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- 9 May 2002
Home Building Amendment (Insurance) Bill
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Page: 1873
Second Reading
The Hon. JOHN DELLA BOSCA (Special Minister of State, Minister for Industrial Relations, Assistant Treasurer, Minister Assisting the Premier on Public Sector Management, and Minister Assisting the Premier for the Central Coast) [3.42 p.m.]: I move:
That this bill be now read a second time.
As the second reading speech has been delivered in the other place, I seek leave to have it incorporated in Hansard.
Leave granted.
The home warranty insurance scheme is established under the Home Building Act and commenced in May 1997. The scheme along with licensing, compliance and education is a key component of the consumer protection regime for the home building industry. Cover is provided by the private insurance sector.
In recent times a number of significant events, such as the collapse of HIH and the events of September 11, have dramatically changed the insurance landscape. These events have impacted on a wide range of businesses, community groups and occupations. The difficulties created by these changes in the insurance market have been well publicised.
Home warranty insurance has not been immune from these developments with major insurers indicating their belief that the current scheme is not viable.
To ensure there is viable consumer protection for homeowners, the NSW and Victorian Governments negotiated in tandem with the major players in the home warranty insurance industry. The outcome is a sustainable home warranty scheme provided through private insurers.
On March 13, 2002 the NSW and Victorian Governments announced uniform changes to their home warranty schemes. The Bill provides for a number of these reforms which I will outline shortly.
In addition to announcing these structural changes to their schemes, the NSW and Victorian Governments have taken action to overcome the situation created by the withdrawal of reinsurance support for sectors of the market. The NSW and Victorian Governments have put in place arrangements to provide the necessary reinsurance in these areas. This has ensured that the three home warranty insurers, Dexta, Royal & Sun Alliance and Reward, can continue to offer insurance to builders, including cover for high-rise projects. These arrangements will operate in the short term. The Government is continuing to work towards a longer-term solution.
The Bill provides for amendments to both the Home Building Act and the Regulation.
Cover under the scheme will be provided on last resort basis. Loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor will be covered. A homeowner will also be able to lodge a claim where he or she is unable to recover compensation from the contractor or take action to have the contractor rectify the problem because of the insolvency, death or disappearance of the contractor. Similar provisions will apply to claims in relation to owner-builder work and the supply of a kit home.
The period of cover under the scheme for structural defects is to be six years after completion of the work or end of the contract whichever is later. For other defects cover of two years will apply.
Insurance covering building work or the supply of a kit home by a licensed contractor will still have to be taken out prior to commencement of the work or supply of the kit. However, in line with the new period of cover under the scheme owner-builders will only have to take out insurance if they sell their home within 6 years of completion of the work.
The amount of cover for defective work will remain at $200,000. This will include cover for such reasonable legal and other costs as may be incurred by the claimant in seeking to recover compensation from the contract.
In the case of a claim for non-completion of work the insurance contract may limit liability to an amount that is 20% of the contract price of the job.
Because of the difficulties that the home warranty market has experienced, a number of industry bodies have been examining the feasibility of setting up alternative indemnity schemes to cover work. Provided such schemes deliver equal or better cover to the home warranty insurance scheme they have the potential to benefit both industry and consumers.
The problems relating to reinsurance which I mentioned before also make it important for the Government to be able to act quickly to put in place arrangements to avoid dislocation to the building industry. The Bill, therefore, provides that the Minister may approve alternative home building indemnity schemes or similar arrangements.
The reforms contained in the Bill will enable builders to continue building while ensuring continuing viable consumer protection homeowners. Faced with global issues confronting the insurance industry the Government has acted to maintain support for consumers and builders while providing a viable market for insurers.
The Bill provides for enabling provisions under which, if appropriate, the Building Insurers' Guarantee Fund may be used as a vehicle to administer arrangements such as the re-insurance arrangements which the Government has recently put in place. The Guarantee Corporation currently handles claims under the Government's HIH rescue scheme.
I commend the Bill to the House.
The Hon. JOHN RYAN [3.42 p.m.]: I have little doubt that 2002 will go down in the history of the world as the year of the insurance policy. This House seems to have debated nothing but insurance for the past 12 months, and possibly we will do so for some time in the future. The bill has come into the Parliament and is about to be passed by this House in less than 48 hours. The Opposition has enormous reservations about allowing that to happen. The bill will have a significant impact on consumers, builders and the insurance industry. For more than two years, day after day, I and other members have brought to this House many serious concerns of home building consumers and home builders. Although it is a cliche, it is true that there is not a more important investment that most people will make in their lives than the purchase of their family home. Hundreds of thousands of people in New South Wales purchase homes during their lifetimes. It is incumbent on us to make sure that they do so in a consumer protected environment which ensures that they get what they pay for—no more, no less. If a client contracts with a builder to build a house in 16 weeks, the client should get a house built in 16 weeks.
All home building clients make a commitment to pay into an insurance policy. They are obliged to take out an insurance policy by means of the Home Building Act. They have understood that, until now, the policy covers them for $200,000 for seven years for any defective or faulty building work, according to the statutory warranties given in the Home Building Act. That cover has barely been adequate. The House should understand that we are now going to slash those benefits significantly and possibly severely. The House does not know, and the Minister for Fair Trading has not told us, the exact impact that this slashing of benefits will have on individual constituents.
I am sure that most honourable members would know that the consumer group known as the Building Action Review Group [BARG] has campaigned steadily for reforms to the Home Building Act and other legislation. That consumer group had no idea until I told it 10 minutes ago that this bill had been through the lower House and will go through the upper House today. The Building Action Review Group has no idea of its provisions. I have not had time to fax the bill to the group, and I am convinced that the Minister has not given it a copy of the bill. I have no doubt that once we pass the bill into law, as the Opposition has agreed to do subject to a condition, Mrs Onorati and her members will believe that we sold them out. I have no doubt that I will get a very angry, bitter and disappointed phone call from Mrs Onorati, whom I have worked with for nearly 2½ years. To be perfectly frank, she has every reason to be annoyed. I am very insecure about passing this bill into law without important questions being asked and answered.
The broad brush of this bill has only been available in the public domain since 11 or 12 March. As honourable members would know, I have a reasonably extensive knowledge of this issue. However, we have been told that the bill has to go through the Parliament today, a day on which all of my notes and material are in my home office. I do not have the capacity to ring my usual contacts to get their comments on this bill. I do not have the capacity to go through my files to look at how the bill will affect many of the people who have written to me. We are told that if the bill is not passed today, the home building industry will be subject to a level of instability and the Opposition will be to blame for that—notwithstanding the fact that the home building industry at the moment, sponsored largely by the Federal Government's first home owners grant, is robust and progressing well.
The Opposition is concerned about the crisis being encountered by builders who are unable to get immediate and quick access to compulsory home warranty insurance in order to start jobs. Those builders, particularly good traders, have an absolute right to have access to that form of insurance. But under no circumstance can we agree to any suggestion that we have delayed the bill. If anything goes wrong, even if it has nothing to do with delaying this bill, the Government will blame the Opposition for it. In my view, the total responsibility for this bill and its impact should rest with the Government. For that reason, we reluctantly agree to the Government's request. If members read the speech that was given by my leader in another place last night, they will see how reluctantly the Opposition agrees to the terms of the bill. We have enormous concerns about the bill. I will outline some of our concerns, but I am hampered by the fact that I do not have access to research, statistics and other details.
In the few hours since I was told that we had to deal with the bill today, I have been involved in briefings and telephone calls to organise and bring forward the detail we need to deal with the bill. Some people may be offended or upset by the Opposition's conduct. There are few occasions on which I have been more offended or upset by my own conduct. In my view, we are not giving this bill the professional treatment that ought to be given legislation. A bill of this nature deserves to be in the House for at least a week so that we, as professional legislators, have a reasonable time to look at its provisions. The Government could not have a credible argument against the bill being made available for examination for a week to allow us detailed consultation. The Government said that it has undertaken consultation. I do not know the extent of that consultation and I do not know of any terms that may have been given by Government members.
The Minister's office is still researching questions that I asked for the first time only an hour or so ago, so I do not have the answers available to me. I am speaking entirely off the cuff, without the security that I would like. I do not believe that is professional or five-tick quality assurance, and I regret that I have to do that. The Opposition is very concerned about passing this legislation with this sort of scrutiny. For that reason the Opposition has suggested, and I understand that the Government will agree, that if the legislation is passed today it will be referred to the Standing Committee on Law and Justice for an immediate inquiry by that committee.
The Opposition asked the Government to agree to refer the Home Building Insurance Amendment Bill and its impact upon home warranty insurance providers, home builders and consumers to the Standing Committee on Law and Justice for an inquiry as soon as possible; to undertake to consider any recommendations that arise from the committee; and to request the chair of the committee to facilitate, where possible, the attendance and participation of interested members of the crossbench who are not members of that committee. The Standing Committee on Law and Justice has a fixed membership, with only one crossbench member.
As crossbench members may have an interest in this issue and may wish to ask questions at the hearings, it is only fair and reasonable that they should have an opportunity to do so. Of course, there must be some control: the committee must be able to transact its business without hindrance. However, the Opposition does not want to lock the crossbench out, and for that reason has asked the Government for that consideration. I now have in my possession a letter from Minister Aquilina to the Hon. Ron Dyer, Chair of the Standing Committee on Law and Justice. The only apparent difference between the terms of the letter and the terms that I outlined is that it states:
It is understood that in agreeing to the reference of this Bill in this manner, in no way is the government constrained regarding the commencement of this legislation.
I agree with that. I understand that the Government wishes the legislation to commence as soon as possible. That is fine. I do not think the Government has been very reasonable, but I have tried as far as possible to be reasonable in my dealings with the Government because I understand that we have an overriding responsibility to serve the people of New South Wales to the best of our ability. I understand that the issues are urgent and in some respects they are not of the Government's making. The Government did not fly an aeroplane into the twin towers in New York on September 11 last year, nor is it primarily responsible for the collapse of HIH and other things that operate within the insurance environment. Those things are well understood on both sides of the House. In fact, the Leader of the Opposition on another occasion issued a press release—
The Hon. John Della Bosca: Mike?
The Hon. JOHN RYAN: No, Mr Brogden—offering the co-operation of the Opposition in resolving issues such as public liability and indemnity insurance. The Opposition intends to take the same approach with regard to this legislation. However, I am greatly concerned that the House is passing detailed legislation, which will heavily impact on some individuals. It will not heavily impact on the vast majority of members of the public because most members of the public who contract to build a home usually get what they pay for, but for those who do not, the impact will be unbelievable. Those whose homes are not built properly suffer from marriage breakdowns and financial ruin. Sometimes they live for years in the wreckage of their partly completed houses. It is of concern that those people should have to endure such things without the full and adequate protection of home warranty insurance.
Another matter of concern to the Opposition is that to a reasonable extent many of the provisions in the bill have been dictated to the Government by the insurance industry. I have no objection to the insurance industry putting a fair case to the Government that something needs to be done, but we do not have any idea of the actual costs of the scheme. One must ask what will be the impact on consumers of claims. What are consumers getting now for this very expensive insurance that they will not get under the new scheme? I am in no way able to inform the House, and I suspect that the Government is likewise unable to do so. We have been told in general terms that insurance of this nature operates successfully in other States. However, we are not in a position to know that. I would have thought it would be worth making an inquiry to ascertain whether there are any complaints about the schemes operating in other States before we consider introducing it freehold into New South Wales.
This bill is largely a survey of the lowest common denominator available in home warranty insurance across the State, with one single exception: New South Wales already has a maximum benefit of $200,000 for a claim. We are keeping that one claim, but in every other respect the benefits that have normally been available to New South Wales consumers are being cut. I do not mean this as a personal criticism of the Minister but I use it as an illustration of the environment in which we are working. In the Minister's second reading speech he referred to matters driving the reform, such as the events of September 11 and the HIH Insurance collapse. However, he does not explain in any detail the operation of the bill.
The Opposition has no idea, from the second reading speech, of the specific provisions under which the bill operates. Normally when one reads a second reading speech that detail is available. Indeed, often one does not even need to read the bill. However, in this case it is impossible to understand the provisions of the bill without reading the explanatory notes. The Minister's very brief second reading speech does not provide that information. One of my colleagues in the other place quipped that she has given five-minute speeches which contain more detail than the Minister's second reading speech, and that is true. I do not say that to be critical of the Minister but it causes me to question whether the Minister is not prepared to take the risk in his second reading speech—and we all know that sometimes when something is unclear, a court may use a second reading speech to provide some clarity. The Interpretation Act provides for that.
The Minister was not prepared to commit himself and explain the details of the bill in his second reading speech. The second reading speech contains very little detail. It simply tells us why the bill is necessary, and I am concerned about that. With regard to the insurance industry itself, I would like to have brought to the House an answer to a question that the Minister for Fair Trading, Mr Watkins, gave to me. I listed each of the insurance companies that provided home warranty insurance and asked for details of the number of claims that had been made, the cost of the premiums, the number of claims that had been refused, and other details. That was information that insurers were supposed to provide to the Government in a timely fashion when the insurance scheme started in 1995.
I am speaking from memory here and it will be interesting to test that later. I discovered that insurers have not provided this information in a timely fashion and some were not up to date. Therefore, we did not have an accurate picture of their profit and loss statements to see how viable this insurance was or how much profit the insurers were making. Even the Government was not diligent enough to force the insurers to provide that information promptly. The Government does not know for certain the profitability of the insurers. It is my understanding that the major insurer for home warranty insurance, Royal and Sun Alliance, reported a number of details that were ultimately relied upon by the Minister in answer to my question.
I understand that those details, which were provided to none other than this Parliament, have since changed. The insurer sold insurance through a front company, Home Warranty Insurance, which had an office in Sydney—I have told honourable members how unresponsive I found its staff to be. Royal and Sun Alliance was the company underwriting the scheme and, upon inquiring about the Sydney operations, it discovered a large number of claims which it told us it had no idea existed. I understand that total liability amounted to about $30 million.
The insurance companies are telling the Government that the previous scheme was undercut by HIH premiums and things of that nature and was not financially viable. That might be a fair point, but the insurance companies have an absolute hide to claim that the goalposts have moved when they were supposed to provide the information diligently to the Government throughout the operation of the scheme so that any claims made could be checked. We must remember that this insurance scheme does not operate in the market, where insurers charge what they like and people have the option not to purchase if the price is too high. This is a compulsory statutory scheme: people must sign up to it if they want to build something. I agree that they would be mad to do otherwise, but when the Government compels the purchase of a product it distorts the market. The only way to make up for that distortion is to make available information that allows the Government to monitor the scheme and make supplementary legislative changes to the scheme if it is found to be either not viable or producing rapacious profits for insurers. That is the only market control.
The Hon. Dr Arthur Chesterfield-Evans: If there was an effective building inspection system there would not be so many complaints.
The Hon. JOHN RYAN: I will come to that issue. I sincerely hope that under the new scheme the Government will make sure that all insurers provide the appropriate information—similar to that which the Special Minister of State requires of the Motor Accidents Insurance Scheme through the Motor Accidents Authority. I believe that is a fair level of disclosure for a statutory scheme, and insurers should make similar disclosures before they get what they want. Insurance companies have essentially held a gun to the head of the Government and Parliament. They have said, "Either do this or we will all leave." One insurer, Dexta, announced its intention to leave the market in any event—just in case the Government and Parliament did not get the message.
I understand that in a private enterprise system we cannot force corporations to conduct business if they do not wish to do so. That is commonsense. However, we must recognise that the insurance industry has asked for and received everything it wanted. Virtually none of its requests have been knocked back. Therefore, we should at least demand of it some reports about profitability and the operation of the scheme. That is reasonable. We must check whether the industry is making good on its claims. The home warranty insurance industry in New South Wales has a tragic record of responsiveness to customers. It is not as though we are dealing with a forthright trader; this is a trader with a disgraceful record.
I know many people who made perfectly reasonable claims and who were continually pushed away by insurers. One has only to read in Hansard other speeches that I have made on this subject to find well-documented cases of that nature. How does this insurance package affect builders? The Government will claim that if we make the insurance scheme more viable others will enter the industry making it easier for builders to access insurance. Hurray, our problems will be solved! However, that is not what builders are complaining about. Access to the scheme is a problem but that access is blocked not because there are no insurers capable of selling builders insurance but because insurers are demanding from builders high capitalisation levels before they will sell them insurance. This insurance insures against builder bankruptcy, and companies are now requiring builders to have such high capitalisation levels that one almost wonders why they require insurance in the first place.
Builders are required to give so many capital guarantees that many are forced to put their homes and the assets of family members on the line so that there is something for the insurance company to seize if the builder fails to fulfil a contract. Some builders cannot meet those requirements and as a consequence are charged unreasonable premiums or refused insurance altogether. That is what builders are concerned about, and this package does not address that problem. I had the pleasure of attending a meeting convened by the Leader of the Opposition, Mr Brogden, in his office that brought together representatives of the Housing Industry Association, the insurers Royal and Sun Alliance and Dexta, and other representatives of the building industry whose names and details escape me.
In fact the only major players missing from the meeting were representatives of consumer groups—we wanted to concentrate on industry players—and Elizabeth Crouch from the Housing Industry Association. We discussed the package that the Minister had announced in March. The builders complained to the insurers—there was a great cross-table discussion—that they had difficulty securing insurance because they were obliged to provide so much capital. The representatives of Royal and Sun Alliance said to the builders, "That's not what this package is about. This sort of package operates in other States and we will expect of the building industry in New South Wales the same capital requirements as are required in South Australia, Western Australia and in other States; that will not change."
Tomorrow builders will still report to us that they are having difficulty purchasing insurance. Even if this legislation were enacted right now, builders would still be invigilated by the insurance industry with regard to their capital. I suggest not that that is inappropriate but that this package is not the antidote. To find an antidote to that problem we must take some other action. For example, builders believe they are questioning figures written on the back of an envelope that they are not allowed to see. The insurers will not tell them what they require so the builders must guess. They grab a few more assets and return to the insurers and ask, "Is that enough?" If it is not, they must get a few more assets, and so the process continues. That sort of nonsense must stop.
I understand that in Queensland there is a grading process: builders with a lot of experience in the industry do not require as much capitalisation as builders who have just entered the industry. There are also special schemes that allow builders to start up in the industry, because most builders begin with no assets other than a van in which to carry their tools. If we do not help new entrants we will not have a building industry in the future. There is already a shortage of tradespeople so we should not hinder new entrants to the industry. While this package deals tangentially with the availability of home insurance, it does not solve some of the critical problems about which the builders complain.
What does this legislation do for consumers? It caps consumer benefits that currently apply in New South Wales. I shall examine that issue a little more closely. I noted in my reading of the second reading debate in another place that almost no members had latched on to the significance of this provision. References to how the deal will impact on consumers are scant but I shall ensure that the bill does not pass through this place without some detailed inquiry about that issue. Several measures will cut the benefits to New South Wales consumers. First, it will become an insurance of last resort. Under the current scheme people can make claims of their insurers at any time.
The insurer frequently referred people to other avenues, but sometimes it was possible to negotiate with the builder, for example. The insurer would help them by telling the builder to go back and finish the job, and so on. That used to happen, but it will not happen now. People will have to operate on their own by talking to their builder and begging and cajoling him to come back and finish the job properly. If they want to be a bit more ferocious they might get a solicitor to send the builder a threatening letter, and they will then have to take the builder to the Consumer, Tenancy and Trading Tribunal.
One other option that consumers had until a few weeks ago was to make a complaint to the Department of Fair Trading. The department had about 10 building inspectors, some of whom would leave the office and help these people in tangential ways, but sometimes they provided some assistance. Consumers with a building problem will now be instructed to go straight to the Consumer, Tenancy and Trading Tribunal because the tribunal wants people to access its mediation process. However, if a person buys a lemon of a motor vehicle a team of people in the Department of Fair Trading will come out and look at the vehicle, go to the trader and negotiate a settlement.
Home builders no longer have that option. This is now an insurance of last resort. After some delay consumers who have a problem will try to convince their builder to go back to the site and operate properly, then they will need to go to the Consumer, Tenancy and Trading Tribunal. If the builder is not co-operative with the fast alternative dispute mechanism the matter will be listed for hearing. That hearing will take at least 12 weeks, if not more, to reach the end of the process. Most people I know who have had to take any matter of a serious nature to the Fair Trading Tribunal and its successor, the Consumer, Tenancy and Trading Tribunal, find that it takes at least 12 months for the problem to be resolved. There is no benefit to the insurer in getting speedy service now—the Government argues you never could, even though that was the way the plan was supposed to work.
Consumers are being denied the opportunity to resolve these problems early with the assistance of an insurance company. They are on their own. In addition, they do not go to the tribunal for nothing. In most instances they will be obliged to get a consultant's report on the building, which costs about $300—and I have seen a few that cost $10,000. More than one report may be required, maybe not at $10,000 each, because it is not uncommon to need a specialist engineer, a bricklayer or a number of other people with expertise in termite protection, and so on. There are then the witness expenses. Consumers have to pay those costs out of their own pocket. If it is a serious matter, they might need a solicitor. They might even need a barrister's opinion or a barrister to attend the tribunal because builders are sometimes very well equipped with such advice, and it may well be that the insurance industry will continue with its current level of generosity and assist builders in this fashion, as they have in the past.
So it is not unusual to pay $25,000 to take a matter to the tribunal. I have to say it is not uncommon for it to cost $100,000, and the consumer has to bear that cost. Bear in mind that the maximum payout for this insurance is $200,000. Some people will lose their whole entitlement, or most of their entitlement, on the legal procedures involved in getting their justice, so it will be a totally pyrrhic victory. After this legislation is passed, for many people who have a rotten builder the most efficient and least expensive option will be to bulldoze what the builder has done, hire a new builder and get a new life. If people think they can have a free $200,000, that is not quite true. There is another cap that covers the event of the builder leaving the site. If a builder leaves the building site the consumer is limited to 20 per cent of the contract price, as the insurer's exposure is 20 per cent of the contract price.
For most average building contracts that means they will have available to them about $30,000. Remember that this is insurance of last resort. If it costs consumers $25,000 to take the builder to the tribunal to get a judgment in their favour, which the insurer will honour, and then the builder goes bankrupt, dies or disappears—and that can happen—they might lose all the value of their insurance because it will be taken up by legal costs. In order to give this legislation teeth people may only make a claim against home warranty insurance in the very unlikely event that the builder dies, disappears or becomes insolvent. I have asked, but have not yet received an answer to the question: What if the builder loses his building licence? Six builders last year had their licences suspended by the director-general of Fair Trading. What happens under those circumstances? I would have thought that would be a reasonable case for a claim against insurance. At the moment consumers would have to sue the builder for whatever assets they could get.
What would happen in the highly likely event that a builder—although licensed and solvent—belted up a family member, as sometimes happens in these circumstances. Some shonky builders have threatened home owners. If the owners do not want the builder to come back on to their property because of his conduct or behaviour, what do they do? They are stuck with that. This is important, because when we were going through the exercise of passing reforms to the Consumer, Trading and Tenancy Tribunal and the Home Building Act last year, the then Minister for Fair Trading, the Hon. John Watkins, told me that one of the next stages of the reform would be to examine the regulations that pertain to home building insurance and tighten up the provisions that trigger the opportunity to make an insurance claim, and to look specifically at what happens when the insurer becomes unlicensed or is no longer able to come to the home because of his conduct or some other issue. That is one issue that I believe needs to be investigated by the committee when it hears evidence, because home owners are really going to be left in the lurch.
The Government says these are not problems because this scheme operates in other States, but I will bet my bottom dollar that there are consumers with these problems in other States whom we do not know about. All that needs to happen is for us to perhaps advertise and they will come flocking, and we will discover the downside of this scheme as it operates. At the meeting in Mr Brogden's office inquiries were made as to the current cost of an insurance premium. It costs about $800 to insure the average project home in Sydney. That is an increase of nearly 50 per cent on what it was about two years ago. I asked the question: "When they cut these benefits, will you be reducing your premiums?" The answer was, "No. We might review them in 12 months time but we believe that the current scheme is only viable at those rates of premium if these laws are introduced."
In 1995 people had the protection of the Building Services Corporation—such as it was—and I think they paid a nominal insurance policy. The Government introduced this grand plan in 1995 to privatise the scheme, and premiums have gone through the roof and the benefits have been reduced to almost nothing. There will be almost no opportunities for people to make claims under this scheme. We have given insurers a very lucrative new area of activity, and consumers have been virtually hung out to dry.
[Debate interrupted.]
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