANTA is viewed as being a buffer, available to the applicant business to successfully withstand normal business disruptions or shocks, such as A dispute with a home owner over a progress payment Seasonal issues, such as a building industry shut down Periods of extended inclement weather Other difficulties encountered that result in not being able to progress sites or collect progress payments Errors & unbudgeted unfavourable variances in pricing Errors & unbudgeted unfavourable variances in direct costs Errors & unbudgeted unfavourable variances in overhead expenses Abnormal & extraordinary expenses (such as inventory write downs) Events such as those listed above should not cause a cash flow crisis. Applicant business that are deemed to have insufficient contingencies to fund such disruptions are to be carefully considered, and monitored. The ANTA calculation is critical to this objective. When arriving at final ANTA calculation, the past two years ANTA must be considered. The final ANTA figure will be the lesser of the most recent assessment or the average of last two financial year-ends. This approach determines the ANTA for all assessment types, including requests to release Eligibility deeds of indemnity (not job specific deeds). An underlying assumption, in our underwriting approach, is the question of whether the building entity is generating consistent positive net wealth. Sometimes this wealth is retained in the builder s balance sheet (hence strong Builder ANTA position). Alternatively, that wealth may be diverted and reflected in the balance sheet or statement of financial position of the related entity/ director. Accordingly, in recognition of successful wealth accumulation that has enabled the builder to obtain external funding, there may be grounds to discount liabilities secured off the builder applicant balance sheet, where the secured asset holder s financial position is not more than 70% geared. 2.4.6 Balance Sheet Adjustments Contingent liabilities are treated at face value in ANTA calculations. Any contingent liabilities are to be assessed for their likelihood and impact by obtaining further information from the builder and Intermediary. Intangible assets, including but not limited to items of goodwill, establishment costs, licence fees and franchise fees are not to be included in ANTA calculations. Loans payable by related parties should only be considered as assets for the purpose of ANTA calculations if the full value of the loan remains on the balance sheet of the related party with a strong ANTA in its own right and the related party is directly related to the builder (i.e. for loans to related entities to be included the financial position of that entity must also be considered). Deferred Tax Assets are only useful in reducing future tax liabilities, and are not available to fund current working capital requirements. Retention payments arise out of contractual obligations with previous customers. Uncertainty often exists as to the collectability of these retentions, depending on the specific underlying contract, and the track record of the applicant in terms of previous retention releases. Any portion of trade debtors over 30 days, are to be treated as doubtful in the conservative calculation of ANTA. A close study of the trade debtors listing and trends in debtor days is required, Page 19 19

Assets that are to be fully discounted include: Deferred Tax Assets (DTA) Retentions. Trade Debtors over 30 days Loans to related parties Intangible assets Such assets are unlikely to be readily available for working capital purposes and are unlikely to be accepted as security for lines of credit or other sources of debt funding. 2.4.7 Gross Margins There are two (2) ways of expressing gross margin. The majority of builders and the HWIF BEAT calculates margin as a markup on the cost of sales (on-cost margin). Financial advisors and accountants will express the margin as a percentage of sales revenue (on-sales margin). It is essential that the correct comparison and communication be made. Inadequate gross margin is the primary cause of cash flow deficiency in the industry and is driven by inexperience and underpricing. Where there is a demonstrated weakness in the gross margin due to underpricing the Building Contract Review Program is an appropriate Eligibility condition for small builders. When assessing the gross margins of the business, the amount of Industrial/Commercial turnover is considered. Traditionally the gross margins obtained from commercial and industrial projects are lower than those obtained from residential building; therefore, any change in construction profile will need to be considered against historical performance. A consideration of the way overheads are accounted in the profit and loss report will affect gross margins. A builder who charges all direct overheads costs to a project will report a lower gross margin. 2.4.8 Current Working Capital Position Builders requesting cover in excess of $5 million are required to submit a current snapshot of their working capital position. This schedule will list the Current Assets and Current Liabilities of the business and used by the Insurance Agents to confirm the builder s liquidity, ongoing viability and ability to undertake and complete projects. Note: Debtor and Creditor Days are important indicators of the Cash Flow position of the business. Failure to pay creditors on a timely basis may result in decreased ability to secure materials or labour thus increasing the risk of insolvency. However, if the builder has legitimately negotiated delayed credit terms with a supplier/s and the business appears sound, such trade credit issues may be ignored. Other key factors include: overdraft balance and available limit. The Builder Eligibility Assessment Tool (BEAT) considers undrawn funding facilities. The value of undrawn facilities is considered as improving the overhead expense day s coverage taxation and GST liabilities work in progress levels agreed terms for suppliers and subcontract labour directors loans aged list of creditors and debtors bank facilities letter and letter from bankers confirming banking covenants have been met. In order to consider undrawn funding facilities, an up to date letter from the financial institution confirming the value of undrawn facilities. The funding must be in the name of the applicant entity, or its directors or shareholders. Multiple facilities may be aggregated. Page 20 20

The financial assessment is a first order consideration and the financial status of the builder will be paramount in determining whether Eligibility is to be granted or continued, on what terms and conditions it is to be granted and the Turnover limits to be imposed. This Guideline describes the methodology that is applied to financial information and its assessment through the BEAT. 2.4.9 Cash Flow Projections and Budgets Cash Flow projections and budgets, if sufficiently accurate, are an important part of the forward planning of a business. Major builders should require a builder to submit a budget verses actual profit and loss report in support of an application for Eligibility or review to test overhead sufficiency. In some circumstances where growth is requested from a poor working capital position a cashflow statement can be useful to management. Requesting this report can focus the builder on the need for cash flow control. 2.4.10 Cross Border Aggregations and Commercial Builders Where interstate or non-residential building activity is included in the turnover, it is understood that the assessment will be based on total activity. The building entity must meet HWIF criteria for the total turnover not just the NSW HWIF limits sought. A copy of the equivalent interstate HWI Eligibility approval will be obtained. 2.4.11 Corporate Structure The ultimate risk of failure is directly associated with the identity or identities of the licensed builder operating the business, regardless of the corporate structure involved. This is particularly pertinent for smaller builders. The individual licensed entity s own financial position must be assessed but also that or those of the real individuals who constitute the operations of the entity, regardless of corporate structure. Hence, for example, for an incorporated builder, both the company and the directors of the company should be considered as one for financial assessment purposes. The builder s choice of trading structure determines whether they will be supporting the building business directly or indirectly with their own asset base. Indicatively: sole traders fully and personally liable for the building liabilities partnerships between individuals - jointly and severally liable for the partnership liabilities partnerships between other entities can assist to limit liability and offer personal asset protection company and trust structures can assist to limit liability and offer personal asset protection to the directors Franchises should also be considered as to their particular relationship with franchisors. 2.4.12 The Grouping of Entities for Financial Assessment Purposes Entities will be grouped for financial assessment with reviews conducted as follows: For sole traders and partnerships (between individuals), the personal assets of the individual should be assessed. For partnerships, by aggregating the financial information of the partners of the business, however the financial circumstances of the individual partners should also be considered separately, as this may indicate that one partner is higher risk, which leads to the partnership being higher risk. For partnerships (between entities, or trusts), the assets of the entities and the trusts should be assessed separately. For groups of building companies, applying the criteria to the consolidated accounts of all entities with building operations. For trust structures, the financial statements of the trading entity (Trust or Trustee) should be assessed. Often the best test of which entity trades is the ABN used by the business. For franchise businesses, the criteria are to be applied to each individual franchise business and the franchisor Page 21 21

(if required) as separate entities. It important to have knowledge of the franchisee, franchisor, the agreement and respective obligations and guarantees for and to each other that is, what if a problem arises, how the franchisor will react and what their obligations are. If the franchisee is a multiple franchisee, the applicant s individual franchise business and a consolidation of all the franchisee s businesses will be assessed. The extent that the Insurance Agent would be required to go beyond one arm s length will depend upon the apparent risk of intercompany transactions, rights and obligations applying. 2.5 Other Underwriting Issues 2.5.1 Franchise, Marketing or Buying Group Participation HWIF policy is to assess each franchisee as independent businesses but overlay positive or negative implications of franchise or group participation. Subject to confidentiality arrangements between the parties, the group heads of agreement will be and assessed in order to understand the nature of the relationship. This category of builder presents potential additional risk as additional contractual obligations and requirements may apply within the relationship: upfront participation costs immediate opportunities for unsustainable growth payments or royalties payable to the group from operating revenues is the builder permitted to source material, labour or other inputs outside of the group arrangements? The Insurance Agent will assess the level of support offered by the group including: business coaching standard models and marketing support estimating services purchasing opportunities IT and financial software systems. 2.5.2 Architect-Managed Contracts and Multi-Unit Developments - References If a builder is requesting Eligibility for architect-managed contracts or multi-unit developments they must provide examples of similar projects that have been undertaken or otherwise satisfy the HWIF of their capability to undertake such work (for example, suitably sized residential developments). References from architects, building surveyors and engineers should be examined thoroughly for any builder proposing to undertake architect-managed construction contracts. The Insurance Agent will obtain full details of costing for multi-unit development, including evidence of support for funding when application is made for cover for specific developments especially in the case of speculative builders. Architect-managed high value residential and multi-unit construction is specialised and requires the skills to match. For a builder to obtain these profiles notwithstanding the contract value, they must provide technical references. Building excellence awards may further strengthen any technical references received on the builder. Page 22 22

2.5.3 Three (3) Largest Projects Information on the three (3) largest projects is to be compared to the estimated maximum contract value for each category of work proposed to be undertaken. This should be critically examined for any builder who is applying for architectural designed contracts. 2.5.4 Architect Tendered Construction If the Eligibility application is due to a builder having won an architects tender, an Owner Tender Statement form should be sought from the homeowner to ensure that the accepted quotation is not out of line with other quotes leading to a financial strain. If an Owner Tender Statement form is not supplied, the Insurance Agent will request the gross margin included in the quotation from the builder and consider using the Building Contract Review Program (BCRP). 2.5.5 Developer Contracts Refer section 3 (Underwriting Requirements for Certificates of Insurance). 2.6 Assessing Turnover and Project Limits 2.6.1 Turnover and Job Size Growth The gross insurable turnover of the builder is to be compared between the current and previous financial years to identify any abnormal growth expectations (refer table 8 regarding Growth matrix). The construction mix is also to be reviewed to confirm any change in construction profiles. An assessment is required of jobs commenced, number of proposed jobs and estimated contracts in the next year. Changes to the category and type of construction activity can have major implications on the business and overall profitability e.g. residential v commercial or contract v speculative. Builders, who seek to increase their construction limit significantly, will need to demonstrate their financial and technical ability to undertake these jobs. The following factors need evaluation when assessing turnover levels: technical ability and experience number and size of current projects gross margins capital available to fund overhead growth geographic spread to enable span of control to be exercised complexity of contracts confirmation of financing abilities and sources ability to source qualified and competent subcontractors day-to-day management of subcontractors. 2.6.2 Turnover Growth Matrix Turnover growth is a common factor for failed builders. Growth requires capital until increased cash flow and profits cover the increased overheads associated with the growth. Page 23 23

Increased growth increases overhead cost (staff, systems, plant and machinery, vehicles, offices). Until the extra projects generate sufficient profit to fund the additional costs, these additional costs must be funded placing pressures on working capital. If builders seek to fund these additional costs initially through cash flow payments on the extra jobs, the builder can be more susceptible to failure to meet overhead costs as progress payments may be delayed, disputed or defaulted. Funding growth from retained earnings assists to mitigate this risk. Progress payments can continue to be used for their main purposes of funding job costs and generating margin. In time the extra profit can be used to assist covering additional overheads costs. In principle, Table 8 sets out the acceptable urgent and one off increase in turnover where the builder is up to date with Periodic Eligibility Review (PER) requirements and subject to clear non-financial track record checks. A maximum of one auto increase can be provided a year. The level of increase would depend on the risk rating and not available to Z rated builders. The level of increase would depend on the risk rating and not available to a BEAT score of less than 4.0. Table 8. Guideline for consideration of turnover growth approvals Turnover Approved Increase (Rating W & X ) Increase (Rating Y ) Up to $1.5 million 50% 30% $1.5 million to $3 million 30% 25% $3 million to $5 million 30% 20% $5 million to $15 million 25% 20% 1. To determine the % level of growth sought - compare the requested turnover against actual business turnover, which is obtained from the turnover or sales figure on the last financials (not approved Eligibility turnover). 2. An increase in construction values driving the turnover increase is more about technical competence. An increase in the volume of work may be about the strength of the business management and financial capacity, as well as the way in which these sales are generated and costed. 3. Where growth sought exceeds the above thresholds, this does not represent grounds to decline the request. There may still be a valid case to approve the requested growth. This requires additional investigation. 2.6.3 Turnover Increase Declinature Where an underwriter recommends declinature of a Turnover Limit Increase application, this is to be auto escalated to the respective underwriting committee, before the decision is determined and communicated. Declinature must clearly explain the reasons and invite a submission from the builder addressing the issues of concern. Where there are a material number of incomplete insured projects, a risk management plan must be developed and implemented by the Insurance Agent Underwriting Committee. 2.6.4 Project Limit Increase This is not the same as a turnover increase application hence a full financial underwriting assessment is not required unless the builder has not complied with periodic Eligibility review requirements. The Project Limit Increase is assessed based on experience and satisfactory technical references, utilising the Building Contract Review Program (BCRP) where required. All non-financial checks are still required to be reviewed (Licence, Mercantile Agency and BTC). Annual indexation of successfully completed projects applies, based on the applicable Australian CPI. Page 24 24

Table 9. Guide for Builders Risk Characteristics of Builders Builder Characteristics Trading Structure Continueous Trading in structure Management Building Qualifications Management Information Systems Business Planning Risk preference Limited Risk Medium Risk Highest Risk Sole Traders and Partnerships between individuals Company Trusts and Partnerships between corporate entities Over 6 years Between two (2) to six (6) years Less than 2 years Rates high in Integrity, depth, excellent track record Meets all educational requirements and keeps updating CPD points Fully developed and installed easy to access Detailed and comprehensive and integrated with operations Risk Averse analyses Risk with risk minimised as much as possible Heavy reliance on a few key people in the business Partially developed and installed, some key information access lacking Conservative Accepts risk on conservative basis Initial stages of development and implementation Optimistic Accepts risk on optimistic basis Lacks Experience or has past history of building business failure Nil Non Existent Shoebox mentality Non- Existent Risk positive accepts all risks little analysis Track record (Past Objectives) High success rate Consistently fails to achieve Track Record (Character Moral Risk) Clean History Nominal Client/ supplier disputes -always takes action to resolve before legal action Frequent Client/ supplier disputes -lets it get to legal action stage Prior failures and poor history in dealing professionally with clients and suppliers Financial Characteristics -Trading Position Financial Characteristics -Financial Position Financial Information Shareholder/Owner relationship In all industry conditions demonstrates Performs above industry average benchmarks Strong Position with sound net asset position Audited, stable accounting policies, adheres to planning and budgeting processes Stable, supports management, willing to inject further funds In most conditions favourable results. Has satisfactory explanation for any poor performance below industry averages Safe position with satisfactory net asset position Audited relatively stable accounting policies Stable, supports management, May be able to inject further funds Unfavourable results and trends performs below industry average benchmarks Marginal position with heavy external debt load Not audited, relatively stable accounting polices Unstable, partially supports management, unwilling to inject further funds Page 25 25 Consistent poor/ negative performance with heavy losses Distressed Position and likely to fail under minimal stress. Not audited constantly changing policies, no planning or budgeting Unstable, lack of financial and management support, will not inject further funds

2.7 Benchmarks of the Financial Strength 2.7.1 For Small and Medium Builders This assessment is the combined consideration of the ratios set out in Tables 10 and 11 with a scoring system and weighting applied by the HWIF Builders Eligibility Assessment Tool. Table 10. Financial Risk Factors (Small and Medium Builders) Ratio Low Risk Medium Risk High Risk Gross Profit margin (Gross profit as >20% 12% - 19% 12% a percentage of Cost of Goods sold) Net profit margin before tax.8% 4.7% 4% Adjusted Net Tangible Assets ANTA/turnover.10-15% 5% - 10% 3% Working Capital (Current Assets/Current Liabilities) >1.8 1.2-1.4% <1.0 Creditor days - Average Accounts Payable/Average Cost of Goods Sold per day Debtor days - Average Accounts Receivable/Average Sales per day <30 days 30-60 days >60 days* <15 days 15-30 days >30 days Turnover Change from average of past years <50% 50-100% >100% Overhead expense (days coverage out of working capital) >40 days 21-30 days < 14 days Capital and retained earnings to turnover >2% 1.5-2% <1.5% * Unless negotiated with suppliers and profitability is sound. 2.7.2 For Major Project Home Builders For major builders and those medium builders whose profiles are determined to justify treatment as a major project home builder, assessment is to be reviewed by HWIF, supported by financial and supporting management requirements (Refer Fact Sheet 11). Insurance agent will approve the builder s Eligibility with the condition major project home builder quarterly submission required Builder will access online system developed by HWIF to lodge their quarterly submission within 60 days of the end of each fiscal quarter Builders broker and insurance agent receive read only access to view their clients submissions The online data provided each quarter will be used to monitor: Working capital Gross Margins Work In Progress Average construction times Adverse Information 2.8 Other Risk Factors Non-financial risk factors (Table 11) are a significant contributor to the overall assessment. Insurance Agents are to identify mitigating factors to offset any High or Very High risks. The Insurance Agent may also identify additional factors that affect the risk and should assess them as appropriate. Page 26 26

Table 11. Other Factors: Characteristics and Assessed Risk Characteristics 1. Trading Structure 2. Continuous years trading in this structure - experience 3. Principals residential building business experience 4. Signs of adverse history 5. Trade Credit history 6. Directors /Principals history 7. Past insolvencies Assessed Risk Trust = High Company = Modest Sole Trader = Low Partnership = Low Nil to 1 year = Very High 1-3 years = High 3-5 years = Acceptable 5-10 years = Modest > 10 years = Low Nil to 1 year = Very High 1-3 years = High 3-5 years = Acceptable 5-10 years = Modest > 10 years = Low Very serious recent pattern of incidents = Very High Serious but isolated incidents = High Minor or older incidents >5 years ago = Acceptable Clean history = Low Poor/Adverse = high Marginal = Acceptable Clean history = Low Poor/Adverse = high Marginal = Acceptable Clean history = Low Severe and unmitigated = Very High Moderately severe and partially mitigated = High Recent but appears to be fully rehabilitated = Acceptable No previous business closures = Low The respective results against each characteristic will be scored and weighted as to their assessed significance. 2.9 Fatal Characteristics Some factors within key manager and shareholders are considered fatal to the assessment and should have an over-riding impact: a. Insufficient ANTA available for security b. Recent material unmitigated business closures or insolvencies, due to mismanagement of the building company by the directors c. Adverse claims, disputes or credit history Page 27 27

2.10 The Rating Category Table 12. Combination of Matrix Scores Combined Score Combined score >8 Combined score 6 or greater Combined score 4 or greater Combined score 2 or greater Combined score <2 Accept Rating W Accept Rating X Accept Rating Y Rating Z Decline Decision Eligibilities are placed in the following assessed risk rating categories: 2.10.1 Category W The building entity has been assessed and is strong in its own right, with no adverse features; Category W is to apply with no requirement for additional security. 2.10.2 Category X The building entity has been assessed and is fair to strong in its own right with few adverse features; Category X is to apply with no requirement for additional security. Turnover not to exceed 20 times ANTA. 2.10.3 Category Y The building entity has been assessed as a conditional acceptable risk that is, with conditions applied beyond the standard Profile conditions. Financial status not optimum and/or some other adverse features. Any assessment that establishes a need for a security, based on an Eligibility application is to be rated no higher than Category Y. 2.10.4 Category Z This category normally requires the builder to be notified that they will not be acceptable on standard terms and will need to accept alternative conditions. Where alternatives are to be offered, they may include one or more of the following: a) Capital injection Injecting further new capital and/or financial capability into the business could address working capital deficiencies. Converting related party liability loans to share capital will strengthen deficiencies in ANTA. Evidence that a capital injection condition has been met is required: i. A post injection balance sheet must be provided, which reflects the effect of the capital injection or bank statement showing cash injection deposit. ii. A copy of the minutes of the company's board meeting, resolving to receive the capital into the business and resolving to: retain the capital in the business and not to loan these funds out of the business use these funds for the productive use by the business. iii. A mercantile agency search is to be conducted as part of any future review to confirm that the injection has been registered with ASIC. Page 28 28

b) Deed Of Indemnity Refer to Section 6. c) Increased reporting frequency if the issue is management experience or adverse financial trends. d) The Building Contract Review Program (BCRP) for contracts of $50,000 and over (builder will be permitted to undertake contracts below $50,000. Refer section 12 - BCRP Some applications will require a combination of conditions, to address each issue. For example: Poor Gross Margins may require the help of the Building Contract Review Program, to assist in costing projects appropriately. Negative working capital will require a capital injection and a monitoring of the cash flow through more frequent reporting. It would be hard to proceed where in such instances no additional capital is available. Satisfying the appropriate alternatives will elevate the builder to the Y category. Note (i): Concerns about a builder, which are not related solely to the builder s financial status, should be addressed through the Building Contract Review Program rather than the provision of security as the provision of security would not in all cases satisfy the deficiency identified. Category Z will also include builders, which are subject to Intensive Monitoring, for which alternatives a) to c) are not generally applicable. Note (ii): It is vital that where conditions are placed on a builder s Eligibility in order to remedy concerns that the Insurance Agent has in place procedures and systems to allow the monitoring of the builder s compliance with those conditions and such monitoring is effectively implemented. 2.10.5 Category D Decline An Insurance Agent is to communicate a decline decision to the builder clearly setting out the reasons for the decision and the dispute resolution process, available to the builder if they are not satisfied with the decision and reasons given. 2.11 Addressing Weaknesses In order to establish the cause and potential impact of the weaknesses identified, channels for investigation are outlined below: 2.11.1 Current Ratio < 1.0 What is driving this poor working capital? Is there an underlying margin issue connected with poor job estimation processes and/or margin erosion during the construction period? Is there an issue of asset management which is not providing enough liquidity? Is it an issue of progress payment scheduling? Consider debtor and creditor day listings and controls. 2.11.2 Net Profit Negative Within Last Three (3) Years Was it a material loss or just a paper loss? Timing of reporting. Page 29 29

An issue that is inherent in the business or a one-off extraordinary loss? Has the business since recovered? 2.11.3 Debtors > 30 days Has there been deterioration in debtors, or are these consistent over the last three (3) years? Obtain an up to date aged debtors listing, to confirm that the value of debtors is realistic, that there are not any delinquent accounts. If there are relatively major debtors owing over 30 days, obtain an explanation from the applicant as to the reasons for the delay. 2.11.4 Creditors > 60 days Has there been a material deterioration in creditors, or are these consistent over the last three (3) years? Review the aged creditor listing. If a long established business, are the payments within supplier credit terms. The applicant may be having difficulty meeting obligations as they fall due. 2.11.5 Warning - Cash Greater Than 30% of ANTA Review bank statements for the last six (6) months to confirm that the current position is not abnormal. Determine if due to a recent cash injection through property settlements. 2.11.6 High Growth Is the builder sufficiently capitalised to fund the requested level of growth? What is driving the growth? Is growth associated with a relationship with a marketing entity - if yes, is the marketing fee structure and job scheduling likely to unduly strain the builder? Who are the key managers and do they have sufficient experience in managing such growth and proposed turnover? Obtain a work in progress report to review current construction times and spread of contracts at various stages. Possibly Increase the frequency of management reporting. 2.11.7 Gross Margins Low Is the business still able to generate positive net profits? If so, then the business has successfully maximised efficiency in order to be sustainable in a competitive market. Is the underlying margin issue connected with a franchise or a marketing relationship? Is the applicant producing a detailed costing breakdown? Poor supervision and site management with margin erosion during the construction period. Page 30 30

3. Underwriting Requirements for Certificates of Insurance Including Pricing Issues Intermediaries acting on behalf of Insurance Agents will generally issue certificates of Insurance. The Eligibility conditions will permit the automatic issue of a Certificate of Insurance where the application is within the Profile of the applicant s existing Eligibility. There are circumstances, however, where a Certificate of Insurance is not automatically be issued and will require referral to an authorised Insurance Agent. It is the clear intent of HWIF that the approved Eligibility turnover limit is intended to be drawn down over a 12 month period and controls may provide for the turnover to be steeped up progressively to ensure this occurs. Builders should estimate their future requirements and apply for a limit that will permit planned and projected annual activity. There are also circumstances where, subject to their strength/category rating and volume of certificates to be issued, Insurance Agents may authorise builders to process and (where not a referral to the Insurance Agent) issue their own certificates. This practice is subject to audit as per Intermediary audits. 3.1 Applications There are two (2) Certificate of Insurance application forms for builders: A Project application form (for all work other than multiple dwelling project) - this form is to be used for projects involving: the construction of one (1) dwelling under one residential building contract; and the construction of one (1) dwelling for the one owner on the one site. A Multiple Dwelling Projects application form this form is to be used for projects involving: the construction of two (2) or more dwellings under one residential building contract; and the construction of two (2) or more dwellings for the one owner on the one site. Generally, standard Project applications will receive automatic acceptance through Intermediary access to the Insurance Agent s system. Non-standard applications are to be referred to the Insurance Agent and the Insurance Agents are to individually underwrite the risk judging the significance of any Refer conditions towards the ongoing viability of the builder and assess accordingly. Applications for projects involving developers and/or multiple dwelling constructions are to be made using the Multiple Dwelling Projects Application form. All mandatory accompanying documentation is also required to be referred to the Insurance Agent for individual consideration. Type of projects includes: duplexes, triplexes, terraces etc. (i.e. residential dwellings/buildings with shared services or structures walls, roofing etc.) rectification and alteration work to an existing multiple dwelling building (including high-rise buildings) low and medium rise buildings (including villas, townhouses, blocks of flats/units etc.). Evidence of support for funding is not required where the owners corporation is listed as the homeowner when an application is made for multi-unit/strata titled developments. 3.2 Specific Underwriting Issues This section sets out the nature of the specific underwriting issues to be considered by the Insurance Agent in assess project applications referred to it for individual underwriting. Page 31 31

3.2.1 Applications Outside Eligibility Profile Where the application for a project certificate is not within the builder s Eligibility Profile (subject to the discretion as provided in this Guideline and the HWIF s Underwriting Guidelines), the Insurance Agent will not issue a certificate to that builder without either: requiring a review of the builders annual turnover and job size limit.the certificate is then only to be issued if it falls the revised Profile and meets any other conditions specified considering the requirements of this Guideline and the HWIF s Underwriting Guidelines for a one-off major project outside of the approved size limit. The Insurance Agent may require the builder to provide additional security and/ or use a builder management service provider declining to issue the Certificate of Insurance. All deviations of up to 20% above the largest projects completed (in the past 3 years) are permitted for constructions below $750,000 without an Eligibility review where the construction value sought by the builder is a one-off and where: the construction is of a similar nature to past experience the turnover limit will not be exceeded 3.2.2 Applications for Single Dwellings Below $200K Where project application is made for a single dwelling below $200K, the building contract, and scope of works, is to be provided in addition to the project application. Such an application is to be automatically referred to the Insurance Agent, for their consideration. The concern is that these are unusually low value single dwellings, and as such, care is to be taken to ensure that the contract value insured reflects the work to be performed. 3.2.3 Applications Where Eligibility is Suspended or Cancelled or Issue is Detrimental The Certificate of Insurance will not be issued if there is reason to believe that issuing the certificate would be to the detriment of the HWIF. 3.2.4 Applications by Builders Subject to Building Contract Review Program The Certificate of Insurance will not issue to that builder: until a Building Contract Review Program service provider selected from the Service Provider Panel has been appointed by the builder in respect of that project the Building Contract Review Program service provider has made an initial report to the Insurance Agent, and that report is favourable and makes no adverse findings in respect to the building work to which the Certificate of Insurance applies, that would be detrimental to the HWIF. 3.2.5 Rectification or Maintenance Work on Multi-Dwelling Buildings/Properties New multi-storey (high-rise) residential construction is automatically exempted under the Home Building Act 1989 from the requirement to obtain home warranty insurance cover. In general terms, a multi-storey building means a building that has a rise in storeys of more than three (3) (not counting a storey only used as a car park) and which contains two (2) or more separate dwellings. However, this exemption does not apply to works carried out on existing multi-storey (or other multi- dwelling) buildings, such as repairs, maintenance, renovations, alterations and additions to either the common property of the building or to individual dwellings. These works require home warranty insurance cover to be obtained by the builder where the contract price is over $20,000, or, (if the contract price is not known) the reasonable market cost of the labour and materials involved exceeds $20,000. Page 32 32

Construction work on multi-dwelling buildings/properties, including work carried out on existing multi-storey (high-rise) buildings, requires some specialist skills and has some particular risks that need to be managed. Relevant examples of where home warranty insurance cover is required for residential building work undertaken on an existing multi-unit building include repairs, maintenance, alterations or additions to the common property of a strata scheme, company title scheme or community land scheme such as: the installation of new or the replacement of old handrails or balustrades or balconies repairing or maintaining air-conditioning systems, plumbing or electrical works painting corridors, stairwells, hallway doors waterproofing repairs concrete spalling repairs repairing roofs and guttering. These examples would also apply where the work is carried out on the common area of a multi-dwelling building/ property owned by one entity. To obtain a Certificate of Insurance, the builder must have an Eligibility work profile to match the project requirements and be able to satisfy the Insurance Agent that they have the technical expertise and access to sub trades to complete the project in a timely manner without defects. Certificates of Insurance should not be issued without consideration of the following additional documentation: Scope of works. Proof of funding for contract whether the building/property owner has the funds to pay for the work contracted (not required where the work is being undertaken on behalf of an owners corporation). Sometimes the project is the result of an insurance claim. In such cases, confirmation that the project is being contracted by the insurer will obtained - such as a work request document on the insurer's letterhead and a description of the works. Builder experience whether the builder has experience at this work. Terms of the contract the Insurance Agent will obtain a copy of the contract and assess the extent to which the terms may be weighted in favour of the homeowner. A 50% loading applies to the structural and non-structural work premium rates for building work undertaken on an existing residential multi-dwelling building/property (including multi-storey [high-rise] residential buildings). 3.3 Developers Under the Home Building Act 1989 an individual, partnership or corporation is a developer where residential building work is done on their behalf in connection with an existing or proposed building or residential development where four (4) or more of the existing or proposed dwellings are or will be owned by the individual, partnership or corporation. A developer of residential building work also includes the owner of the land where the development is carried out and who owns, or will in future own, four (4) or more of the existing or proposed dwellings. The definition also provides that if another person or organisation who will also own four (4) or more of the units in the development entered into the building contract for the work, then they also are considered to be the developer. A company that owns a building under a company title scheme is not a developer for the purposes of the Act. Under the Act, a residential building contract entered into by a builder with a developer is treated the same as any other contract for the purposes of obtaining home warranty insurance cover. The builder is required to obtain home warranty insurance cover for each dwelling covered by the contract. The developer must attach the Certificate of Insurance to the contract for sale of each dwelling. Page 33 33

The Home Building Act also provides that a person who is the immediate successor in title to a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the developer were required to hold a contractor licence and had done the work under a contract with that successor in title to do the work. Residential building work done on behalf of a developer is taken to have been done by the developer. Accordingly, where the development has a contract value of over $750,000 a developer (in addition to the builder) must demonstrate their financial capacity to be involved in multi-unit development projects. A developer may demonstrate their financial capacity by being a well-established developer [(that is, not a special purpose vehicle (SPV)] and which has a record of adjusted Net Tangible Assets of at least 10% of the contract price or proposed value of the project. Otherwise, the developer (or its director/s or a related entity) is required to provide suitable security (e.g. Related Party Undertaking). Generally, the risk for work undertaken on behalf of a developer is only related to defective work and not non-completion. This is because a developer is excluded from being a beneficiary under a contract of home warranty insurance (policy). However, there may be cases where a developer enters into arrangements to sell a property prior to completion of the building work (including off the plan sales) that imply the work will be completed and, therefore, the risk might include non-completion and loss of deposit. Usually in relation to off the plan sales a contract to purchase is signed, but the date for completion of the contract will not be until the building is completed and the strata plan is registered. The purchaser usually pays a deposit and the balance is paid when the contract is 'settled' upon the building's completion. 3.4 Underwriting of New Multi Unit Projects The Insurance Agent or Intermediary must sight a copy of the Certificate of Title or a rates notice for the property to verify ownership. Details of the funding of the project should be provided to the Insurance Agent. The Insurance Agent will also see a copy of the contract between the builder and the developer in order to confirm that the developer is properly identified as the other party to the contract with the builder and that the credentials, financial position and funding arrangements of the correct developer are being assessed and that the correct entities are captured under any Related Party Undertaking. A copy of the contract is also required in order to establish that there actually is a written contract (not always the case where the builder and developer are related entities) and to confirm the contract amount and whether it includes GST; the number of dwellings (units) being constructed; the site address and a breakdown of individual dwelling (unit) amounts (if not uniform). Special care in assessing developer risk should be exercised where: the property owner is a separate entity to the developer (including where the owner and developer are related entities) the property owner has entered into a joint venture with the developer the developer is a SPV formed to manage the development and then be liquidated after completion of the project (or on sale of all dwellings) characteristics that should be used to assist to identify SPVs are: o o o recent date of incorporation primary asset is the proposed development name of the company the developer and builder are related entities (e.g. common directorship between a builder and developer or majority shareholding/controlling interest). Where there is reasonable doubt as to the builder s capabilities to successfully complete the development project, a Certificate of Insurance should not be issued. Some issues that may require detailed consideration: Scope of works the Insurance Agent may need to have its technical services unit assess the particular application. Proof of funding for contract what financing arrangements are in place and whether the developer has the Page 34 34

funds to pay this (e.g. a recent funding offer letter, on the institutions letterhead). Builder experience have they got experience at this type of project. Terms of the contract the Insurance Agent will a copy of the contract and assess the extent to which the terms may be weighted in favour of the developer. The provisions of this Section apply to multi-unit projects such as villas, town houses and low and medium rise buildings containing units, flats etc. The provisions of this Section do not apply to other multi-dwelling projects such as duplexes or triplexes. 3.5 Speculative Spec Construction A 'spec' builder is the general term for an individual, company or partnership that carries out residential building work on land that they own - that is, residential building work carried out other than under a building contract with another party. The building work is speculative in that the property is generally intended for resale following completion of the work. Regardless of any stated intention to retain the property for investment or rental purposes, the 'spec' builder must arrange home warranty insurance cover on the proposed residential building work before starting the work and attach the Certificate of Insurance evidencing home warranty cover to any contract for sale of the property that occurs within six years of completion of the building work. It is an offence under the Home Building Act for any builder who does residential building work other than under a contract to start the work before taking out home warranty insurance cover on the proposed work. It is also an offence for the 'spec' builder to enter into a contract for sale of the property on which the builder carried out the building work without attaching a Certificate of Insurance evidencing home warranty insurance cover to the contract for sale. The purchaser of property from a 'spec' builder may have the right to rescind the contract for sale before settlement if a home warranty Certificate of Insurance is not attached to the contract for sale. Generally, the risk for work undertaken by a spec builder is related to defective work and not non-completion of work. However, similar to work undertaken on behalf of a developer, there may be cases where a spec builder enters into arrangements to sell a property prior to completion of the building work (including off the plan sales if a multi dwelling project) that imply the work will be completed and, therefore, the risk would include non-completion and loss of deposit. There are additional risks associated with speculative building work and as such, the Insurance Agent will obtain and consider the following information: Proof of ownership verify ownership (rate notices etc.) and ensure it is in the same name as that of the licensed builder Scope of works the Insurance Agent may need to have its technical services unit assess the particular application. Proof of funding for project what financing arrangements are in place. (e.g. a recent funding offer letter, on the institution s letterhead) Source and nature of funding the funding source (i.e. whether it is from the primary mortgage market or an alternative source) and the nature of the funding and collateral provided. 3.6 Architect/Designer Managed Projects Builders can only purchase policies for architect managed projects if they have been approved by the Insurance Agent to do so, based on Eligibility considerations. There are significant risk factors from these types of arrangements, including: The value of the dwelling is usually significant and the non-completion exposure to the HWIF would be a major loss. The quality of the fit-out, fixtures, fittings, finishes and level of detail is at the upper end of the market. The builder has to have extensive contract administration skills and experience to deal with the architect,professional project managers and solicitors representing the owner. Page 35 35

The builder requires confirmed access to working capital sources due to the larger size of the progress payments, higher carrying cost of the materials/subcontractors and the increased likelihood of mid contractual disputes which may unfavourably impact the builders solvency. The builder requires access to experienced project managers/ supervisors. The builder requires excellent estimating skills, as deficiencies in this area will lead to major contract losses if fixed price contracts over significant build times are undertaken. Variations could easily be in excess of 10% - 50% of the original construction value and if they are not documented and signed off (which will invariably lead to disputes) can have a serious impact on the builders solvency and profitability of the job particularly at final payment time. All variations need to be documented. Contract retentions and liquidated damages amounts require review before acceptance. If the builder is not currently approved for such work, they can complete the application form and must provide supporting information of experience in dealing with architects/designers/project managers etc. Where there is no demonstrable experience and there are no other adverse features, the Insurance Agent may approve the project conditional on the builder participating in the Building Contract Review Program for the project. 3.7 Architect Tendered Construction An Owner Tender Statement form should be sought from the homeowner to ensure that the accepted quotation is not out of line with other quotes. If an Owner Tender Statement form is not supplied, the Insurance Agent will seek the margin of information included in the quotation from the builder and will consider using the Building Contract Review Program. 3.8 Project Management Project Management of residential developments adds to the risk of the construction, for similar reasons as Architect managed work. Refer to that section above. The Insurance Agent should also ensure that for these types of projects the total construction cost of the project is insured including all building costs and the project management fee which must be within the Eligibility profile of the builder. 3.9 New Multi-Dwelling and High Value Constructions (>$750,000) Principles similar to those for Architect/Designer Managed Projects apply. If the builder is not currently approved for such work through their Eligibility Profile, they can complete the application form and must provide supporting information of experience in dealing with multi-dwelling constructions and/or architects/ designers/project managers etc. Where the job is not within the builder s Profile and there is no demonstrable prior experience, and where the construction is within the turnover limit of the builder, and there are no other adverse features, the Insurance Agent should refer the builder to the Building Contract Review Program, which could support the approval. Where there is reasonable doubt as to the builder s capabilities to successfully complete the project, a Certificate of Insurance should not be issued. Some issues that may require detailed consideration: Scope of works the Insurance Agent may need to have its technical services unit assess the particular application. Proof of funding for contract whether the owner has the funds to pay. (e.g. a recent funding offer letter, on the institutions letterhead) not required for flat rate builders undertaking duplex or triplex projects. Consideration will be given to whether proof of funding is required (or to the type of proof required) where the homeowner is funding the project from sales of other property or income. Proof of funding is not required where the owners corporation (Body Corporate) is funding the project, Page 36 36

Builder experience whether the builder has experience at this work. Terms of the Contract the Insurance Agent will obtain a copy of the contract and assess the extent to which the terms may be weighted in favour of the owner. A non-speculative duplex, triplex, terrace etc. project where the total contract value is below $750K does not specifically require proof of funding, subject to underwriter judgement. 3.9.1 Remediation Options for High Value or High Risk Projects The use of remediation options should be considered to mitigate the risk associated with a high value or high-risk project. In particular, where the financials are not strong (i.e. category Y or Z), experience levels, established history or contractual arrangements, project-specific remediation should be considered for the following types of projects: multi-unit projects developer projects speculative developments architect or designer managed projects high value projects. The nature of the deficiency or weakness is to be considered in determining the appropriate remediation option. There are two (2) primary remediation options: project-specific deeds of indemnity Building Contract Review Program. A project-specific deed of indemnity may be appropriate where the financial strength of the builder is not strong, or where under the contract the control vest with a third party, e.g. a developer. A project specific deed of indemnity from company(s) or principal(s) with a vested interested in the successful completion of the project and robust financial resources may assist in reducing risk. A referral to the Building Contract Review Program is likely to be appropriate where the builder has little or no experience with the nature of the work proposed, e.g. the builder is undertaking a multi-unit or high value project for the first time. The Building Contract Review Program service provider will assist to overcome deficiencies in the builder s experience. In some cases, it may be appropriate to consider both options. Where remediation is necessary, the Insurance Agent will present relevant options to the builder (through their Intermediary). If the builder does not agree to an appropriate remediation, the Insurance Agent will not issue a Certificate of Insurance. Project-specific deeds of indemnity should be limited to a maximum value of 10% of the project value or 50% of the maximum loss under the Home Building Act for the project (whichever is the lesser) and have an expiry date of 78 months from the date of completion. As with other deeds, the Insurance Agent will ensure that any deed is executed once the builder has obtained independent advice. 3.10 Proof of Funding In instances where this Guideline or specific underwriter conditions require proof of funding, the funding letter must be final, current and unconditional letter; leaving no confusion whatsoever as to the availability of the funding. 3.11 Cost-Plus Contracts The margin contained in the contract should be ascertained to determine whether it is adequate (15% gross margin is expected for single dwellings higher for renovations and potentially lower for multi units) with particular focus upon projects greater than $750,000. Page 37 37

3.12 Contract Variations All contract variations are to be in writing between the builder and homeowner. The Owner s copy of the Certificate of Insurance lists the original contract price. An additional premium is payable in the event of a variation of greater than 10%. Variation requests above 20% must be supported with a copy of the variation to contract documentation to verify the scope of the variation. Note: Variations or multiple contracts at the same site could have put the original project outside the builder s Eligibility profile. In such cases, a special Eligibility review should be undertaken. However, as the HWIF is on risk for the project in any event an application an amended Certificate of Insurance because of a contract variation should be treated on its own merits and separate to any Eligibility review. 3.13 Retrospective Cover Generally, the vast majority of builders are aware of their statutory obligations to obtain home warranty insurance cover prior to commencement of work (and prior to receiving any payment, including a deposit, under a contract). Where a builder has, either deliberately or as a result of an oversight, not taken out home warranty insurance cover for a job and subsequently seeks to obtain retrospective cover for the work there is a risk that cover is being sought because a problem/defect and/or a customer complaint has arisen. An application for retrospective cover may be received after payment of a deposit but prior to commencement of the work, during construction or after completion of the work. Written confirmation from the homeowner that there is no dispute between the homeowner and builder must accompany any application for retrospective cover. An inspection report from an independent certified building inspector should also accompany the application, depending upon the extent to which the building work has progressed. The Insurance Agent will sight a copy of the inspector s certificate of currency for its professional indemnity insurance prior to processing the application. Where the project has been completed, the Occupation Certificate for the work should also accompany the application. Given the objectives of the home warranty insurance scheme in relation to consumer protection, cover will not be withheld where the underwriting criteria have otherwise been satisfied, there is no dispute and the inspection report is satisfactory. That is, it would be granted throughout the statutory warranty period of cover. Repeat offences by a builder should signal a special Eligibility review and consideration of cancellation of Eligibility. Notification of instances where home warranty insurance cover has not been obtained prior to commencement of work and/or payment of monies under the contract must be notified to the HWIF for provision to NSW Fair Trading. 3.13.1 Contracts Originally Under $20,000 Where variations increase the final contracts to an amount over $20,000 during construction or where a builder is not aware of the value of the project at the time the contract is entered into, the builder is to make application for a Certificate of Insurance as soon as the builder became aware of the value of the project is likely to exceed $20,000. The builder is not to request or receive any (further) payment under the contract until an amended Certificate of Insurance is issued. The application for amendment to the Certificate of Insurance is to be accompanied by a letter of satisfaction from the building owner/owners Corporation (or strata manager) confirming that all the work done to date is satisfactory and there are no disputes. An inspection report and notification to NSW Fair Trading are not normally required in these cases unless the owner s satisfaction letter is not forthcoming 3.14 Certificate Referral Requirements The following Table describes the circumstances and the action to take for referral of project applications to the Insurance Agent. Under the HWIF premium-rating algorithm, premiums are not adjusted for such risks. Page 38 38

Table 13. Certificate Referral Requirements Where the scheme s Certificate of Insurance issue rules place a certificate application as a Refer, the Insurance Agent iwill undertake an assessment of the case concerned as follows: Issue A close relationship between builder and homeowner (non-arms length) that may create a risk in itself. Construction Value Burst (i.e. 20% or more above previous largest project in the past three (3) years) The construction is a Project that was tendered - architect or otherwise Multi-unit rectification The percentage margin is less than the Minimum Margin option for Cost Plus contracts Construction Type not within builder s Profile Action Project-specific deed may be required from related party and/or director(s) of building company. 1. If contract value < $750k builder to supply technical references from a qualified building professional (e.g. structural engineer, architect) detailing any other jobs of a similar contract value/nature the builder has completed before, the time taken to complete, the quality of the workmanship, if there were any claims made. 2. If contract value > $750k Depends on the builder s technical capabilities and their financial stability. As per (1) above but also requires an up-to-date financial assessment. Obtain completed Architect Tender Statement if the architect is willing to provide, or obtain the margin included in the calculation from the builder. Updated financial assessment may also be required if a review has not been undertaken in the last 18 months. Assess whether the builder has experience in the work involved obtain details of relevant experience including technical references from a qualified building professional (e.g. structural engineer, architect) detailing any other jobs of a similar contract value/ nature the builder has completed before, the time taken to complete, the quality of the workmanship, if there were any claims made (if not already available). Builder to supply copy of Building Contract assess whether the % return is adequate. Require clarification and if necessary trigger Eligibility review. Seek clarification whether works have already commenced and the circumstances. Estimated Start Date is in the past. Works have commenced [or completed refer also retrospective cover] Where works have commenced but are yet to be completed obtain: 1. Copy of the Building Contract. 2. Where construction work is to Footings but not beyond copy of engineers report confirming the footing work has been completed to an acceptable standard and is within the requirements of the contract. Copy of engineers Professional Indemnity cover also to be supplied. 3. Where construction work is beyond Footings stage copy of Building Consultant s Defects Report confirming work completed is to a satisfactory standard, is within the requirements of the contract, the schedule of progress payments are consistent with the value of works completed. 4. Written explanation from builder detailing why the job wasn t registered prior to work commencing: Investigate whether builder has a history of purchasing policies after commencement. Consider whether it was an isolated administrative oversight, emergency building work or preliminary demolition work all of which can be excused. HWIF to receive of each builder where a satisfactory explanation has not been provided including all relevant details. Page 39 39

Issue Action Seek clarification and explanation, including confirming the actual start and completion dates and reasons for the situation arising. Estimated Completion Date is in the past Where works have started but are yet to be completed obtain: 1. Copy of the Building Contract. 2. Where construction work is to Footings but not beyond copy of engineers report confirming the footing work has been completed to an acceptable standard and is within the requirements of the contract. Copy of engineers Professional Indemnity cover also be supplied. 3. Where construction work is beyond Footings stage copy of Building Consultant s Defects Report confirming work completed is to a satisfactory standard, is within the requirements of the contract, the schedule of progress payments are consistent with the value of works completed. 4. Written explanation from builder detailing why the job was not registered prior to work commencing. Where works are 100% complete - Obtain: 1. Final Inspection Report (Defects Report cannot be older than 6 months and must be completed by an independent registered building surveyor/inspector, architect or engineer together with a copy of PI cover from the provider of the report). 2. Letter of satisfaction from the owner confirming all works are complete, they are satisfied with the quality of workmanship and no claims are on foot. 3. Copy of the Building Contract. 4. Written explanation from builder detailing why the job was not registered prior to work commencing. 5. Copy of the letter builder has sent to NSW Fair Trading Home Building Service advising works commenced without home warranty insurance being in place. 6. Confirmation from the NSW Fair Trading Home Building Service they have received letter from the builder re: works commenced without home warranty insurance being in place. If the determination gained from reviewing information is unsatisfactory and there has been repetition of the instances, a review should be conducted to determine whether the builder should maintain Eligibility. Serious repeat offences should bring about suspension of Eligibility and a requirement for the builder to enter the Building Contract Review Program for contracts of $50,000 and over (builder will be permitted to undertake contracts below $50,000 without alternatives being required to be adopted, unless there are other impediments applying). HWIF to receive of each builder where a satisfactory explanation has not been provided including all relevant details. Slab/Footings not Specified Credit Card Gateway failure Records show no current licence for the State of the Site location and/or the type of work Request information Seek resolution from builder prior to issue Do not proceed. Require valid, current licence Irregularities are to be pursued with the builder s Intermediary. Any identified risks should be fully investigated and where necessary, lead to a rejection of the application unless satisfied with the outcome of the investigation or the situation is rectified. Page 40 40

3.15 Cancelled and Amended Certificates of Insurance 3.15.1 Cancelled Certificates of Insurance Cancellations or alterations to Certificates of Insurance previously issued (within the home warranty scheme) may occur in circumstances where the certificate has been issued well in advance of building commencement and changes have occurred to the owner s or the developer s original plans. It is the responsibility of the builder or holding Intermediary to gather the information required for a cancellation of the Certificate of Insurance. Conditions for a Certificate of Insurance to be considered for a cancellation or amendment are: a period of no more than two (2) years has lapsed since the date of issuance of the particular certificate and the date the request to cancel is received by the Insurance Agent; and there is no contractual dispute between the builder and the homeowner; and work has not commenced and no payment has been made to the builder under the contract (or if a deposit has been paid and work has not commenced that the deposit has been refunded in full); or The Insurance Agent will assess the application for cancellation and approve or decline the application in accordance with the circumstances and the evidence provided. Documentation required for application to cancel Certificates of Insurance: Letter from builder addressed to the Insurance Agent advising the reasons for cancellation. Confirmation in writing from the homeowner (or developer) (not required from the homeowner (or developer) for builders that issue 50 or more policies per annum) stating: o o o o no building work has commenced this is to be taken as meaning that there has been no commencement of land clearance any deposit paid by the homeowner has been refunded in full the reasons for the cancellation and attaching a copy of any document terminating the contract between the building entity and the owner no claim exists in respect of the project for which the certificate has been issued and that the homeowner or developer agrees not to rely on the certificate. Statutory Declaration from the owner-builder confirming that all copies of the certificate have been destroyed and acknowledging that the owner-builder cannot and will not utilise the cancelled certificate in any future sale of the land on which the owner-builder work was undertaken. If approved, the Insurance Agent will either refund any premium to the Intermediary or instruct the issuing Intermediary to refund any premium direct to the building entity in question or, where the building entity has no holding Intermediary, refund any premium directly to the entity. The approved cancellation file is to be retained by the Insurance Agent in policy number order and is to be made available in the event of a claim. A declined application for cancellation will have all of the documents returned to the respective Intermediary for their attention. Under no circumstances is a Certificate of Insurance to be cancelled in order that it can be reissued with a new date of issue. There are important provisions under the Home Building Act 1989 where the rights and obligations of builders and homeowners are reliant on the date of issue of a Certificate of Insurance. Any request of a broker or builder or homeowner for the cancellation and reissue of a Certificate of Insurance with an amended date must be declined. Page 41 41

3.15.2 Amendments to Certificates of Insurance Amendments to Certificates of Insurance already issued can only be made where the details are of a trivial nature only, such as typographical issues, or where the contract price has changed. Under no circumstances is the date of issue of a Certificate of Insurance or names of contracting parties to be altered. There are provisions under the Home Building Act 1989 where the rights and obligations of builders and homeowners are reliant on the date of issue of a Certificate of Insurance. Any request of a broker or builder or homeowner for the date of issue of a Certificate of Insurance to be amended will be declined. As indicated in the section on Contract Variations, additional premium may be required where the contract price has increased by more than 10%. Evidence of the agreement of the builder and homeowner to the variation and the original Certificate of Insurance are required to be obtained. 3.15.3 Early Termination of the Building Contract There will be instances where a building contract between a builder and homeowner is terminated after work has commenced and/or monies have been paid under the building contract and prior to completion of the work. Where work has commenced or monies have been paid the HWIF is on risk. As such, where a contract is terminated after work has commenced (even if the amount of work carried out is minor) the HWIF is unable to cancel the policy (and even if it did it would still be on risk for the work undertaken under the original contract). Accordingly, the HWIF has determined to treat any early termination of a contract as a variation and to amend the premium to reflect the value of the works completed. The partial refund of the premium would be the difference between the premium (including GST and Stamp Duty) paid on the original contract price (including variations) and the revised premium (including GST and Stamp Duty) based on the amount of the final account/invoice. The Certificate of Insurance is to be amended (and a replacement certificate issued) to show the new contract amount (i.e. the amount of the final account/invoice). In order for the Certificate of Insurance to be amended and for a refund to occur the Intermediary should obtain the original Certificate of Insurance and provide a statutory declaration from the builder detailing the stage of works completed, the final contract value and confirmation that there is no dispute between the parties as to the value of the work performed and that there are no monies are outstanding to the Insurance Agent. If the parties are in dispute as to the final contract value it would not be possible to partially refund the premium until the dispute is resolved. The resolution of the dispute should require evidence of the final account/invoice. If approved, the Insurance Agent will either refund any premium to the Intermediary or instruct the issuing Intermediary to refund any premium direct to the party that paid the premium or, where the building entity has no holding Intermediary, refund any premium directly to the entity. The refund approval record will be retained by the Insurance Agent and is to be available in the event of a claim. 3.15.4 Certificate Generated in Error Should the Intermediary have generated the Certificate of Insurance without payment and seeks to have it cancelled, the Insurance Agent may cancel the Certificate of Insurance on the production of all copies of the Certificate of Insurance and a satisfactory written explanation from the Intermediary. The Intermediary must declare that the certificates have not been issued to or relied on by the builder or homeowner or other party. Once a Certificate of Insurance has been issued any attempt to withdraw the Certificate must be treated as a cancellation of a certificate (refer above section Cancelled Certificates of Insurance ). Page 42 42

3.16 Subsequent Applications Involving the Same Parties and/or Site Where a builder applies for a second and additional Certificate/s of Insurance for work to be undertaken at the same site and for the same homeowner (or a related person/entity or an owners corporation) a copy of the building contract, plans & specifications and scope of works must be obtained. As each Certificate of Insurance issued exposes the HWIF to the maximum indemnity under the policy it is important to ensure that the reasons for the builder/homeowner requiring a further Certificate of Insurance are appropriate. Should it be determined, after reviewing the submitted documentation, that the work is being undertaken as a variation to the original building contract (i.e. there is no new contract) then a further Certificate of Insurance should not be issued. Rather the matter should be treated as an amendment to the original Certificate of Insurance (refer to previous sections on Contract Variations and Amendments to Certificates ). Where it appears that the work to be covered by the additional Certificate of Insurance would normally be treated as a variation but the parties are entering into new contractual arrangements the reasons for doing so should be obtained. Such cases should then be referred to the HWIF for consideration and advice prior to issuing a Certificate of Insurance for the work covered by the new contract. Where it is determined that there is a new contract in place a check should be undertaken as to whether the combined total of the contracts would result in the profile limits for the builder being exceeded. If so, the builder should be advised to submit a Builder Profile Change application and an assessment of that application completed in order to determine whether the application for the further Certificate of Insurance can be approved (again the reasons for entering into new contractual arrangements should be obtained and, if necessary, referred to the HWIF). NSW Fair Trading has advised that where a builder is returning to a site to rectify defective work performed by that builder (e.g. as a result of a complaint by a homeowner or an owners corporation) that neither the statutory warranty nor home warranty provisions of the Home Building Act 1989 apply to that work. In such circumstances, an application for a Certificate of Insurance covering the rectification work must be declined. Where it is determined that the work under the original contract has been completed and the new contract covers new work legitimately not envisaged at the time of the original contract or where it had always been planned that the work be undertaken in stages (and the same builder was the successful tenderer for the next stage) then the Certificate of Insurance application may be approved. 3.17 Fraudulent Certificates of Insurance Receipt of Information Where an Intermediary receives information alleging the provision of fraudulent Certificates of Insurance by any person or entity (including a builder, developer, owner-builder, homeowner, Intermediary, staff member etc.) this must be recorded and immediately reported to the Insurance Agent. Page 43 43

4. Underwriting Reviews and Builder Monitoring Home warranty exposure needs to be under regular review and monitoring against the HWIF underwriting criteria to identify and adjust to emerging risk. The Insurance Agent will review a builder s Eligibility on a regular basis. The timing of these reviews is to be based on the apparent risk to the HWIF; however, if risk monitoring identifies emerging risk issues then an immediate review is triggered. 4.1 Programmed Periodic Eligibility Reviews Periodic Eligibility Reviews ( PER ) are programmed on a regular basis according to the apparent exposure the builder creates for the HWIF given the builder s size and situation. Table 16 below sets outs the schedule of PERs, this schedule is subject to other reviews overtaking them, which include: any modified of review requirements, as issued by the HWIF builder requesting a change to Eligibility which initiates a review Special Eligibility Reviews triggered by a risk management issue for example adverse credit, significant growth, low construction pricing and builders subject to intensive monitoring Table 16. Programmed Review Cycle Within 15 months of the issue date of the initial Eligibility, a Review is to carry out to assess whether new builder status should be maintained or whether the builder can be placed in another category (i.e. small medium major). New Builders While the builder remains in the new builder category, the builder is to be reviewed annually, with each submission due by the anniversary of the first review terms issued date. For Eligibility review purposes, if a builder participates in the BCRP, the builder is to be treated as a new builder and should be reviewed annually. Note: this requirement does not apply where the participation in the BCRP relates to a specific project and is not a condition of Eligibility. Non-Reviewed Small Builders A Periodic Eligibility Review is not required where a builder meets all of the conditions Frequency: Annual Small Builders (NSW HWIF Approved Limit $1.5M - $3M) Medium Builders (NSW HWIF Approved Limit over $3M and not a Major Builder) A full Periodic Eligibility Review is required annually, where a small builder falls outside of the New or Non-Reviewed segments. This applies to an approved NSW HWIF turnover up to and including $3M. Priority is given to: Small Builders with conditions imposed on Eligibility such as intensive monitoring, a deed of indemnity or paid up capital Small Builders that have a multi-unit approved limit. Frequency: Annual full Periodic Eligibility Review is required annually, Priority is given to: Medium Builders with conditions imposed to Eligibilities such as intensive monitoring, a deed of indemnity or paid up capital Medium Builders that have a multi-unit approved limit. Page 44 44

Major Builders Frequency: Annual Annually, based on updated information, with additional quarterly monitoring of the builder s income and expenditure for Major Project Home Builders. The agent recommends the Eligibility review date for these reviews each year. Major Builders with a condition on their most recent Eligibility assessment for home warranty with major project home builder quarterly submission required must provide their submissions within 60 days of the end of each fiscal quarter. Builders can submit these submissions online using their access authority. Brokers and Insurance Agents are also have restricted access to their clients submissions. Quarterly submission requirement will not remove the obligation for major builders to provide annual submissions. Table 17. PER Information Required by Builder Segment Information Required Small Medium Major Update of business structure, principals and builders licenses where changed Yes Yes Yes from original Eligibility application Job Costing system used (if applicable) No Yes Yes Requested home warranty turnover limit Yes Yes Yes Proposed non home warranty construction turnover Yes Yes Yes Required home warranty project limits Yes Yes Yes Principals history in building or other businesses (including adverse issues) first Yes Yes Yes time PER under HWIF scheme only Financial statements of the builder for the last 2 years Yes Yes Yes Sole Trader or Partnership Tax returns (individual or partnership) or accountant prepared and principal certified financial statements Company or Trust External accountant prepared and director certified financial Yes Yes Yes statements Copy of trust deed for trusts where applicable Yes Yes Yes Statement of financial position of principal/s or director/s Yes Yes No Statement of working capital (including for medium and major only details of Yes Yes Yes aged debtors and creditors reports) Declarations of solvency and details of any outstanding disputes or legal matters Yes Yes Yes Work in progress report of all projects under construction (including address, Yes Yes Yes name of owner, contract value, stage of work, undrawn contract value & cost to complete) Display Home Information (including address, market value, date completed No Yes Yes or stage of construction and brief description) Related Party Financial Statements (if connected by some substantive financial transaction) No Yes Yes The review documentation can also be utilised as a Builder Profile Change (if required). In the case of a request for an increased Turnover/Eligibility, an updated statement of director(s) assets and liabilities is required. Evidentiary requirements will be as required for a full Eligibility review as described in section 2. For small and medium builders, rates notices of any properties acquired since the last Eligibility assessment should be called for where appropriate. Page 45 45

The Insurance Agent will consider the results of the review in the context of the builder s existing Eligibility Profile and Terms and determine whether the builder s Profile and terms should vary. The potential outcomes from a PER could be: revised Eligibility Approval (note that increases in turnover and job limits should not be granted unless requested) revised Eligibility Conditions, including: reduced turnover or job limits the Building Contract Review Program security or additional security additional capital; release or amended Security Suspension of Eligibility (pending resolution of an outstanding issue) Cancellation of Eligibility. Once the review is completed, the Insurance Agent will advise the builder, through their nominated Intermediary of the outcome of the review and the Eligibility Profile and conditions for the builder (either confirming the existing profile and terms if unchanged or the new profile and terms if changed together with any reasons for the change). This correspondence should also advise the expected timing of future reviews. 4.2 Demarcation of Responsibility Major Builders For major builders, while the DUA rests with SICorp, the Insurance Agents underwriting responsibilities include: Maintaining a complete and up to date underwriting file Intermediary training and management regarding major accounts Quality assurance on submissions, to confirm completeness Providing complete annual PER submissions to SICorp by the due date Conducting quarterly assessments and making recommendations to SICorp on the quarterly submissions of major project home builders, and on the quarterly submissions of intensively monitored builders. Mercantile extracts & automatic mercantile alerts subscriptions on the entity and key managers Taking appropriate action when adverse, or potentially adverse, information is received about major builders, through the mercantile alerts or otherwise Preparation and collection of securities Providing original securities to SICorp and retaining a copy on file Ensuring that any conditions applied are met by the applicant Advising the applicant of the dispute escalation process, including the role of underwriting committees Licence checks Credit & BTC checks Inputting financials to BEAT Maintaining a major builder register, including Due dates for next submission, Date of last financials held, Last risk rating (BEAT & CSC) Last conditions applied, including quarterly intensive monitoring Page 46 46

Any outstanding conditions Any overdue conditions Value of securities held & names of indemnifiers Any other issues material to the risk management Providing monthly updates to SICorp, particularly regarding overdue submissions & overdue conditions When terms are issued by SICorp, to check if these terms are already met, e.g. securities already held To provide quality assurance on terms and communications issued by SICorp through the Insurance Agent Underwriting assessment of multi-unit applications for major builders, as per DUA s Facilitating meetings between SICorp & major builders, where required 4.3 Restrictive Conditions Where an existing builder is reviewed and it is determined by the Insurance Agent, at the conclusion of the assessment, that a capital injection or a deed of indemnity or other conditions of Eligibility are required to be met, then the applicant must meet the following time frames: 1. The applicant must satisfactorily meet the conditions of Eligibility within 20 business days. 2. The applicant may choose to make a submission, to the Insurance Agents Underwriting Committee, disputing the conditions or review outcome. The Insurance Agent will receive a dispute within 20 business days. The Insurance Agent s Underwriting Committee, in accordance with the Underwriting Committee procedures set out in this Guideline and the Complaints and Disputes Procedures Guideline, then considers this submission. 3. If the terms are not met within 20 business days, or a satisfactory submission to the Insurance Agent underwriting committee is not received, the applicant is provided with 10 business days written notice of Eligibility suspension. (Subject to HWIF approval if projects are believed to be under construction). 4. If the entity subsequently requests Eligibility, a new Eligibility application is required to re-assess the applicant. To facilitate the operation of 1-4 above, at the time of issuance of terms: Builder and Intermediary must be advised of the above time frames and of the possibility of Eligibility being suspended and cancelled, if the terms are not met. Applicants are advised of decision disputes processes, initiated by a submission to the Insurance Agent's Underwriting Committee. The underwriting file is to be noted accordingly. 4.4 Triggered Special Eligibility Reviews Special Eligibility Reviews are triggered where there is a major risk management issue identified including one of the following: A noticeable alteration in trends (compared to the previous 12 months) being an increase in: the number of project certificates (generally in a short time frame) requested by a builder, where there may be concern regarding the capacity of the builder the number of known incomplete projects that are outside the builder s estimated completion time frames a builder seeking to exceed or increase the approved annual Eligibility turnover (refer Turnover growth matrix. Receipt of adverse market information, including (but not limited to) delinquency in attendance on site, failure to Page 47 47

communicate with consumers, non-payment of sub-contractors or suppliers, or is not contactable on telephone numbers provided. Changes (that are of a negative nature) in trade credit days beyond the 30 day ageing category. Significant deterioration in the financial or operational circumstances (identified through interim accounts or other sources) of the builder. Where financial accounts are received and they contain specific adverse commentary related to any component of the reports. A request for a certificate that would breach the approved profile limits applied to that builder, by more than 20% of the largest project insured in the past three (3) years (after allowing for inflation impacts on construction values). Complaints including consumer complaints to the Insurance Agent and complaints notified to HWIF by NSW Fair Trading (including any disciplinary or intended disciplinary action). Court and/or Consumer, Trader and Tenancy Tribunal (CTTT) actions. Non-compliance with Court or Tribunal orders. Alerts received through credit referencing or credit monitor facilities. Dishonored and significantly overdue premium payment transactions other than innocent incidents. Adverse report by a Building Contract Review Program service provider (where applicable). Change in builder ownership (i.e. partners or directors). Change in nominated supervisor (only where the incumbent nominated supervisor ceases to work for the builder). During the Special Eligibility Review, which should be undertaken within one (1) month period, the Insurance Agent will stop issuing Certificates of Insurance, only if the issue of the certificate would be to the detriment of HWIF. The Insurance Agent will provide the builder with at least 10 business days written notice of any decision to discontinue issuing certificates together with reasons for the decision. This must include the builder to request via their Intermediary that the decision be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee To conduct a Special Eligibility Review, the Insurance Agent will obtain from the builder, through the builder s Intermediary, current information to enable the review to be completed. Generally, the information required will be the same as for a PER. Where a full Eligibility review has recently been completed and for example, updated financial statements will not be available, the Insurance Agent may use their discretion and obtain relevant available information such as the latest unaudited quarterly accounts. The outcomes from such reviews could be: no change to Eligibility revised Eligibility restrictive Eligibility Conditions, including reduced turnover or job limits the Building Contract Review Program security additional capital suspension of Eligibility (pending resolution of an outstanding issue) cancellation of Eligibility. The Insurance Agent may only suspend or cancel Eligibility where this is within their delegated authority. Where it is not within the Insurance Agent s authority, it must obtain written approval from the HWIF. Where insured projects are still under construction, Insurance Agents are to seek approval from the HWIF before suspending or cancelling Eligibility. Where it has been determined to suspend or cancel a builder s Eligibility (whether by the Insurance Agent or by the Page 48 48

HWIF), the Insurance Agent will provide the builder with at least 10 business days written notice of that decision. The reasons for the decision should be provided prior to the effective date of the suspension or cancellation. Insurance Agent will advise the builder via their Intermediary of the right of to request that the decision be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. If appropriate, the Insurance Agent may also resolve that the builder should be subject to ongoing intensive monitoring. 4.5 Builders Subject to Intensive Monitoring If the Insurance Agent identifies as a result of a PER, a Special Eligibility Review or other means that a builder previously rated as W, X or Y no longer meets the minimum requirements for a Category Y rating, for reasons such as: Currently known and on watch. Gross Margin deterioration builder may be buying projects. Creditor days extending. Escalating purchase rate of home warranty insurance contracts - gaining deposit monies to source cash. Trading Losses; deteriorating net tangible asset position. Restructuring of Groups asset transfers/quarantining assets. Strategic change in the nature/ focus of the business (relative to that traditionally undertaken). Deteriorating financial trends (liquidity, profitability); Diminished turnover. Trade Credit deterioration - terms reduced/ removed. Internet alerts i.e. Dun & Bradstreet. Change in management or ownership. Change in financial institution. Change in progress payment patterns. High Growth (refer to table 8) The builder will be considered high risk and is to be subject to ongoing and intensive monitoring while the builder remains in this category. The Insurance Agent will notify the HWIF of any Medium or Major Builder identified in this situation as soon as practical and in any case within two (2) business days of identification. The Insurance Agent will develop and document a risk management plan for any builder that is subject to intensive monitoring. The nature of the risk management plan should be suitable for the size of the builder and the builder's genuine prospects for remediation. The risk management plan is to be developed in consultation with the HWIF and following consultation with the builder and their Intermediary. The risk management plan may rely on existing strategies developed by the builder to remediate its business, provided the Insurance Agent is satisfied the strategies will achieve the objectives of the HWIF. The primary objective of the Insurance Agent will manage down of HWIF exposures and to mitigate any potential loss. Mitigation strategies developed by the Insurance Agent and incorporated into their risk management plan may include (but are not limited to) one or more of the following: managing down turnover and job number limits drip feeding issuance of policies and certificates (e.g. one off one on) requirement to use the Building Contract Review Program accepting and monitoring delivering of the builder s remediation strategies (if considered satisfactory) Page 49 49

obtaining covenants from the builder and principals of the builder requiring delivery on the builder s remediation strategies (if the strategies are considered satisfactory) cancellation of Eligibility. Satisfactory elements in the builder s remediation strategies may include (but are not limited to) one or more of the following: provision of additional capital and/or refinancing restructuring of the business cost cutting or revenue generating measures sale of the business obtaining suitable expert advice. The Insurance Agent will ensure that any decision taken is made within the Insurance Agent s Delegated Underwriting Authorities. In particular, the Insurance Agent will ensure any proposal to cancel Eligibility for a builder with incomplete project is referred to the HWIF. All such builders should be placed on a HWIF decline register. The Insurance Agent will intensively monitor these builders to ensure the builder adheres to the risk management plan and its remediation plan. The Insurance Agent will also require Medium and Major Builders to report on progress at least monthly. The Insurance Agent will review and update the risk management plan to reflect any emerging circumstances. The Eligibility of a builder subject to intensive monitoring is to be subject to ongoing review and reassessment in the light of any emerging information. As a result, the builder is not subject to the normal periodic Eligibility reviews, but the Insurance Agent will ensure that updated financial and other information is obtained as soon as it is available. Once the builder s Eligibility is no longer considered high risk (i.e. the builder meets the minimum requirements for Category X), periodic Eligibility reviews are to occur in accordance with the PER requirements. 4.6 Eligibility Profile Changes Builders seeking to change their Eligibility Profile need to complete a new profile change application form and refer to Insurance Agents for assessment. Changes to Profile can create negative financial consequences for the builder. Ramifications include changes to working capital requirements, building cycles, available resources and management. Insurance Agents should examine all factors that may be seen to affect future viability. Insurance Agents will also assess overall financing requirements for the turnover, construction type and maximum contract value sought. An Eligibility Profile Change request may be a trigger for a Special Eligibility Review if turnover limits are to be increased or adverse findings are identified during consideration. As part of this assessment, the type of construction, the type of builder base: private sector v public sector, major v small etc., cost basis: cost plus v fixed price should also be assessed. Page 50 50

5. Premium Pricing The HWIF will issue revised premium rates and/or pricing arrangements from time to time. The Insurance Agent will implement the HWIF s revised premium rates and/or pricing arrangements from the nominated effective date. The HWIF will provide the Insurance Agent with at least 40 business days notice of a revision to the HWIF s revised premium rates and/or pricing arrangements. 5.1 Builders Subject to Flat Rate Pricing The Insurance Agent may establish for major builders who have standard construction projects, such as a project home builder, an average price that applies to all of the builder s policies issued (within their Eligibility Profile). The Insurance Agent may only establish average price arrangements where the builder has had a minimum of 25 projects in the past 12 months and the nature of those projects is homogeneous. However, existing arrangements in place with the private insurers are permitted to continue subject to the price cap guarantees in place at the time. The average price is to be based on the average contract value for a builder over the past 12 months and using the HWIF premium rates and pricing arrangements weighted for the different construction types undertaken within the profile. Multi units can be included in the flat rate pricing approval, provided they are homogenous in nature over the year. Annual reviews of the flat rate pricing must examine the actual experience over the 12 months purchasing history as at 31 March each year and applied from 1 July each year. HWIF reserves the right to revise premiums for this group of builders where a general premium increase is applied other than 1 July. 5.2 Multi Dwelling Projects Pricing The multi-dwelling project premium rates apply to all projects where two (2) or more dwellings/units are being built on one site (e.g. low & medium rise buildings containing flats, units etc., villas, townhouses and similar developments). The multi-dwelling project premium rates also apply to duplex, triplex, terrace and similar developments (i.e. where there are shared services or structures such as common walls, roofing etc.). The multi-dwelling project premium rates will also apply to developments involving the new construction of a dwelling and granny-flat where a separate Certificate of Insurance is required for the granny-flat. The addition of a granny-flat to an existing dwelling will attract the standard alterations/additions (structural) rates. The rate also applies to alterations/additions to a multi-dwelling property (including high-rise residential buildings). This loading also applies to the non-structural work premium rates for work undertaken on a multi-dwelling property (including high-rise residential buildings). Free standing cottages on individual sites (i.e. without any shared services or structures) forming part of a multi-dwelling development, which are not intended to be subject to strata title or community title on completion, will attract the single dwelling rates. Page 51 51

6. Securities 6.1 Requirement for Securities A security may be required, in some circumstances, in order to protect the HWIF. A security can provide some reassurance, regarding risks identified through the Eligibility assessment process. A security can also be required when assessing the risk presented by a particular project application for a Certificate of Insurance. The provision of a security may be an option for offsetting issues of concern identified through the underwriting assessment. The principle reason for obtaining a security is to influence the behavior of the indemnifying parties in the event that the building entity experiences a deficiency in working capital or requirements for extraordinary capital expense. The intention being that the business is run with its long-term sustainability as the key objective of management. The HWIF s preferred security instruments are standard Deeds developed by the HWIF for this purpose Any variation to a standard Deed of Indemnity must be approved in advance on a case-by-case basis by the HWIF. The original security (Deeds) will be held by the HWIF. Insurance Agent ensures that the builder has provided the original security (correctly completed) to the Intermediary prior to issuing a certificate of Eligibility or activating terms. Insurance Agent will make sure that the Intermediary provides the original to the Insurance Agent in a timely fashion (refer also to below section on provision of security documents to the HWIF). The following security sources are permissible and are required when there are doubts regarding (or as a supplement towards) the Net Tangible Asset backing of the builder applicant, where that party has the financial capacity to back the security. there is a related party involvement impinging upon the risk from the related party (i.e. if an individual the provider of the indemnity should have a financial interest in the building business and if from an entity the entity should be related to the builder) there is a developer (project specific only) from the developer (or a director/s or related entity) there is a trust from the beneficiaries over 18 years of age. Table 14. Security by builder structure types Builder Structure Possible Security Individual sole trader Nil Partnership Nil Trust Adult Beneficiaries of the Trust or the Trustee Stand-alone company Director Company as part of a group Associated Company Minimum Mandatory Deed Value $50,000 (for all structure types) Deeds are not acceptable from an unrelated party or a party without management involvement in the building entity such as spouses who are not partners or directors of the business. Note that Deeds of Indemnity are not a panacea for addressing all deficiencies. Deeds effectively provide additional reserve capital to a business, which can address weaknesses in a builder s net assets or ANTA. Deeds, however, should not be used to remedy: non-financial deficiencies for example the builder s history or experience deficiencies in working capital, gross margin or profitability lack of financial capacity to support requested turnover growth. Page 52 52

The need for a deed to offset ANTA weakness can be reduced where evidence is provided of a line of credit (shown as a liability) to the business that is completely secured over assets outside of the building entity. Where a Deed of Indemnity is not an appropriate remedy, alternative remedies should be used that are more appropriate to addressing the identified deficiencies. Where a builder has a clean three (3) year trading history and a total business turnover of up to $3 million, then the directors personal position can be accepted as equity without the need to obtain a Deed of Indemnity. BEAT will automatically add the personal position to the applicant s ANTA. Circumstances where securities will be sought include: Where the builder has a deficient level of equity, due to: assets being accumulated off balance sheet, or within a related company or parent entity, or being a non-reporting subsidiary to a public company and the equity level cannot be determined. From the marketing agent, buying group licensee or franchisor company (and/or its principals) of a franchisee where the franchise agreement does not provide adequate comfort that the builder is sufficiently independent. From a developer that is not able to demonstrate to the Insurance Agent their financial capacity by being a well-established developer (that is, not a SPV) and has a record of ANTA of at least 10% of the subject builder s turnover. A project specific deed of indemnity is required where a multi-unit project is approved conditional on sufficient ANTA Where through the Eligibility or job-specific assessment or through active monitoring of all builders with current eligibilities and those with Eligibilities on hold, a weakness is identified. The ANTA of the provider of the security must be assessed. The indemnity should only be valued if the indemnifier has demonstrated sufficient financial strength and there is no evidence of poor past dealings or previous financial impairment of the indemnifier/surety or (as applicable) persons who are in a position of influence over or who take part, in management of the indemnifier/surety. A sole trader with insufficient capital may consider forming a partnership with a suitable party that does or to set up an incorporated entity with sufficient registered capital. If assets of an indemnifier/surety to which recourse may be had pursuant to the indemnity/guarantee are otherwise charged or encumbered the value ascribed to the indemnity/ guarantee should be discounted as to 100% in the dollar by the amount of the indebtedness secured on those assets. The following provides a guide for the order of preference in terms of a suitable associated party for the purposes of providing a deed of indemnity for Eligibility: 1. Related Company/Related Companies. This includes group structures where there is a central treasury function characterised by related transactions between the building entity and other entities within the group, where those entities are identified as potential indemnifiers (refer also to below section on the use of Group Trading Agreements). This also includes developers, in the case of a multi dwelling project, where the applicant building entity has a deficient level of equity, or where the equity value within the applicant entity cannot be determined. 2. Directors/Shareholders of the building entity. 3. Beneficiaries of a related trust. This is dependent on those beneficiaries having an interest in the building entity, through directorship and/or shareholding. 4. Related unit trust. This would depend on the trust deed allowing such an undertaking. 5. Related discretionary trust. This is a last resort and is only to be used as a pro active behaviour influencing mechanism. It is unlikely any financial benefit to the HWIF would be derived from such a security. If provided, such a security would not be included in the financial assessment. Page 53 53

Where a builder with an existing Eligibility has their financial position deteriorate to such an extent that their ANTA becomes less than zero, the builder is to be subject to risk management (refer section 8) and while a Deed of Indemnity may form part of the risk management strategy it is expected that a security will not be the extent of that strategy. 6.2 New Eligibilities Following Dissolution of Partnerships, Trusts or Companies Where a new Eligibility is sought for a builder who was formerly a principal of another licensed building company and where the HWIF has issued Certificates of Insurance to the other entity a Deed of Indemnity should be sought. The Deed should cover exposure of the HWIF to other past entity, in part as security for any issues that may have led to the dissolution of the former licensee. 6.3 Evidence and Value of Securities Original Deeds of Indemnity and any related documents are to be obtained. The Insurance Agent will assess the financial position of the indemnifier (including its ANTA, history of performance), whether the undertaking is at arm s length, the proposed indemnifier is informed and has a commercial relationship with the builder. 6.3.1 Deeds as a Condition of Eligibility As a function of the shortfall of the builder s ANTA against the standard of 3% of Total Business Turnover OR 10% of Approved Turnover, whichever is the lesser, as assessed by the Insurance Agent at the time of application assessment. Assets are assessed at 80% of their net value. To illustrate, for a builder with ANTA of $100,000, if: Total Business Turnover is $10 million (3% = $300,000) Approved Turnover is $9 million (10% = $900,000) Total Business Turnover is used in assessing the ANTA and subsequent value required under a deed. total Business turnover is $10 million ANTA is calculated as $100,000 ANTA short-fall of $200,000 (to bring ANTA to 3% of Total Business Turnover or $300,000) deed valued at 80% of calculated value indemnity required $250,000 ($200,000 divided by 0.8). 6.3.2 Project Specific Deeds The value is to be 10% of the Contract Value or 50% of the maximum loss available under the Home Building Act for the project whichever is the lesser. 6.3.3 Multiple Indemnifiers It is intended that indemnifiers be jointly and severally liable for any amount sought to be recovered under the Deed. Accordingly, where there are multiple indemnifiers for the one builder only one Deed of Indemnity form can be submitted on behalf of the builder (using the Multiple Party version of the Deed). It is not permitted for different indemnifiers to provide separate deeds (including separate amounts). Additionally, as the most recent Deed would result in all prior deeds being terminated the use of separate Deeds is not appropriate. Page 54 54

6.4 Group Entities & Group Trading Agreements (GTA) It is the overriding intention of HWIF, without variance, that all businesses, where there is a key manager association (partner, director, licensed supervisor or shareholder) are to be assessed by the same Insurance Agent. The applicant must either cancel or switch all current Eligibilities to the one agent before any assessment can commence. A Group Trading Agreement (GTA) taken across operating entities within the group permits a consolidated assessment to be conducted. Where a consolidated assessment is conducted a GTA will be a condition of eligibility approval across all entities within the assessed group. In circumstances where there is evidence of related loans providing working capital and equity across entities controlled by common interests a GTA will be mandatory across all entities contributuing or recieving a benefit from any related loan activity (also referred to as Group Treasury arrangements). Where a consolidated group assessment determines that the ANTA requirements of eligibility as set out in this Guideline are met no other form of indemnity will be required. Where the consolidated assessment identifies a deficiency in ANTA, additional Deeds of Indemnity will be required to meet the eligibility requirements as set out in this Guideline. The decision to obtain a GTA is left to the professional judgement of the underwriter. The decision is subject to the normal Delegated Underwriting Authorities (DUA) and can be reviewed, on escalation, by the relevant underwriting committee. The following properties may identify the need for a group assessment and subsequent GTA: Is there a Treasury function (related loans activity) that moves funds between group members? Does the building entity/entities exchange management or licensing fees with other related entities? Is there any evidence of internal cost recovery between related entities? Do the assets in a non building related entity provide security for an external loan facilty in the building entity? Are there fluctuations in related loan balances from year to year (particularly those shown as current assets or liabilities)? Are there more than one entity controlled by common interests that holds or is seeking eligibility? The outcome of a group assessment should establish an aggregate turnover limit being offered to the group. A GTA allows the sharing of eligibility limits for group entities within the aggregate approved limit without further financial assessment. The GTA: allows the conduct of a more appropriate group risk assessment. Within a group, the financial health of an entity is inextricably linked to that of the group to which it belongs provides a level of assurance that corporate groups will meet the ongoing statutory warranty obligations of an applicant entity, in the event that entity becomes insolvent or is wound up may address, equity concerns within the applicant entity, 6.5 Review of Securities The Insurance Agent will review and if necessary amend security requirements attached to a builder s Eligibility each time the Insurance Agent completes an Eligibility review. Where a Deed is no longer required it may returned to the builder with the approval of HWIF. Following the release on 16 October 2013 of new versions of all Deeds of Indemnities utilised by the HWIF the following provisions apply: In all instances where a deed has previously been provided on behalf of a builder (for the purposes of Eligibility) that deed should be refreshed/replaced by the new version of the Deed at the next Eligibility review. The provision of a new deed will automatically terminate any prior Deeds provided on behalf of the builder (for the purposes of Eligibility). It will not be necessary for such prior deeds to be returned to the indemnifiers. Page 55 55

6.6 Release of Securities If the builder (and their Intermediary) consider the builder s financial position (or other circumstances) has improved, the builder may request an Eligibility review. The builder is to provide all the relevant information to enable a full Eligibility review to be completed. Builders are not entitled to seek such a review more frequently than annually The decision on whether to release a deed is driven by whether the minimum ANTA conditions have been satisfied. The calculation method is as follows: When arriving at final ANTA calculation, the past two (2) year ANTA must be considered. The final ANTA figure will be the lesser of the most recent assessment or the average of last two financial year ends. This approach is used in determining the ANTA for all assessment types, including requests to release Eligibility deeds of indemnity (not job specific deeds) If the Insurance Agent is satisfied, following the Eligibility review that the security is no longer required the Insurance Agent will seek approval from the HWIF for the return of the security. 6.7 Expiry of Securities Securities held by the HWIF under the home warranty insurance scheme, if not otherwise released at an earlier date following a review, are drafted to automatically expire: For a Deed of Indemnity attached to an Eligibility three (3) years after practical completion date of the last job (building work) for which the security was applicable. For a project-specific Deed of Indemnity 78 months after the practical completion date for the project to which the Deed relates. Page 56 56

7. Declinature, Cancellations, Suspensions and Modifications of Eligibility 7.1 General Builders who pose an adverse risk and thus may have Eligibility declined, cancelled, suspended or have conditions imposed, based on any of the following: generally, the outcome of a Special or Periodic Eligibility review currently insolvent does not have a current builder licence currently unprofitable/negative cash flow underwriting matrix indicates decline accrex/btc adverse credit listing, past abuse of staff threatening and intimidating behavior towards homeowners more than three (3) defect claim notifications (but with consideration to the size of the builder and the number of completions it undertakes over the period) advice and evidence that homeowners complaints have not been addressed (including non-complied court or Tribunal orders and advice by NSW Fair Trading of increased complaint occurrence) trading through other entities claim triggers have been activated licensing authority sanctions (including advice by NSW Fair Trading of disciplinary action or intended disciplinary action) Industry Association expulsion failure to maintain CPD evidence of non-disclosure evidence of poor workmanship criminal record dual insurance court actions, collections, defaults, court actions against directors/owners/partners/trustees past insolvencies or involvement in building companies that have been liquidated/wound up builders who have a past adverse claims history for any warranty work failure to provide additional information that is fairly and reasonably requested by Insurance Agents of HWIF. The above applies to any director, principle or key manager of the applicant entity. Generally, a nominated supervisor should be deemed a key manager of a building entity, particularly if this is a small or medium builder. This is particularly where the directors, in their own right, have insufficient experience to support the requested project limits. A Builder whose Eligibility rating category would be declined if it was re-assessed, would be subject to Eligibility cancellation, unless subject to intensive management due to the HWIF exposure to jobs at site. Page 57 57

7.1.1 What is a Key Manager? A key manager includes anyone who directs the critical decision making of the applicant business, or is likely to exert influence, on the business. The key managers include, but are not limited to: Directors Material shareholders (including parent entities and key managers of parent entities) Nominated licensed building supervisors Senior Managers Chief Executive Officer (CEO) Chief Financial Officer (CFO) Sales Managers Where it appears that a person who is not a director etc. of an applicant business but as a key manager may direct the critical decision making or is likely to exert influence on other key managers then the role of that person including any adverse history must be taken into account as part of the Eligibility assessment. In determining whether a person or entity is a key manager of a business guidance can also be sought by reference to the definition of a close associate contained in the Home Building Act 1989, which provides: a person is a close associate of an applicant for, or holder of, a contractor licence or of an applicant for the renewal or restoration of such a licence if the person: is a partner of the applicant or holder, or is an employee or agent of the applicant or holder, or is a corporation, or a member of a corporation, partnership, syndicate or joint venture, in which the applicant or holder or a person referred to above has a beneficial interest, or bears a prescribed relationship to the applicant or holder, or is a corporation that is a subsidiary (within the meaning of the Corporations Act 2001 of the Commonwealth) of the applicant or holder, or holds or is entitled to exercise, in respect of the applicant or holder or the business of the applicant or holder, any other relevant financial interest, relevant position or relevant power. a person bears a prescribed relationship to an applicant or holder of a licence if the relationship is that of: a spouse, or an existing or former de facto partner, or a child, grandchild, sibling, parent or grandparent, whether derived through the above circumstances or otherwise Note. De facto partner is defined in section 21C of the Interpretation Act 1987. relevant financial interest means: any share in the capital of the business, or any entitlement to receive any income derived from the business, whether the entitlement arises at law or in equity or otherwise. relevant position means the position of director, manager, and other executive positions and secretary, however those positions are designated. relevant power means any power, whether exercisable by voting or otherwise and whether exercisable alone or in association with others: to participate in any directorial, managerial or executive decision, or to elect or appoint any person to any relevant position. Page 58 58

7.2 Suspended Eligibility The Insurance Agent will suspend Eligibility where the builder (and/or their Intermediary) has not provided the necessary information to allow completing a special or periodic Eligibility review in a timely manner. The Insurance Agent is also to consider that builder has not responded to previous requests for the required information or otherwise the builder is not co-operating with reasonable requests from the Insurance Agent. Insurance Agents are to provide entities with at least 40 business days written notice that a Periodic Eligibility Review (PER) is required. Prior to suspending Eligibility, the Insurance Agent will formally in writing put the builder on notice, in writing, that the builder s Eligibility will be suspended if the required information is not provided by a specified date. The advice is to be issued at least 10 business days in advance of the specified date and to list all outstanding information to be provided by that date and advise of the right of the builder to request via their Intermediary that the decision be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. The Insurance Agent may also suspend a builder s Eligibility where the Insurance Agent has received information which, if confirmed, would likely lead to cancellation, while the Insurance Agent investigate and confirms or otherwise the veracity of the information. Where it has been determined to suspend a builder s Eligibility (whether by the Insurance Agent or by the HWIF), the Insurance Agent will provide the builder with at least 10 business days written notice. The decision should include the reasons for the decision prior to the effective date of the suspension and advise of the right of the builder to request via their Intermediary that the decision be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. Policies and Certificates of Insurance cannot be issued against a suspended Eligibility until the successful Eligibility review is complete. A suspended Eligibility may be reinstated as a current Eligibility following successful completion of a review. 7.3 Cancelled Eligibility A cancelled Eligibility is one, which has been revoked, and the builder is no longer able to use the Eligibility to obtain Certificates of Insurance. The Insurance Agent should without notice cancel a builder s Eligibility where the builder: is no longer licensed (i.e. the licence has been surrendered by the builder or suspended or cancelled by NSW Fair Trading or has expired for longer than three (3) months and as such is unable to be renewed or restored) is insolvent (refer to definition in Appendix C) ceases to exist for example has died (for an individual) or has been wound up or deregistered (for a company) or the partnership has been dissolved. Where a licence suspension is lifted by Fair Trading and/or an expired licence is reissued by Fair Trading following a new application by the builder, Eligibility should not be reinstated without a new application. The assessment of the new application should take into account the reasons for the licence suspension or expiry. Where the licence expired because of an oversight and has been reissued within 12 months of an Eligibility assessment/periodic Eligibility review the approval of the HWIF can be sought for reinstating Eligibility without a new assessment. Where Eligibility has been cancelled because of insolvency and a security (Deed of Indemnity) is held on behalf of the builder all indemnifiers are to be notified of the insolvency and advised that the grounds for lodging a claim under all policies issued for work undertaken by the builder have now been activated. A builder s Eligibility may also be cancelled where following a special or periodic Eligibility review of the builder that it is considered in the best interests of the HWIF that the builder s Eligibility should be cancelled. In the event a cancellation is to proceed, the decision to cancel Eligibility must be made under the relevant authority Page 59 59

level within the Insurance Agent. The Insurance Agent will also provide the builder with at least 10 business days written notice of that decision. The reasons for the decision should be provided prior to the effective date of the new Eligibility and advise of the right of the builder to request, via their Intermediary, that the decision be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. 7.4 Modification of Existing Eligibility Profile and Terms Following a special or periodic review or otherwise, the Insurance Agent may determine to modify the existing Eligibility Profile and Terms for a builder (subject to the application of relevant delegations and authority levels). The Insurance Agent will advise the builder, through the builder s Intermediary, of their new Eligibility Profile and Terms. Where the change to the builder s Eligibility Profile and Terms is to the benefit of the builder, the change is to have immediate effect, including to any applications for Certificates of Insurance currently on foot. Where the change to the builder s Eligibility Profile and Terms is to the detriment of the builder, the Insurance Agent will provide to the builder at least 10 business days written notice of that decision. This must be provided prior to the effective date of the new Eligibility and advise of the right of the builder to request, through their Intermediary, that the decision be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. The reasons must be consistent with the underwriting guidelines and where appropriate refer to the general underwriting criteria relied upon for the decision. The Insurance Agent may continue to issue Certificates of Insurance that fall within the previous Eligibility Profile during the notice period; unless the Insurance Agents considers continuing to issue Certificates of Insurance would be to the detriment of HWIF. 7.5 Communication Communication should be clear to the Intermediary acting on behalf of the builder so they can fully handle all queries with the builder. The Intermediary must ensure that they understand the issues and requirements before communicating with builders. The onus in on the Intermediary to seek clarification from the Insurance Agent as required. The names of individual Underwriters are not to appear on the decline, suspension or cancellation letter. 7.6 Escalation and Disputes If the builder is not satisfied with the way any matter has been handled, their concerns can be escalated initially to the internal Underwriting Committee of the Insurance Agent with further escalation to the HWIF s Underwriting Committee if needed. The letter notifying the builder of the suspension, cancellation, or condition of Eligibility is to refer to the escalation and disputes process. Refer to the HWIF s Complaints and Disputes Procedures Guideline for a detailed guideline on the handling of complaints and disputes in relation to underwriting decisions involving Eligibility and Certificates of Insurance. Page 60 60

8. Risk Management Risk assessments may occur during both the Eligibility assessment process and the certificate application process in respect to Refer risks. 8.1 Active Monitoring of Risks The purpose of this monitoring is the early identification of builders whose financial or operational circumstances have changed significantly from the position as at the last Eligibility review, and where identified, to actively manage the builder to minimise the risk to the HWIF and the impact on homeowners. The Insurance Agent will monitor, at a minimum: quarterly income and expenses (generally for intensively monitored builders) complaints lodged against builders with the Insurance Agent (or the HWIF) claims and loss notifications lodged with the Insurance Agent (or the HWIF) ]all indemnifiers should be notified of any claim or loss notification] disciplinary action/determinations by NSW Fair Trading Court/Tribunal actions commenced against the builder (whether for debt recovery or other reasons) reports from Building Trade Credit automated alerts and reports from a suitable mercantile agent (e.g. Mercantile Agency or similar) reports from Building Contract Review Program service providers significant changes in ownership adverse publicity surrounding the builder anything abnormal noted during a normal programmed review anything abnormal identified during the certificate referral process. Additionally, the following may serve as a trigger for action: premium payment dishonoured not immediately rectified. industry feedback including informal advice and anonymous tips. aged list of creditors, subcontractors and debtors. bank facilities letter and written confirmation from bank that not all covenants are being met. Page 61 61

9. Distribution and Advocacy The objectives of consistency and even-handedness for the NSW Home Warranty Insurance scheme provide a right for all Intermediaries to advocate on behalf of builders. It is the Insurance Agent s responsibility to make decisions without any consideration of market pressures or broader intermediary relationships. A key role of an Intermediary is to advocate on behalf of their clients. Appropriate advocacy will assist in an informed decision to be made by an Insurance Agent based on a complete submission as required under this Guideline. The Intermediary must disclose all matters material to the eligibility assessment in their possession and knowledge. This includes seeking approval for an elibilty profile that will represent the builder s home warranty insurance requirements for the next 12 months (not for a lesser amount which will knowingly require increasing within the following twelve (12) months). The Intermediary is required to communicate clearly and in a timely manner the HWIF s requirements and decisions as well as assist in obtaining information that is necessary for a HWIF Insurance Agent to conduct risk assessments and to monitor and manage ongoing risks. The Intermediary is to help minimise unnecessary disruption to projects due for commencement and identify such concerns to the Insurance Agent as appropriate. Appropriate advocacy by Intermediaries does not include attempting to influence decisions of Insurance Agents on behalf of the HWIF by reference to the overall and/or particular business relationships between the Intermediary and Insurance Agent. In providing communication to builder clients, including any requests for further information, the Intermediary should always ensure they have a clear understanding of the reasons behind the requirements in order to allow effective communication. In order to carry out this function effectively and efficiently, an Intermediary is to be very familiar with the following: HWIF current published Underwriting Guidelines the requirements for new eligibilities, including documentation requirements and the minimum financial benchmarks the requirements for Periodic Eligibility Reviews, including frequency cycles and documentation requirements communications and directions made by the Insurance Agent or HWIF processes and requirements in issuing Certificates of Insurance. During the actual assessment process, Insurance Agents are encouraged by the HWIF to deal directly with builders where clarity or further particulars are required The intent of direct communication is to ensure; decisions are made on the most contempary information time delays are minimised builders are given direct access to Insurance Agent staff completing the assessment. As a courtesy Insurance Agents should copy the Intermediary into communications between the Agent and builders. 9.1 Reserving Reserving is the term given when, if approached to insure the same business by two (2) or more different Intermediaries; an insurer selects to provide a quotation to one of those Intermediaries exclusively. In those circumstances, the insurer has Reserved for the Intermediary to whom it elects exclusively to quote. Although this Guideline is seeking to drive consistency, there may be circumstances where Intermediaries request Insurance Agents to reserve if they do not wish their competitors to have access to the terms and conditions that the Insurance Agent provides. Page 62 62

The Insurance Agent is not to reserve terms and must provide terms to the Intermediary who is holding a current and valid letter of appointment or authority to seek terms from their builder client. 9.2 Credit Terms and Application of Premiums to Policies Intermediary Responsibilities The Insurance Agent will ensure that Intermediaries comply with the credit terms agreed in the HWIF template distribution agreement. For the avoidance of doubt, where a Certificate of Insurance has been provided to any party, by any means, by the Intermediary, the premium must be remitted to the Insurance Agent by the Intermediary within the agreed credit terms. The Intermediary must do this regardless of whether the Premium and Tax on Premium has in fact been received from the Builder or Owner-Builder by those dates. Where an Intermediary has generated a certificate, without providng a copy to any party by any means, and the builder no longer requires it, the certificate is to be cancelled without formal cancellation procedures applying. 9.3 Change of Intermediary and Insurance Agent Protocol A change in Intermediary or Insurance Agent will not alter the HWIF s terms and conditions unless the builder provides additional information. Otherwise, common terms and conditions of Eligibility will continue to apply to the builder (including scheduled Eligibility reviews). 9.3.1 No Change of Insurance Agent A Letter of Appointment (LoA) must be obtained and the Insurance Agent will advise the previous Intermediary of the new arrangement in writing. The new Intermediary must be provided with the Eligibility profile, conditions of Eligibility approval and any outstanding review requirements. 9.3.2 Change of Insurance Agent A switch requiring a change in Insurance Agent will not be permitted where an assessment (i.e. new application, profile change request or a review) is in progress. will not be permitted where a special Eligibility review has been requested. may be permitted where a builder has not responded to a request for a periodic Eligibility provided the previous Eligibility review request is treated with urgency by the new agent. An assessment by the holding agent is in progress (including a scheduled or special review, new application and profile change request) where: terms have been offered by the holding Insurance Agent but have not yet been met by the builder. The builder is required to meet the conditions before the switch can be implemented. the builder wishes to dispute terms that have been offered by the holding Insurance Agent. The builder is to escalate the decision to the holding Insurance Agent s underwriting committee, and the issue required is to be resolved, prior to the switch being implemented. the builder has been offered and accepted terms from the holding agent and wishes to apply for an immediate change of those terms (e.g. increase in approved turnover, change in profile, change/removal of terms). The builder is to escalate the decision to the holding Insurance Agent s underwriting committee, and the issue resolved, prior to the switch being implemented. Page 63 63

Where a builder is not satisfied with the outcome of the Insurance Agent s underwriting committee process they are able to escalate the matter to the HWIF s underwriting committee for further consideration. Upon the HWIF approving the switch and providing BEAT access the new Insurance Agent is required to undertake an Eligibility review based on up to date financial statements (at least 6 months later than the latest assessed accounts). An Eligibility review is not required where a builder has been reviewed by the original holding Insurance Agent within the prior 3 months based on up to date financial statements at the time of switching to the new Insurance Agent. Once the switch is authorised the holding agent will cancel that builder s Eligibility without notice. 9.3.3 Change of Insurance Agent for Common Directorships and Group Structures It is the overriding intention of this section, without variance, that all businesses, where there is a key manager association (partner, director, licensed supervisor or shareholder), are to be assessed by the same Insurance Agent. The applicant must first cancel or switch the current Eligibility in order to apply through a different insurance agent where associated eligible entities or group structures are involved. If there are related entities that are licensed in NSW or are on BEAT, then the application for any builder cannot proceed until: A group assessment must be concluded relevant deeds of indemnity are provided Insurance Agent has advised the HWIF of the outcome of the assessment. It is absolutely critical to identify the related eligible entities and conduct group assessments through one Insurance Agent. Refer also to the section on Group Trading Agreements 9.3.4 Change of Insurance Agent for Major Builders In order for major builders to switch Insurance Agents all of the most recent Eligibility review documentation, including up to date financial statements, must be provided to the new agent before the switch is authorised. If the broker has changed, a letter of appointment is also required. Upon being provided access to BEAT by the HWIF, the new agent will be provided with: Most recent HWIF assessment that has already been conducted by the holding agent Last annual submission assessment Approved turnover Used turnover Project limits Outcome of the last financials assessed by the holding agent Conditions of Eligibility List of current projects on risk to allow management of run-off turnover Confirmation that the Eligibility is cancelled. All claims notifications Page 64 64

9.3.5 Builders Returning to Original Agent If a builder was initially assessed by the original holding agent then, as required, the new agent must offer those same terms. Where the builder wants to return to the original agent then again the terms initially provided will remain in place. However, if the builder was re-assessed by the new agent on new up to date information then the most recent terms offered would apply in the event of the builder returning to the original agent. 9.3.6 Builders in the Building Contract Review Program (BCRP) Where the original holding Insurance Agent has placed a builder in the BCRP, as a general condition of Eligibility, the same condition must be applied by the new agent. Should the builder want to have the condition removed following the switch the builder would need to demonstrate that they have completed a minimum of three projects as required in the BCRP refer to the section of this Guideline on the BCRP dealing with periodic reviews of builders in the BCRP and exiting the Program. Page 65 65

10. Underwriting Committees 10.1 Insurance Agent Underwriting Committee Each Insurance Agent is to establish and maintain an underwriting committee. Matters referred to the Insurance Agent s Underwriting Committee include: All underwriting decisions made by the Insurance Agent that are disputed by a builder Underwriting decisions requiring consideration of (relevant) factor(s) not expressly dealt with by the Underwriting Procedures Guideline Underwriting decisions relating to high risk builders, i.e. those that are or may be required to be (depending on the view taken by the Committee) subject to intensive monitoring Any other matter determined by HWIF. At least 10 business days' notice is given to a builder where an Insurance Agent proposes to cancel, suspend or adversely modify an Eligibility approval. The Insurance Agent will advise the builder of the decision and reasons. 1. A complaint by a builder in relation to an underwriting decision concerning a builder s Eligibility for home warranty insurance or the issue of a Certificate of Insurance (project certificate) should in the first instance be submitted to the Insurance Agent via the builder s Intermediary. 2. If the Eligibility approval, conditions or denial outcome is unacceptable to the builder they, can then request via their Intermediary that it be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. Where the Insurance Agent s Committee reviews a dispute raised by a builder, the Committee is to consider the matter on its merits based on all the relevant information available. This includes any further information submitted to the Committee by the builder, following notification of the original decision. Refer to the HWIF s Complaints and Disputes Procedures Guideline for a detailed guideline on the handling of complaints and disputes in relation to underwriting decisions involving applications for, or a review of, Eligibility and applications for a Certificate of Insurance (project certificate) for a specific project. The Guideline also sets out the provisions for the establishment, constitution and operation of Underwriting Committees by Insurance Agents and the HWIF and the process for escalating disputes to the HWIF. 10.2 HWIF Underwriting Committee The HWIF has established and will maintain an underwriting committee the HWIF s Underwriting Committee. The HWIF s Underwriting Committee includes representatives of the HWIF, who will also provide the chair of the committee. The committee will also have a representative from each Insurance Agent and two (2) industry representatives (each with a reserve) as nominated by the Master Builders Association of NSW and the Housing Industry Association NSW Division. The Underwriting Committee will not convene without two (2) industry representatives participating. The HWIF s Underwriting Committee is to operate as a committee of review consisting of industry underwriting experts and builders, constituted by the HWIF to; review the builder challenged conditions of Eligibility by insurance agnets Page 66 66

review decline decisions by insurance agents review all additional information provided by the builder to mitigate adverse decisions make recommendations to the HWIF The HWIF s Underwriting Committee will also be responsible for the review and recommendations to the HWIF of changes to the Underwriting Guidelines and Underwriting Procedures Guideline as well as consideration of other underwriting matters and related processes. The HWIF may in its absolute discretion, determine an underwriting matter without first having received a recommendation from the HWIF s Underwriting Committee. Situations where the HWIF may act without a recommendation include (but are not limited to) where: an urgent response is required; the decision does not comply with the HWIF s Underwriting Procedures Guideline; the HWIF s Underwriting Committee is unable to agree on a recommendation; the HWIF is concerned, on reasonable grounds, that the Committee or a member of the Committee may be prejudiced in relation to a particular matter. The HWIF Underwriting Committee will only review the specific reasons for the decision being disputed (i.e. while the reasons for a declinature will be reviewed, no new reasons for the declinature will be considered). The HWIF s Underwriting Committee will meet as required. It shall make its Eligibility determinations having regard to prudent insurance industry practice, having received input from the Insurance Agent. Where a Committee member has a conflict of interest in any disputed matter, they must abstain from decision-making of the particular matter. HWIF s Complaints and Disputes Procedures Guideline provides further detailed guidelines on the handling of complaints and disputes in relation to underwriting decisions involving applications for, or a review of, Eligibility and applications for a Certificate of Insurance (project certificate) for a specific project. The Guideline also sets out the provisions for the establishment, constitution and operation of Underwriting Committees by Insurance Agents and the HWIF and the process for escalating disputes to the HWIF. Page 67 67

11. Other Special Underwriting Considerations 11.1 Kit Homes The scheme does not provide cover for suppliers of Kit Homes but cover is required for contracts, which include the erection/construction of such homes, subject to existing minimum threshold values. 11.2 Marketing Groups and Franchises Of central importance to the analysis of a group member is that the heads of agreement should be able to evidence that the builder has control over its business, yet is able to source/receive in improved business support. The Insurance Agent should understand what support is offered to HWIF in the event of a group member becoming insolvent. There should also be consideration of the degree of dependence on the parent group to ascertain whether the financial position of the group or franchise licensee needs to be assessed. The Insurance Agent may seek a Deed of Indemnity from the group or licensee company (and/or its principals) as an added precaution. Should any of these requirements not be to the satisfaction of the Insurance Agent, the builder s application is assessed as a Category Y or Z with additional conditions applied. 11.3 Tax File Numbers The Intermediaries Insurance Agent should remove Tax File Numbers (TFN) from the information supplied by or on behalf of builders. All TFNs are to be blacked or whited out by Intermediaries so that the TFNs cannot be identified. Page 68 68

12. Building Contract Review Program ( BCRP ) 12.1 Underwriting Considerations The Building Contract Review Program (BCRP) replaced the former managed builder program (MBP) from 1 July 2013. The BCRP aims to assist new entrants to the building industry, as well as existing small to medium builders, to obtain Eligibility (or home warranty cover for a specific project) where the builder is unable to provide suitable evidence of experience in the proposed building activity. The BCRP is intended to be a transition phase and builders can apply in future to have the condition removed. It is expected that a new builder will participate at least three times in the BCRP before being permitted to contract for similar projects without the program. The reports issued by the BCRP service providers will be used during all Eligibility reviews. The participating builder will be provided with a copy of all BCRP final reports. Subject to minimum Eligibility requirements having been satisfied, builders may be required to engage a BCRP service provider for contracts of $50,000 and over (or such higher threshold determined by the Insurance Agent) as a condition of Eligibility or approval for a specific project. The BCRP must be used as a condition of Eligibility in the following instances (where all other relevant financial and non-financial considerations are satisfactory): where the builder has never contracted and successfully completed a new single dwelling or alteration project for a homeowner; where the builder is proposing to contract a larger or more complex project than the builder s experience supports; where the builder has never before contracted with a developer and successfully completed a multi-unit project (as the multi-unit contractor or key manager within a building business) The BCRP is also appropriate where the Gross Margins of the builder are an issue of concern. The program can assist a builder to correctly price contracts and test actual cost against budget. Under the BCRP builders are required to participate in a process whereby the contractual arrangements for a project (including scheduled payments) are reviewed and approved, costings checked; residential building work inspected and, where appropriate, progress payments endorsed. The Insurance Agent will not issue a Certificate of Insurance to a builder required to participate in the BCRP for a project where the contract price is $50,000 or over (or such higher threshold as determined by the Insurance Agent) until: a BCRP service provider selected from the provider panel has been appointed by the builder in respect of that project; and the BCRP service provider notifies the Insurance Agent (via the Intermediary) that the project is to be covered by the provider s program; and the BCRP service provider confirms to the Insurance Agent (and also via the Intermediary) that: the contractual documentation for a project has been examined and assessed as satisfactory; and the builder has provided a detailed budget which provides a gross margin that is reasonable for the project requirements, type, size and value the BCRP service provider is also to determine (and advise the Insurance Agent and Intermediary) the number of site and off-site construction reviews required, taking into account the nature of the project. (The intent is to ensure that the builder's supervision and contract administration is appropriate and that the project is running to budget and contracted completion date.) Page 69 69

12.2 Outline of BCRP Eligibility and Certificate Process 12.2.1 Eligibility 1. Builder applies through broker/intermediary for Eligibility. 2. In cases where the Insurance Agent is not satisfied that the builder fully meets the Eligibility criteria there may be a requirement for the builder to participate in the BCRP for projects with a contract price of $50,000 or more (or such higher threshold as determined by the Insurance Agent). 3. Builder accepts Eligibility conditions (including participation in the BCRP). 4. Eligibility is granted subject to a condition requiring the builder s participation in the BCRP for each project contracted by the builder with a contract price of $50,000 or more (or such higher threshold as determined by the Insurance Agent). 12.2.2 Certificates of Insurance 1. Builder selects preferred BCRP service provider from provider panel and accepts quotation. 2. Builder submits contract documentation and detailed project budget to the BCRP service provider. 3. BCRP service provider reviews and confirms that the contract documents [including construction period] are appropriate and the project budget and scheduled progress payments are reasonable. The service provider also determines the number of builder performance reviews (site visits and remote site visits). Where the service provider is unable sign off on these components or if work has commenced (or payment made to the builder) under the building contract the service provider is to notify the Insurance Agent. 4. BCRP service provider notifies Intermediary and Insurance Agent of confirmation of appropriateness of contract documents and reasonableness of the project budget, scheduled progress payments, and provides a schedule of builder performance reviews. 5. Intermediary applies [on behalf of builder] to the Insurance Agent for a Certificate of Insurance for the project attaching the BCRP service provider s confirmation and builder performance review schedule. 6. Insurance Agent approves the issue of a Certificate of Insurance for the project. 7. The BCRP service provider undertakes builder performance reviews during project. 8. On completion of the final review, the BCRP service provider confirms that the project has been completed and forwards a final report to the builder and Insurance Agent. 12.3 Overview Operation of Building Contract Review Program A competitive tender has been utilised to select and establish a panel of BCRP service providers from which builders may choose. The BRCP providers are to deliver all of the following components of the program for each engagement. 12.3.1 BCRP Component 1 Contract Document Review Reviewing contract documentation for each project to ensure that: the correct parties to the residential building contract: site address etc. are identified; the correct name and licence number of the builder's trading entity is shown on all documentation (i.e. name on building contract, certificate of insurance application and licence is the same); the licence held by the builder's trading entity covers all the work being contracted; the building contract terms do not create a commercial risk for the completion of the project because of unfair terms, provisions etc. (including contracts with developers and architect administered contracts); Page 70 70

the project application for home warranty insurance is consistent with the BCRP service provider's understanding of the project; and review the project's construction schedule provided by the builder to ensure that it is appropriate for the type and complexity of the project. 12.3.2 BCRP Component 2 Reasonableness of Budget and Progress Payments Ensure that the builder provides a detailed budget, providing for a gross margin that is reasonable for the project requirements, type, size and value; Adequately test the builder's detailed budget completeness and realistic costs including contingency allowance. Verify as much as possible likely contingencies including cost erosion and wage assumptions; and Review and confirm the scheduled payments under the building contract directly relate to the progress of work carried out at each stage that a payment is scheduled (i.e. progress payments do not exceed the cost of work performed and materials supplied under the contract plus margin). 12.3.3 BCRP Component 3 Builder Performance Review Schedule Determine the number of reviews (site visits and remote site assessments) that are required to be completed, taking into account the nature of the project (and as determined by the HWIF), in order to ensure that: the builder's supervision of the project construction works is of an acceptable industry standard; and othe project is progressing to contractual completion date and budget. Site visits require attendance at the project site by the BCRP service provider. Remote site assessments do not require site assessment. The service provider must review sufficient information and make any necessary enquiries. The completion of a remote site assessment can include (as an example) a review of project photographs or relevant documentation and phone enquiries with the builder. Site visits and remote site assessments do not reflect the mandatory certification inspection dates; rather they are to be determined based on the specific project and the requirements under component 4 of the BCRP. 12.3.4 BCRP Component 4 Builder Performance Review Obtain a copy of the certificate of home warranty insurance for the project from the builder and check that all details correspond with the contract and the licence of the builder's trading entity; Undertake reviews as determined under BCRP Component 3 - Builder Performance Review Schedule; At the time of each site visit or remote site assessment: review all scheduled progress payments invoiced to determine that progress claims were appropriate; review all third party certificates (including engineers' inspections, mandatory PCA inspections, trade compliance certificates etc.) issued since the previous BCRP review; review contract variations ensuring they are in writing and properly costed; review progress in accordance with the project construction schedule and terms of contract and investigate reasons for any significant delays; review the builder's competence in site supervision for all works carried out since the previous report, and any areas previously identified as a concern; including: 1. set out and levels 2. sequencing of trades Page 71 71

3. general standard of finish 4. frame integrity 5. cavity drainage integrity, external weep holes and termite barrier integrity 6. sill and window flashings 7. wet area treatment 8. stormwater disposal, and 9. future integrity of footings against drainage and other works still required to be completed. For each site visit or remote site assessment prepare a report and include dated photographs, any concerns (including over items 1 9 above) and notes covering an observation of the following: general site presentation; work flow of trades and materials; and competence of the trades and appropriateness of the materials being used. Immediately report to the Insurance Agent any concerns over the builder's competency to complete the project (including concerns as to time delays, standard of work performed, any evidence of cash flow issues and where payments have been made or sought other than as scheduled under the building contract. Provide timely copies of all completed Builder Performance Review Reports to the builder and Insurance Agent. 12.3.5 BRCP Component 5 Final Report on Completion of Project On completion of the project prepare a final report including: confirmation that all Builder Performance Reviews identified in Component 3 of the BCRP have been completed; details as to whether there are any resolved issues of concern; and comment on the progression or development of the builder s competency relating to specific areas that have been reviewed as part of the BCRP for the project. 12.4 Services to Insurance Agents (and/or Intermediaries) 12.4.1 Certificate of Insurance To enable a builder to obtain, and an Insurance Agent to issue, a Certificate of Insurance for a specific project: BCRP Component 1, 2 and 3 Confirmation Confirm the cost of the BCRP to the builder. Confirm the requirements of BCRP Components 1, 2 and 3 have been completed satisfactorily, or have been adjusted so as to be satisfactory, (through the Insurance Agent and the builder s Intermediary). Provide the number and timing of site visits or remote site assessments required during the project to the builder (and the Insurance Agent and builder s Intermediary). BCR Component 1,2 and 3 Incomplete notice In the event that the Builder does NOT satisfactorily complete the requirements of BCRP Components 1, 2 and 3, the BCRP service provider must notify the builder s Insurance Agent of this fact within 7 days of the due date of the requested information. Page 72 72

Component 1,2 and 3 Project commenced notice In the event that the builder has already commenced works under the project contract, the BCRP service provider must notify the Builder s Insurance Agent of this fact immediately. 12.4.2 During the Project The BCRP provider must Immediately report to the Insurance Agent any instances of concerns over the builder s competency to complete the project (including concerns as to time delays, standard of work performed, any evidence of cash flow issues and where payments have been made or sought other than as scheduled under the residential building contract) including copies of all Builder Performance Review Reports completed to that time. The BCRP provider should also provide timely copies of all completed Builder Performance Review Reports for the project to the builder and Insurance Agent. Such reports should be placed on the underwriting file for the builder and referred to during periodic Eligibility reviews. 12.4.3 On Completion of the Project BCRP Component 5 - Final report on completion of the project On completion of the project, the BCRP provider must prepare a final report using the standard HWIF template and provide a copy to the builder and the Insurance Agent. The final report is to be placed on the underwriting file for the builder and referred to during periodic Eligibility reviews. The content of the final report is to include: confirmation that all builder performance reviews identified in BCRP Component 3 have been completed details as to whether there are any unresolved issues of concern; and comment on the progression or development of the builder s competency relating to the specific areas that have been reviewed as part of the BCRP for the project. The HWIF may also seek feedback from all builders who have participated in the BCRP. 12.5 Summary Reporting Provide a monthly report to each Insurance Agent in relation to Builder s holding Eligibility with the Insurance Agent detailing: builders currently in the provider s BCRP (including recent departures and new entrants) the status of all projects being undertaken by Builder s in the provider s BCRP. 12.6 Services to the HWIF The BCRP provider is required to enter into arrangements with the HWIF to provide summary reporting on monthly basis (or as requested) in relation to the number and details of: builders enrolled in program (including new entrants/recent departures /cumulative); builders projects with each Insurance Agent; projects covered by the program including type and value (new/in progress/ completed/ cumulative); the current status of projects in progress; issues of concern notified to Insurance Agents about a builder and/or a particular project; complaints about the service provider received from builders and homeowners and the status/outcome of the complaints; Page 73 73

builders who have graduated out of the program; BCRP service provider obtains a copy of the Certificate of Insurance for the project and notifies the HWIF by including the certificate number in the monthly reporting template; BRCP service providers are to provide any additional reports/information, from time to time as requested. 12.7 Periodic Reviews of Builders and Exiting the Program The Insurance Agent will closely monitor all builders holding Eligibility subject to use of the BCRP. Irrespective of builder size all builders, required to participate in the BCRP as a general condition of Eligibility, are to undergo a periodic Eligibility review every 12 months. Consideration can be given to removing the condition requiring participation in the BCRP after three (3) completed projects. Contact should be made with the BCRP service provider/s and reference made to the final reports and individual Builder Performance Review Reports in order to determine whether it is appropriate for the builder to graduate out of the BCRP. Where the builder has not completed three projects through the BCRP at the time of the initial periodic Eligibility review the issue can be revisited at each subsequent review or on request by the builder. Once the builder s Eligibility is no longer subject to use of the BCRP, subsequent reviews are to occur in accordance with the builder size as described in the Section 4. In addition to periodic Eligibility reviews, special Eligibility reviews are to be undertaken when triggered by a defined event. Page 74 74

13. Owner-Builders Unlike licensed builders, owner-builders cannot obtain home warranty insurance cover prior to commencement of the project. As a result, owner-builders are not subject to the Eligibility or review process that applies to builders. When underwriting an application for the issue of a Certificate of Insurance for owner-builder work the Insurance Agent takes into account the following criteria: The extent that the work complies (or does not comply) with applicable regulatory requirements An inspection of the work being undertaken and a report of that inspection finding that the work is free from defect (or detailing all defects - which will be listed as an exclusion under any contract of home warranty insurance) The proposed period of insurance at the date of issuing of the Certificate of Insurance The total reasonable value of the works It is HWIF policy to withhold insurance where a claim trigger has already occurred (e.g. insolvency of the owner-builder named on the application form). In such cases, refusal of insurance may be grounds for the owner-builder seeking an exemption from NSW Fair Trading from the requirement to obtain home warranty insurance. 13.1 Period of Insurance For the purposes of determining the period of cover to be provided by an insurance contract in relation to owner-builder work under an owner-builder permit, the work is taken to be complete on practical completion of the work. This is when the work is complete except for any omissions or defects that do not prevent the work from being reasonably capable of being used for its intended purpose. It is to be presumed (unless an earlier date for practical completion can be established) that practical completion of owner-builder work occurred on the earliest of whichever of the following dates can be established for the work. a) the date of issue of an occupation certification under the Environmental Planning and Assessment Act 1979 that authorises commencement of the use or occupation of the work, or b) the date 18 months after the issue of an owner-builder permit for the work Where an occupation certificate has not been issued for the owner-builder work, the completion date for the work is the date 18 months after the issue of the owner-builder permit. Accordingly, the period of cover for owner-builder work (e.g. six (6) years for a loss arising from a structural defect and two (2) years from a loss arising from other than a structural defect), commences on the earlier of the date of issue of an occupation certificate or the date that is 18 months after the issue of the owner-builder permit. 13.2 The Type of and Cost (Value) of the Work Whether the work has been completed, cover is only provided for the component of the work that has been completed by the owner-builder under the owner builder permit and relevant statutory approvals. Any defective item listed in the inspection report is excluded from coverage under the contract of home warranty insurance. The Certificate of Insurance, which is required to be included in the contract for sale of the property by the owner-builder, must require that the inspection report be attached. The Certificate of Insurance must also advise that defects identified in the (attached) inspection report are exclusions and refer to the date of the report and the name of the inspector/organisation. Page 75 75

The Insurance Agent will consider the current solvency status of the owner-builder when making a decision to offer home warranty insurance cover and should decline cover if the owner-builder is an undischarged bankrupt. Pricing is determined by the value of the project and the number of years since completion (policy term applicable to the builder project). Other terms and conditions may be applied to an owner-builder including a requirement to provide a deed of indemnity should it be considered that circumstances warrant such security. If an owner-builder is not able to obtain home warranty insurance cover the owner-builder may apply to NSW Fair Trading for an exemption from the home warranty insurance provisions of the Home Building Act. In order to do so the owner-builder requires formal written notification from the Insurance Agent that the application has been declined or that home warranty cover will not be issued for the owner-builder project. 13.3 Owner-Builder Works Owner-builder work is any work (including supervision and co-ordination) involved in the construction of, or alterations, repairs or additions to, a dwelling (which includes a house, terrace, town-house, garage, swimming pool and certain other structures and improvements): where the reasonable market cost (including labour and materials) exceeds $5,000, and which relates to a single dwelling or dual occupancy: o that requires development consent under Part 4 of the Environmental Planning and Assessment Act 1979 or o that is a complying development within the meaning of that Act. An owner-builder is not required to be a licensed builder, however, they must obtain an owner-builder permit from NSW Fair Trading and the issue of a permit requires the applicant to meet prescribed criteria including (where the value of the proposed work is over $12,000), completion of an approved owner-builder course or an equivalent qualification. Only one owner-builder permit can be issued within any five (5) year period, unless the application and any earlier permit relate to the same land, or unless special circumstances exist. Should an owner-builder decide to sell their home within six (6) years after completion of the work, the owner-builder will need to take out home warranty insurance where the reasonable market cost of the labour and materials exceeds $20,000. The home warranty insurance scheme provides protection to a subsequent purchaser (successor in title) of a property where the purchaser is unable to have any defective owner-builder work (not apparent at the time of purchase) rectified because of the death, disappearance or insolvency of the owner-builder, providing the defect is identified within six (6) years (for structural defects) or two (2) years (for other defects) of completion of the work in question. For home warranty insurance cover purposes, owner-builder work is taken to have been completed on the earlier of the date of issue of an occupation certificate for the work or the date that is 18 months after the issue of the owner-builder permit. Where an occupation certificate has not been issued, the completion date is 18 months after issue of the ownerbuilder permit for the work. The contract for sale of a property on which owner-builder work has been undertaken must: include a note that an owner-builder permit was issued in relation to the work carried out and have the HWIF certificate attached. If home warranty insurance cover is not arranged, the purchaser can void the sale contract before settlement. Page 76 76

13.4 Owner-Builder Work Contracted to a Licensed Builder or Licensed Trade Contractor Where an owner-builder contracts any part of the work to a licensed builder or trade contractor, and the contract price for that work is more than $20,000, or, (if the contract price is not known) the reasonable market cost of the labour and materials involved exceeds $20,000 that licensed builder or licensed trade contractor is required to obtain home warranty insurance cover for the work. The existence of home warranty insurance for owner builder contracted work is in the best interests of the owner builder but is not a requirement of issuing cover by HWIF for the total owner-built project. 13.5 Owner-Builder Applications Applications are required to satisfy the following conditions: The applicant is the owner of the property. The applicant was issued with an owner-builder permit under the Home Building Act 1989 by NSW Fair Trading for the work. The reasonable market cost of the labour and materials involved in the owner-builder work was over $20,000. Development Consent (or a Complying Development Certificate) under the Environmental Planning and Assessment Act 1979 was obtained for the work. A Construction Certificate (or a Complying Development Certificate) under the Environmental Planning and Assessment Act 1979 was obtained for the work. A final inspection was undertaken by the Principal Certifying Authority and an Occupation Certificate under the Environmental Planning and Assessment Act 1979 issued for the work (where work has been completed). If in a termite prone area a Termite Treatment Certificate/Notice was obtained for the work; A scope is available of the works performed. All plumbing, gasfitting and electrical wiring work complies with the regulatory requirements and, where required, certificates of compliance have been issued for that work. The quality of construction is generally of an acceptable standard. 13.6 Owner Builders Standard Documentation Checklist Requirements A completed and signed application form. Evidence of ownership of the property (e.g. copy of the Certificate of Title or a Rates Notice). The owner-builder permit for the work. The Development Consent or a Complying Development Certificate for the work. The Construction Certificate for the work (not required where a Complying Development Certificate has been issued). Copy of plans and specifications for the work including any engineers footing designs and soil classification reports. The Occupation Certificate for the work (where construction has been completed). Certificates of compliance for plumbing, gasfitting and electrical wiring work (if applicable/available). Page 77 77

If in a termite prone area a Termite Treatment Certificate/Notice (usually a condition of Development Consent). If original certificate is older than two (2) years, a pest inspection report may also be required. Any other relevant compliance certificates (if applicable/available) e.g. waterproofing, glazing etc. Inspection report not older than six (6) months from the date of application, containing a list of the defects and, if appropriate, incomplete work. This can only be completed by a building inspector/consultant and in a format acceptable to the HWIF. Details of any building or trade licences held by the owner-builder or related entities. Details of other owner-builder work undertaken by the owner-builder or related entities. Details of any home warranty insurance claims or Consumer, Trader and Tenancy Tribunal (CTTT) orders in relation to building work undertaken by the owner-builder or a related entity. Details of any insolvency or excessive credit of the owner-builder or a related entity. 13.7 Availability of Final Occupation Certificate Where an owner-builder has not obtained a final Occupation Certificate the application for home warranty cover cannot be approved until such time as it is obtained. In the event that a legitimate reason is provided for the non-issue of the final Occupation Certificate (e.g. the original PCA is no longer in business and another PCA or the Council will not take over responsibility) then consideration may be given to the application provided the Inspection Report confirms the reasons for the absence of the Occupation Certificate and confirms that the conditions of the Development Consent have been satisfied. Where an interim Occupation Certificate has been issued this can be accepted where the conditions of the Development Consent remaining to be satisfied are of a minor nature (e.g. incomplete landscaping or paving). The Inspection Report should detail the work required to be completed in order for a final Occupation Certificate to be issued and such work recorded as exclusions on any Certificate of Insurance issued the owner-builder work. 13.8 Owner Builders Inspection Report Requirements The conditions relating to the acceptability of inspection reports submitted by an owner-builder with the application for a Certificate of Insurance are as follows: The report must be from a qualified expert such as a building consultant/ inspector, building surveyor, architect or engineer who must have a valid professional indemnity policy in place at the time of signing the report and who authorises the report being made available to third parties. The person providing the inspection report must be independent of the owner-builder (in particular, the ownerbuilder cannot provide their own inspection report even though they may be an architect, engineer etc.). In addition to there being an obvious conflict of interest there is also doubt as to whether professional indemnity insurance would cover such situations. Details of qualifications, industry association/professional institute membership and professional indemnity insurance and an authority for the report to be made available to third parties should accompany the report. The report should indicate the quality and completeness of works undertaken by the owner-builder and include the following: the name and address of the owner-builder site address documentation in relation to all Development Consents, Construction Certificates (or Complying Development Certificates) covering building work undertaken at the site during the previous 10 years site profile (e.g. residential block with dwelling and detached garage). summary description of buildings (e.g. single/double storey, type of construction including sub-floor, frame, wall, roof construction and materials) Page 78 78

list all works done at the site (irrespective of whether consent has been granted to some or all of the works including works completed less than 6½ years previously and any incomplete works) separate summary listing and a detailed description of:»» all defects»» incomplete work (refer also above section on Availability of Final Occupation Certificates )»» inaccessible areas»» second hand materials. All defects, incomplete works, inaccessible areas and second hand materials should be described covering the dwelling/s as well as outbuildings, pergolas, landscaping, pool etc. While not exclusive and recognising that each site is different the below list provides an indication of the level of detail required in a report. The report should detail, comment and/or advise on: Any obvious breaches of the building code and standards. Brickwork or external linings, are they straight, level and properly constructed? Is mortar sound - not crumbly? Is the sub-floor area accessible and if so accessed? Was the sub-floor area dry and properly drained? Is there a basement - is it dry and properly drained? For concrete slabs, comment on cracks, expansion joints, uneven surfaces, breaks in waterproof membrane, etc. Is the roof space accessible? Was it accessed and is the roof structure sound and properly built? Check roof flashings, roof tiles, decking and guttering. List any cracks, defects, leaks or roof drainage problems. Are all windows and doors properly fitted showing adequate gaps and functioning/opening properly? On older homes, check that there is no dry rot, termite problems, rusted metal fixtures, etc., Detail on all internal walls - are they straight and sound? Is internal/external painting adequately done? On older homes, check that windows have not been painted shut. Is there any mould, mildew or damp/rising damp evident or residue of same? With respect to floor and wall tiling, are tiles properly installed, evenly spaced, trimmed and not drummy? Are all skirtings and architraves properly installed, properly mitred and secured? Are all plumbing and other services properly installed and functioning? Check all flashings, balconies, decks, roof pitch, etc., for adequate slope and waterproof protection, were there any defects noticed in any work or caused elsewhere in the house by the work done by the owner-builder and his/her contractors? Detail of second hand materials and fixtures, e.g. timbers, bricks, windows, tiles, appliances, fixtures, etc. It is vital that the inspection report comply with all the above requirements. The existence of professional indemnity insurance does not replace the need for a comprehensive inspection report to be provided. 13.9 Declining an Owner-Builder Work Application Where an Insurance Agent declines an application for home warranty cover for owner-builder work the Intermediary is to be advised of the full reasons for the declinature and of the escalation process for having the decision reviewed by the Insurance Agent and potentially the HWIF. The Intermediary is also to be advised of any information that would be required in order for the decision to be reviewed. Additionally, the Intermediary should be advised of the avenue available to the owner-builder of applying to NSW Fair Trading for an exemption from the home warranty insurance requirements of the Home Building Act 1989 on the basis it is not possible to comply with the requirements due to the application having been declined. Page 79 79

14. Customer Service 14.1 Standards The Market Practice Guidelines made under the Home Building Act 1989 require the HWIF to document its service standards. The following quantitative service standards are to apply (all days shown being business days ): Table 18. Service Standard for Eligibility Assessment and Review Eligibility Issue notice to the builder commencing an Eligibility review process and requesting provision of information and documentation by specified due date (PERS only) Acknowledge receipt of Eligibility application or review documents The application/review documents have been received but are deficient and further information is required from the applicant to progress the application/review. Complete Eligibility assessment/review and communicate Eligibility profile, terms and conditions to the builder (via the Intermediary) Insurance Agent Requirement for Completion Notice issued at least 40 days prior to due date Within two (2) days of receipt of the documents Within seven (7) days of receipt of the documents Within 10 days of receipt of complete information Table 19. Service Standard for Project Applications for Single Developments within Profile (<$1m) Project Applications for Single Developments within Profile Issue Certificate of Insurance to builder, homeowner and Council. Insurance Agent Requirement for completion Within two (2) days of receipt of complete information Table 20. Service Standard for Project Applications for Single Developments outside Profile (<$1m) Project Applications for Single Developments outside Profile Assess whether additional information required and/or Special Eligibility Review required and if required request information or initiate review Underwrite application for Certificate of Insurance and advise the builder (via Intermediary) of decision including any proposed conditions on the approval (e.g. security, builder management program). Issue Certificate of Insurance to builder, homeowner and Council. Insurance Agent Requirement for completion Within two (2) days of receipt of the application for a Certificate Within two (2) days of receipt of complete information or finalisation of Special Eligibility Review (whichever later) Within two (2) days of receipt of builder accepting underwriting conditions Page 80 80

Table 21. Service Standard for Project Applications for Multi-unit and High Value (>$1m) projects Project Applications for Multi-unit and High Value Projects Assess whether additional information required and/or Special Eligibility Review required and if required request information or initiate review Underwrite application for Certificate of Insurance and advise the builder (via Intermediary) of decision including any proposed conditions on the approval (e.g. security, builder management program). Issue Certificate of Insurance to builder, homeowner and Council. Insurance Agent Requirement for Completion Within five (5) days of receipt of the application for a Certificate Within five (5) days of receipt of complete information or finalisation of Special Eligibility Review (whichever later) Within two (2) days of receipt of builder meeting underwriting conditions The Insurance Agent will communicate immediately with the builder s Intermediary where it believes it cannot meet the service standards prior to the due date for delivery. The Insurance Agent will advise of the reasons for the delay and the expected actual delivery date. Page 81 81

15. Complaints Against the Insurance Agent 15.1 Complaints Management System The present home warranty insurance arrangements commenced on 1 July 2010 when the NSW Self Insurance Corporation (SICorp) became the sole provider of home warranty insurance within NSW. The NSW Self Insurance Corporation trades as the NSW Home Warranty Insurance Fund (HWIF). The Corporation utilises an outsourced model for the provision of underwriting (Eligibility and project certificates), premium collection and claims handling services and has engaged Insurance Agents to provide these services through a contractual arrangement. The Corporation and its Insurance Agents are required to comply with Market Practice and Claims Handling Guidelines made under the Home Building Act 1989. Under the Guidelines each Insurance Agent is required to establish and maintain an internal complaints handling process. The Guidelines can be accessed via the NSW Fair Trading at www. fairtrading.nsw.gov.au. 15.2 General Insurance Code of Practice Buying Insurance Although the Code of Practice does not strictly apply to State insurance, the HWIF believes that aspects are good practice for Insurance Agents. The following standards have been adapted to apply to the initial enquiry and buying of insurance and renewal of cover. 1. The Insurance Agent will only ask for and take into account relevant information when assessing an Eligibility application. 2. The builder will have access to information about them that the Insurance Agent has relied on in assessing the application and an opportunity to correct any mistakes or inaccuracies. The Insurance Agent will provide its reasons in writing upon request. In special circumstances, the Insurance Agent may decline to release information but it will not do so unreasonably. In these circumstances, the Insurance Agent will give the applicant reasons and they will have the right to request a review of the decision through the disputes and complaints handling procedures described in the Complaints and Disputes Procedures Guideline. 3. Where an error or mistake in assessing the application for Eligibility or a Certificate of Insurance is identified, the Insurance Agent will immediately initiate action to correct it. 4. All sales processes are to be conducted in a fair, honest and transparent manner to the extent that the Insurance Agent has influence over it. 5. If the Insurance Agent cannot provide insurance, it will: a. give reasons b. refer the applicant to the HWIF, or NIBA for information about options (unless they already have someone acting on their behalf); and if the builder is dissatisfied with the decision c. make available information about the complaints handling procedures, including the Underwriting Committee for any required re-determined final opinion. 6. If Eligibility is to be cancelled, any money owed by the Insurance Agent will be sent within 15 business days to the Intermediary. The Code of Practice can be accessed at www.codeofpractice.com.au. 15.3 What is a Complaint? A complaint is defined as any expression of dissatisfaction with a product or service offered or provided by the HWIF or its Insurance Agents (including the Insurance Agent s Intermediaries and service providers). Page 82 82

15.4 What is a Dispute? A dispute is defined as a complaint that has been considered and responded to by the Insurance Agent and the complainant is not satisfied with the outcome. 15.5 HWIF Complaints and Disputes Procedures Guideline The HWIF s Complaints and Disputes Procedures Guideline explains how the HWIF and its Insurance Agents handle complaints and disputes in relation to standards of service, underwriting decisions and decisions on claims. The Guideline also sets out the role and operation of underwriting and claims committees established by the HWIF and its Insurance Agents. The Guideline can be accessed at the HWIF website at www.homewarranty.nsw.gov.au. 15.5.1 Lodging a Complaint or Dispute 15.5.1.1 Complaints About Service Standards A complaint regarding service standards or other matters of a general nature should initially be directed to the relevant Insurance Agent either face to face, by phone or in writing (including email). If a complainant does not feel that their complaint has been dealt with effectively by the Insurance Agent, they can lodge a dispute with the Home Warranty Insurance Fund. Disputes should be lodged in writing. 15.5.1.2 Complaints About Underwriting Decisions (Eligibility and Project Certificates) A complaint by a builder in relation to an underwriting decision concerning a builder s Eligibility for home warranty insurance or the issue of a Certificate of Insurance (project certificate) should in the first instance be submitted to the Insurance Agent via the builder s Intermediary. If the matter is not resolved, the builder can then request via their Intermediary that it be escalated to the Insurance Agent s Underwriting Committee and potentially to the HWIF s Underwriting Committee. 15.5.1.3 Complaints About Claim Decisions Where a homeowner is not satisfied with a decision on a claim by an Insurance Agent they have a right of appeal to the Consumer, Trader and Tenancy Tribunal www.cttt.nsw.gov.au (or the District Court where the amount involved exceeds the Tribunal s $500,000 jurisdictional limit). The homeowner is also entitled to request a review of the decision by the Insurance Agent. If the matter is not resolved, the homeowner can then request that it be escalated to the Insurance Agent s claims committee and potentially to the HWIF s claims committee. 15.5.2 Handling of Complaints Each Insurance Agent has their own internal complaint handling procedures that are approved by the HWIF. At a minimum, complaints will be handled in the following way: Page 83 83

Verbal complaints will be acknowledged immediately and written complaints within three (3) business days advising the complainant of the complaint handling procedure. All complaints regarding an Eligibility or claim decision will be acknowledged in writing. Complaints will be investigated and a response provided in writing within 15 business days of receipt of the complaint provided the Insurance Agent has all the necessary information and has completed any investigation that may be required. In cases where further information, assessment or investigation is required, reasonable alternative timeframes will be agreed. Complainants will be kept informed of the progress of the response to their complaint. The response to the complainant will include reasons for the decision and information about how to access the dispute resolution process of the HWIF. If the complainant is dissatisfied with the Insurance Agent response to a complaint, they may escalate the complaint and request it be treated as a dispute. 15.5.3 HWIF Dispute Resolution The HWIF will contact the builder or homeowner within five (5) business days of receiving the dispute to let the complainant know it has been received and provide a contact name. The HWIF will review the dispute in accordance with its Complaints and Disputes Procedures Guideline, Underwriting Procedures Guideline, Claims Guideline and/or other relevant guidelines and procedures as applicable. The HWIF will then determine the dispute and notify the Insurance Agent of the decision. The Insurance Agent will implement the decision, which is final and binding, as soon as practicable. The Insurance Agent is also to notify the builder or homeowner of the decision, in writing, and include contact details for the HWIF should information be required about the decision. The advice to a builder or homeowner of the HWIF s response to a dispute will include information regarding dispute mechanisms external to the HWIF, offered by NSW Fair Trading www.fairtrading.nsw.gov.au. Please note that where a homeowner is not satisfied with a decision on a claim there is a right of appeal to the Consumer, Trader and Tenancy Tribunal (Home Building Division) www.cttt.nsw.gov.au or the District Court (where the amount involved exceeds the Tribunal s $500,000 jurisdictional limit). Page 84 84

Appendix A - Scope of Insurance Cover The home warranty insurance scheme in New South Wales is established under the Home Building Act 1989 (and the associated Home Building Regulation 2004). The legislation prescribes: the circumstances where cover is required; the minimum cover provided ;and the entitlements to benefits in the event of a claim. The requirement for home warranty insurance to be in place for most residential building work is also a standard condition of a Development Consent under the Environmental Planning and Assessment Act 1979. Important Note: The functions of SICorp under the NSW Self Insurance Corporation Act 2004 include the carrying on of the business of providing home warranty insurance for building work that requires such insurance under the Home Building Act. However, it is not the function of SICorp to determine whether home warranty insurance is required under the Home Building Act for a particular project. This is the role of the Principal Certifying Authority (PCA) engaged for the project under the Environmental Planning and Assessment Act and/or NSW Fair Trading, which administers the Home Building Act. Persons making such enquiries are to be advised to contact the PCA or Fair Trading or to obtain independent legal or other professional advice. Risks Covered Home warranty insurance cover provides cover for the original owner and the owner s successors in title against: Loss or damage resulting from non-completion of the building work because of the insolvency, death or disappearance of the builder (not applicable to work undertaken by speculative builders or owner-builders); Loss or damage arising from a breach of a statutory warranty, being loss or damage in respect of which the beneficiaries cannot recover compensation from the builder or owner-builder or have the builder or ownerbuilder rectify because of the insolvency, death or disappearance of the builder/owner-builder. Insolvency includes where the licence of a builder has been suspended (under section 42A of the Home Building Act 1989) for failure to comply with a monetary order of the Consumer, Trader and Tenancy Tribunal or a court (not applicable to owner-builders). (Sections 99 and 101 Home Building Act 1989) Statutory Warranties The following warranties are implied in every contract to do residential building work in NSW: a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract, a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new, a warranty that the work will be done in accordance with, and will comply with, the Home Building Act 1989 or any other law, a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time, a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the Page 85 85

extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling, a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the contractor licence or person required to hold a contractor licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder s or person s skill and judgment. A person who is the immediate successor in title to an owner-builder, a holder of a contractor licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a contractor licence and had done the work under a contract with that successor in title to do the work. Residential building work done on behalf of a developer is taken to have been done by the developer. A person who is a non-contracting owner in relation to a contract to do residential building work on land is entitled (and is taken to have always been entitled) to the same rights as those that a party to the contract has in respect of a statutory warranty. (Part 2C Home Building Act 1989) Losses Indemnified Without limitation of the losses or damage for which indemnity must be provided under a contract of home warranty insurance as set out above under the heading Risks Covered, a contract of home warranty insurance must indemnify a beneficiary under the insurance contract for the following loss or damage, being loss or damage in respect of which a beneficiary cannot recover compensation from the builder concerned, or have the builder rectify, because of the insolvency, death or disappearance of the builder: loss or damage resulting from faulty design, where the design was provided by the builder, or loss or damage resulting from non-completion of the work because of early termination of the contract for the work because of the builder s wrongful failure or refusal to complete the work (not applicable to owner-builder work), or the cost of alternative accommodation, removal and storage costs reasonably and necessarily incurred as a result of an event referred to in sub clause (i) or (ii), or loss of deposit or progress payment due to an event referred to in sub clause (i) or (ii) (not applicable to ownerbuilder work), or any legal or other reasonable costs incurred by a beneficiary in seeking to recover compensation from the builder for the loss or damage or in taking action to rectify the loss or damage. (Clause 56 Home Building Regulation 2004) Making Application for Home Warranty Insurance Cover Whilst home warranty insurance provides an indemnity to the homeowner and their successors in title, the risk to the insurer lies with the contractor (builder or tradesperson) who purchases home warranty insurance. As a result, the Eligibility to purchase insurance for this class of insurance is managed by performing an underwriting assessment of the builder in the first instance. Builders must meet the HWIF s financial and non-financial assessment criteria (as assessed by the Insurance Agent through the application of this Guideline, BEAT and instructions, guidelines or written directions (if any) given from time to time by the HWIF) or where outside the preferred parameters, demonstrate to the Insurance Agent or the HWIF, sufficient mitigation to comprise an acceptable risk Licensing Details If a builder operates their business as a sole trader then the builder s own name should appear on the contractor licence Page 86 86

card issued by NSW Fair Trading. If the licence has been issued to a company (corporation) or a partnership, the name of the company or the names of every member of the partnership will be shown on the licence card. NB: Trusts are not licensed under the Home Building Act 1989 and NSW Fair Trading does not issue licences to Trusts. Neither are licences issued in the name of The Trustee for.. nor as ABC Pty Ltd as Trustee for. Eligibility should only be issued in the name of the licensed entity (i.e. the name appearing on the builder s licence). Contracts to undertake residential building work must be entered into in the same name as is displayed on the contractor licence. If the licence has been issued to a company or partnership, the contract must be in this name. Similarly, if the licence has been issued to an individual, the contract must be in that person s name. Key Definitions Refer to Appendix C Page 87 87

Appendix B - Market Practice Guidelines Under section 8A (2) of the NSW Self Insurance Corporation Act 2004, the HWIF is to comply with any applicable guidelines issued under section 91A of the Home Building Act 1989. Section 91A provides that the Minister for Fair Trading may issue guidelines with respect to appropriate market practices in connection with the provision of home warranty insurance by or on behalf of the HWIF. The Minister for Fair Trading may issue the Guidelines after consultation with the Home Warranty Insurance Scheme Board and with the concurrence of the Minister responsible for the administration of the NSW Self Insurance Corporation Act 2004. The guidelines are to be published in the Government Gazette and take effect from the date of publication or such later date as may be specified in the guidelines. The following material is a direct extract from the Market Practice Guidelines (section 5) issued by the Minister for Fair Trading and effective from 1 July 2010. All Insurance Agents assessing Eligibility applications are to be aware of the content of the Market Practice Guidelines and the Insurance Agent will comply with the Guidelines. Effect of Eligibility A decision by or on behalf of the Insurer to grant Eligibility is not a binding undertaking to insure but is only a statement of intent by or on behalf of the Insurer, that it is prepared to issue a Certificate of Insurance in accordance with the terms and conditions of the grant of Eligibility if the issue of the Certificate is consistent with the requirements of the Underwriting Procedures Guideline and the Market Practice Guidelines, unless some other fact, or matter has arisen so that under the Underwriting Procedures Guideline the Insurer may vary or revoke the grant of Eligibility or not issue the Certificate. Requirements for assessment of Eligibility When assessing a Builder for Eligibility and the rating category and conditions on which the Eligibility is provided, the Insurer must have regard to the following factors: unless Eligibility is conditional on a licence being provided by the Director-General, the Builder must have a current licence under the Act at the date of the Eligibility assessment; the net tangible assets of the Builder (including assets held by persons or bodies corporate which have granted an acceptable guarantee or indemnity to the Insurer); the Builder s net profit position; the Builder s annual turnover; the Builder's record of association with recent insolvencies and the record of disputes that have judged the Builder or associates to be at fault; details of any Eligibility conditions previously imposed by an insurer prior to 1 July 2010; and the Builder's claims experience, however, the Insurer is not limited in its assessment to the factors above and may take into account other matters including non-financial matters. Decision to issue a Certificate to a Builder When determining whether to issue a Certificate to a Builder, the Insurer must have regard to the following factors: the Builder must have a current licence for the work covered by the Certificate on the date on which the Certificate is issued; and any facts or circumstances that have arisen which may cause the Insurer to come to the view that issuing a Certificate would cause a detriment to the Insurer. Page 88 88

Requirements for assessment of Owner-Builders When assessing an application by an owner-builder for Home Warranty Insurance and the premium and conditions on which the Home Warranty Insurance is provided, the Insurer must have regard to the following factors: the owner-builder work must be performed or have been performed by the holder of an Owner-Builder Permit authorising its holder to do that work; the owner-builder's record of association with recent insolvencies and record of disputes that have judged the owner-builder (or his or her associates) to be at fault; the owner-builder's claims experience; and a building inspection report in relation to the owner-builder work, However, the Insurer is not limited in its assessment to the factors above and may take into account other matters including non-financial matters. Conditions Any terms or conditions imposed upon a Builder in respect of Eligibility, and any terms or conditions imposed upon an owner-builder in respect of Home Warranty Insurance, must be consistent with the Insurer's Underwriting Procedures Guideline and Premium Rates provided to the Director-General. Guarantees and indemnities Where the Insurer requires a third party to grant to the Insurer a guarantee, indemnity or undertaking for the purposes of granting or continuing Eligibility or granting a Certificate to a Builder, or for the purposes of issuing a Certificate to an owner-builder, the Insurer must clearly inform the builder or owner-builder as to the requirements as to such guarantee, indemnity or undertaking and advise in what circumstances and in what timeframe the guarantee, indemnity or undertaking may be released by the Insurer. Page 89 89

Appendix C - Home Building Act 1989 - Key Definitions Adjusted Net Tangible Assets (ANTA) relates to the Net Asset position of an entity adjusted for discounting applied to arrive at Net Tangible Asset position. Not all balance sheets values are adopted at face value; examples include the discounting of goodwill and related party loan assets. Discount factors are not publicly available. Builder is synonymous with Contractor for the purposes of this Guideline. Residential building work means any work involved in, or involved in co-coordinating or supervising any work involved in: a) the construction of a dwelling, or b) the making of alterations or additions to a dwelling, or c) the repairing, renovation, decoration or protective treatment of a dwelling. It includes roof plumbing work and specialist work done in connection with a dwelling and work concerned in installing a prescribed fixture or apparatus in a dwelling under clause 8 of the Home Building Regulation 2004 (or in adding to, altering or repairing any such installation). It does not include work that is declared by the regulations to be excluded from this definition refer to clause 9 of the Home Building Regulation 2004 and below table. (Section 3(1) Home Building Act 1989) Page 90 90

Table 23. Residential Building Work fixtures and apparatus included (Clause 9 Home Building Regulation 2004) For the purposes of the definition of residential building work in section 3(1) of the Home Building Act 1989, any fixture or fixed apparatus designed for the heating or cooling of water, food or the atmosphere or for air ventilation or the filtration of water in a swimming pool is prescribed. Residential Building Work work excluded (Clause 9 Home Building Regulation 2004) For the purposes of the definition of residential building work in section 3(1) of the Home Building Act 1989, the following is declared to be excluded from that definition: a) any work (other than specialist work) the reasonable market cost of the labour and materials involved in which does not exceed $1,000 (inclusive of GST), b) any work (other than specialist work) involved in the manufacturing of moveable dwellings, within the meaning of the Local Government Act 1993 (other than moveable dwellings that are manufactured homes, within the meaning of that Act), c) any work (other than specialist work) involved in the site preparation for, or the assembling or erection on site of, moveable dwellings excluded by paragraph (b), unless the work requires development consent, d) any work referred to in paragraph (c) done in relation to land on which a council has authorised a moveable dwelling to be placed by issuing an approval under the Local Government Act 1993, whether or not a development consent is also required, e) any work that would otherwise be residential building work but that by or under an Act (other than the Home Building Act 1989) a person is prohibited from doing unless the person is the holder of a contractor licence or another authority under that other Act (refer below note), f) any work (other than specialist work) done in relation to the removal and transport of a dwelling (refer below note), g) the supervision only of residential building work: by a person registered as an architect under the Architects Act 1921 or the Architects Act 2003, or by a person supervising owner-builder work for no reward or other consideration, or by any other person, if all the residential building work is being done or supervised by the holder of a contractor licence authorising its holder to contract to do that work, h) demolition work, any work involved in the installation of any material that forms an upper layer or wearing surface of a floor (even if installed as a fixture) that does not include any structural changes to the floor, i) any work that involves the installation or maintenance of any fixed apparatus such as a lift, an escalator, an inclinator or a garage door by means of which persons or things are raised or lowered or moved in some direction that is restricted by fixed guides. Work referred to in (e) is not excluded from the definition of residential building work if it is part only of the work to be done under a contract to do residential building work. Work referred to in (f) is not excluded from the definition of residential building work, if it is part only of the work to be done under a contract to do residential building work at the new site of the dwelling (whether or not that work is done under the same contract as the contract to remove and transport the dwelling). Dwelling means a building or portion of a building that is designed, constructed or adapted for use as a dwelling (such as a detached or semi-detached house, transportable house, terrace or town house, duplex, villa-home, strata or Page 91 91

company title home unit or residential flat). It includes any swimming pool or spa constructed for use in conjunction with a dwelling and such additional structures and improvements as are declared by clause 5 of the Home Building Regulation 2004 to form part of a dwelling. It does not include buildings or portions of buildings declared by clause 6 of the Home Building Regulation 2004 to be excluded from this definition refer to the following table. (Section 3(1) Home Building Act 1989) Table 24. Dwellings structures & improvements included (Clause 5 Home Building Regulation 2004) Dwelling buildings & structures excluded (Clause 6 Home Building Regulation 2004) For the purposes of the definition of dwelling in For the purposes of the definition of dwelling in section 3(1) section 3(1) of the Home Building Act 1989, the of the Home Building Act 1989, the following structures and following are declared to be excluded from that improvements are declared to form part of a dwelling when definition: constructed for use in conjunction with a dwelling: a) a boarding house, guest house, hostel or 1. parts of a building containing more than one dwelling lodging house, (whether or not the building is also used for non-residential purposes), being stairways, passageways, rooms, and the b) all residential parts of a hotel or motel, like that are used in common by the occupants of those c) any residential part of an educational institution, dwellings, together with any pipes, wires, cables or ducts that are not for the exclusive enjoyment of any one dwelling, d) accommodation (other than self-contained units) specially designed for the aged, disabled 2. parts of a building containing one dwelling only (where the or children, building is also used for non-residential purposes), being stairways, passageways and the like which provide access e) any residential part of a health care building that to that dwelling, accommodates staff, 3. if non-residential parts of a building containing one or more f) a house or unit designed, constructed or dwellings give support or access to the residential part the structural elements of the non-residential parts giving such adapted for commercial use as tourist, holiday or overnight accommodation, support or access, g) any part of a non-residential building that is 4. cupboards, vanity units and the like fixed to a dwelling, constructed or adapted for use as a caretaker s 5. detached garages and carports, 6. detached decks, porches, verandas, pergolas and the like, residence, h) a moveable dwelling (with or without a flexible 7. cabanas and non-habitable shelters, annex) within the meaning of the Local 8. detached workshops, sheds and other outbuildings (but not Government Act 1993, that is, or is capable jetties, slipways, pontoons or boat ramps and any structures ancillary to these exceptions), 9. concrete tennis courts and the like, of being, registered under the Road Transport (Vehicle Registration) Act 1997 (such as a caravan or a motor home), 10. driveways, paths and other paving, i) a residential building for the purposes of which 11. retaining walls, development consent can be granted only because of State Environmental Planning 12. agricultural drainage designed or constructed to divert water Policy No 15 Multiple Occupancy of Rural away from the footings of a dwelling or a retaining wall, Land. 13. fences and gates, 14. ornamental ponds and water features, and other structural ornamentation, the construction or installation of which requires development consent. Contractor means a person (being a licensed builder or licensed trade contractor) required by section 92 of the Home Building Act 1989 to enter into a contract of home warranty insurance. It is synonymous with Builder for the purposes of this Guideline Page 92 92

(Section 90(1) Home Building Act 1989) Date of completion of residential building work means (1) The completion of residential building work occurs on the date that the work is complete within the meaning of the contract under which the work was done. (2) If the contract does not provide for when work is complete (or there is no contract), the completion of residential building work occurs on practical completion of the work, which is when the work is completed except for any omissions or defects that do not prevent the work from being reasonably capable of being used for its intended purpose. (3) It is to be presumed (unless an earlier date for practical completion can be established) that practical completion of residential building work occurred on the earliest of whichever of the following dates can be established for the work: a. the date on which the contractor handed over possession of the work to the owner, b. the date on which the contractor last attended the site to carry out work (other than work to remedy any defect that does not affect practical completion), c. the date of issue of an occupation certificate under the Environmental Planning and Assessment Act 1979 that authorises commencement of the use or occupation of the work, d. (in the case of owner-builder work) the date that is 18 months after the issue of the owner-builder permit for the work. (4) If residential building work comprises the construction of 2 or more buildings each of which is reasonably capable of being used and occupied separately, practical completion of the individual buildings can occur at different times (so that practical completion of any one building does not require practical completion of all the buildings). (5) This section applies for the purposes of determining when completion of residential building work occurs for the purposes of any provision of this Act, the regulations or a contract of home warranty insurance. (Section 3B Home Building Act 1989) Developer, in relation to residential building work, means an individual, partnership or corporation (other than a company referred to in section 3A (3) of the Home Building Act 1989) on whose behalf the work is done in the circumstances set out in section 3A (2) of the Act. (Section 90(1) Home Building Act 1989) Section 3A of the Home Building Act provides: (1) For the purposes of this Act, an individual, a partnership or a corporation on whose behalf residential building work is done in the circumstances set out in subsection (2) is a developer in relation to that residential building work. (1A) Residential building work done on land in the circumstances set out in subsection (2) is, for the purpose of determining who is a developer in relation to the work, deemed to have been done on behalf of the owner of the land (in addition to any person on whose behalf the work was actually done). Note. This makes the owner of the land a developer even if the work is actually done on behalf of another person (for example, on behalf of a party to a joint venture agreement with the owner for the development of the land). The other person on whose behalf the work is actually done is also a developer in relation to the work. (2) The circumstances are: (a) the residential building work is done in connection with an existing or proposed dwelling in a building or residential development where 4 or more of the existing or proposed dwellings are or will be owned by the individual, partnership or corporation, or (b) the residential building work is done in connection with an existing or proposed retirement village or accommodation specially designed for the disabled where all of the residential units are or will be owned by the individual, partnership or corporation. Page 93 93

(3) A company that owns a building under a company title scheme is not a developer for the purposes of this Act. Disappearance of a builder or owner-builder includes a reference to the fact that, after due search and inquiry, the builder or owner-builder cannot be found. (Section 90(2) Home Building Act 1989) Home warranty insurance means insurance under a contract of insurance required to be entered into by or under Part 6 of the Home Building Act 1989. (Section 90(1) Home Building Act 1989) Insolvent means: in relation to an individual, that the individual is insolvent under administration (within the meaning of the Corporations Act 2001 of the Commonwealth), or in relation to a corporation, that the corporation is an externally administered body corporate (within the meaning of the Corporations Act 2001 of the Commonwealth). (Section 90(1) Home Building Act 1989) Insolvency includes where the licence of a builder has been suspended (under section 42A of the Home Building Act 1989) for failure to comply with a monetary order of the Consumer, Trader and Tenancy Tribunal or a court (not applicable to owner-builders). (Section 99(3) Home Building Act 1989) Key Managers consist of directors of companies, partners in partnerships and proprietors of sole trader operations. In most building entities, particularly small builders, the nominated supervisor is also deemed a key manager, particularly where directors/partners, in their own right, have insufficient experience to support the requested project limits. Major risk management issue means that the outcome of a risk management investigation by the Insurance Agent determines that there has been a significant change, such that the risk to HWIF for that builder has materially increased or a risk management investigation has not been resolved within one (1) month of identification then the issue is escalated to a major risk management issue. Minimum Eligibility requirements means possessing a builder s licence or the intention to obtain one, and having the experience required for the requested annual turn-over and construction limit, and satisfying business registration and ABN requirements, and having positive net tangible assets in the business or through securities available to be charged, and not being an undischarged bankrupt or being otherwise insolvent. Multi-storey building means a building that has a rise in storeys of more than three (3), and that contains two (2) or more separate dwellings. Rise in storeys has the same meaning as it has in the Building Code of Australia. Storey does not include a space within a building if the space includes accommodation only intended for vehicles. (Clause 74(5) Home Building Regulation 2004) Non-contracting owner, in relation to a contract to do residential building work on land, means an individual, partnership or corporation that is the owner of the land but is not a party to the contract and includes any successor in title to the owner. (Section 3(1) Home Building Act 1989) Owner of land means the only person who, or each person who jointly or severally, at law or in equity: a) is entitled to the land for an estate of freehold in possession, or b) is entitled to receive, or receives, or if the land were let to a tenant would be entitled to receive, the rents and Page 94 94

profits of the land, whether as beneficial owner, trustee, mortgagee in possession or otherwise. (Section 3(1) Home Building Act 1989) Owner-builder means a person who does owner-builder work and who is issued an owner-builder permit for that work. (Section 3(1) Home Building Act 1989) Owner-builder work means owner-builder work within the meaning of section 29 of the Home Building Act 1989 that involves: a) the construction of a dwelling, or b) the alteration of, or additions to, a dwelling, or c) the construction of an in-ground swimming pool. (Section 90(1) Home Building Act 1989) Section 29 of the Home Building Act 1989 and clause 45 Home Building Regulation 2004 provides: Owner-builder work is any work (including supervision and co-ordination) involved in the construction of, or alterations, repairs or additions to, a dwelling (which includes a house, terrace, town-house, garage, swimming pool and certain other structures and improvements): where the reasonable market cost (including labour and materials) exceeds $5,000, and which relates to a single dwelling or dual occupancy: - that requires development consent under Part 4 of the Environmental Planning and Assessment Act 1979, or - that is a complying development within the meaning of that Act. Past insolvent/s means for the purposes of assessing an application by a builder for Eligibility or reviewing a builder s Eligibility: a corporation that was an externally administered body corporate within the meaning of the Corporations Act 2001 (Cth) namely, a corporate: i. that is being wound up; ii. in respect of property of which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting; iii. that is under administration; iv. that has executed a deed of company arrangement that has not yet terminated; or v. that has entered into a compromise or arrangement with another person the administration of which has not been concluded. an individual that was insolvent under administration within the meaning of the Corporations Act 2001 (Cth) namely, a person who: (i) under the Bankruptcy Act 1966 or the law of an external Territory, is a bankrupt in respect of a bankruptcy from which the person has not been discharged; (ii) under the law of an external Territory or the law of a foreign country, has the status of an undischarged bankrupt; and includes: (iii) a person any of whose property is subject to control under: (A) section 50 or Division 2 of Part X of the Bankruptcy Act 1966; or (B) a corresponding provision of the law of an external Territory or the law of a foreign country; or (iv) a person who has executed a personal insolvency agreement under: (A) Part X of the Bankruptcy Act 1966; or (B) the corresponding provisions of the law of an external Territory or the law of a foreign country; where the terms of the agreement have not been fully complied with. Page 95 95

Associates of past insolvents for these purposes would include a person who has been a director of, or otherwise in a position of influence over, or taken part in the management of, a corporation described above. Specialist work means: a) plumbing work (other than work declared by the regulations to be roof plumbing work), or b) gasfitting work, or c) electrical wiring work, or d) any work declared by the regulations to be refrigeration work or air-conditioning work. (Section 3(1) Home Building Act 1989) Structural defect means any defect in a structural element of a building that is attributable to defective design, defective or faulty workmanship or defective materials (or any combination of these) and that: (a) (b) (c) results in, or is likely to result in, the building or any part of the building being required by or under any law to be closed or prohibited from being used, or prevents, or is likely to prevent, the continued practical use of the building or any part of the building, or results in, or is likely to result in: (i) the destruction of the building or any part of the building, or (ii) physical damage to the building or any part of the building, or (d) results in, or is likely to result in, a threat of imminent collapse that may reasonably be considered to cause destruction of the building or physical damage to the building or any part of the building. (Clause 71(1) Home Building Regulation 2004) Structural element of a building means: a) any internal or external load-bearing component of the building that is essential to the stability of the building or any part of it, including things such as foundations, floors, walls, roofs, columns and beams, and b) any component (including weatherproofing) that forms part of the external walls or roof of the building. (Clause 71(2) Home Building Regulation 2004) Work In Progress Projects commenced but not completed. Page 96 96

Appendix D - Asset and Liability Discount Values The Personal Statement of Assets and Liabilities is used to assist in the overall calculation of the Capital Adequacy of the building entity. These asset values are discounted to the following discount values: Table 25. Assets (in proportion to the builder s ownership) Discount Value % Cash (provided there is evidence of stability of the deposit level otherwise Zero) 100% Residential Dwellings 80% Commercial Buildings 80% Industrial Buildings 80% Motor Vehicles (exclude company owned vehicles completely) 50 Shares in Public Companies 75% Shares in Private Companies Nil Trade debtors 100% Plant machinery, Tools and equipment 50% Inventory 100% Loans to external entities Nil Work in Progress Contract Nil Goodwill, Trademarks, Intellectual Property Nil Franchise fees Nil Related Party Receivable - if sustainable as receivable Nil Liabilities Personal Borrowings 100% Overdraft Balance 100% Mortgage 100% Bank Loans 100% Credit Cards 100% Motor Vehicle Loans 100% Other Liabilities (Loans to related companies) 100% Proof of Ownership of property assets have to be provided to the insurer, which could include either a rates notice or copy of the Certificate of Title for each dwelling. Note: Net Assets = Assets at distress values less Total Liabilities. Capital Adequacy Ratio measures the Net Asset position against proposed insured turnover. Page 97 97