Time limits are important. In the case of a major defect (category 1), the cover expires six years and six months after the date of payment of the insurance premium or the date of entering the building contract (whichever is the earlier).
Water penetration or defects in construction or products that will lead to water damage are examples of category 1 defects. For a category 2 defect (eg, surface rust on iron roofing) the cover expires six months after the date of practical completion (meaning fit for intended use or occupation).
There are (not unreasonably) time limits on lodging claims. For a category 1 defect the consumer must do so within three months of the defect, in the opinion of the insurer, becoming evident.
However, for a category 2 defect the consumer must do so within seven months of practical completion or three months of the defect first becoming evident, whichever date is the earlier.
There is discretion to give an extension of time for lodging a claim. This is unlikely to be granted where the defect could have been identified much earlier if investigated by a builder.
Disputes with the insurer have often related to whether the “defect” is a maintenance issue (such as minor cracking of tiles) or a category 1 or 2 defect, and then whether the consumer made a claim within the required time limit.
There are various responsibilities that a consumer would prudently accept when they take possession of their home. This is reflected in the policy where no compensation is available where the loss is caused or contributed to by gradual deterioration of the building work due to:
fair wear and tear,
lack of maintenance,
neglect of the insured, and
alleged defects being matters of contractual dispute and not defective construction work.
The policy covers substandard work, and not faulty design or a failure to meet contract specifications where the work is otherwise satisfactory.
A defect has been defined as a fault or imperfection not meeting a standard or a general industry standard or practice.
If the work complies with industry standards but doesn’t meet contract specifications, the remedy for the insured is in contract and under consumer protection legislation.
In one case, a steel door jamb was not provided in an exterior back door as per specification. It was not classified as a defect.
There is no liability for the insurer to pay where:
the consumer unreasonably refuses access to the contractor or agent to undertake remedial work,
a builder is given a direction to remedy work until such time as the insurer is satisfied the builder won’t comply with its direction or a direction of a tribunal or court, and
the builder has a continuing obligation to complete the work.
The insurer may refuse to make payments for any loss if the works have been completed or rectified without its prior written approval (the reason being prejudice to the insurer who may show a lost opportunity to inspect alleged defects, or to prepare a schedule of remedial work, or to cost remedial work using a competitive tendering process).
Unlicensed people cannot do remedial work
There is a duty on an insured in general insurance to take all reasonable precautions to avoid further damage. However, with the Queensland policy the insured can’t use an unlicensed person to do remedial work.
The policy allows general approval for remedial work if the works are required to preserve the integrity of the dwelling or to prevent imminent consequential damage.
Consumers aren’t experts. On one occasion the insurer was unable to inspect work for a number of weeks because of resourcing problems.
It is unfair that a consumer can be prejudiced or have to incur additional expenses because of a resourcing problem within a statutory agency’s operation.
Consumers under the policy need to be careful that they don’t release the builder from any liability in relation to the insured works, as the insurer will also be released.
The same result applies where the consumer indemnifies the builder in relation to the building works. Ideally, a building contract should be checked by a lawyer before signing to ensure they don’t compromise the policy.
Subsequent purchasers can benefit
Subsequent purchasers can receive the benefit of an existing policy. However, they are not entitled to compensation under the policy if the defect was evident prior to their entering into the contract to purchase.
The insurer will reduce any payment under a claim by any overpayment (where the value of the works exceeds the contract price to be paid).
In one case, the value of the works was $361,986 and the price to be paid was calculated at $220,000. The insurer was entitled to deduct $141,986 from any valid claim.
In summary, the fine print of Queensland’s statutory Home Warranty Insurance Policy generally reflects the risk management by the statutory insurer coupled with responsibilities placed upon the building owner.
If a similar statutory scheme was introduced into New Zealand (a possibility given the new licensing requirements for builders and subcontractors) it would, in most cases, avoid litigation for consumers.
The caveat is that any policy (or guarantee) relating to building defects should not be left unread and consigned to the bottom drawer.