Owner Builders and Home Warranty Insurance - NSW

Date: May 03, 2007

Authors: Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)

We are often approached by people who have decided to build their own home as owner builders rather than retain a licensed builder.  There is a common misconception that not only will the house be cheaper but owner builders do not bear the same responsibilities with respect to home warranty insurance as licensed builders.  As advised in previous articles, licensed builders bear a mandatory obligation to take out home warranty insurance if the value of the contract exceeds $12,000.  This insurance protects against the death, disappearance or insolvency of the builder.  It does not protect against defects.  Where defects cover was previously available it allowed the nominated insurer to compensate the home owner for defects yet they were entitled to recover their losses from the builder/responsible party.

Owner/builders are not necessarily required to carry home warranty insurance during the course of building their own home or when they are living in it, but when they seek to sell the property they are required to obtain a certificate of home warranty insurance.  There are a number of brokers and insurers that offer this cover.  Where problems arise the buyer can rely upon this insurance for protection.  Irrespective many owner builders believe that home warranty insurance is all-encompassing including defects which it is not.  There are a number of owner builders including tradespersons who take the view that provided council has inspected the dwelling during the course of construction they don't bear any liability for defects but council does.  This could not be further from the truth as Council has attended as an inspectorial authority to ensure that what is being built accords with what has been approved.  It is not there to ensure that the building is without defects or to protect both the owner builder or any subsequent buyer from problems associated with the death, disappearance or insolvency of any person involved with the construction of the dwelling. 

Owner builders often forget that where they substitute for a licensed builder they assume the role and responsibilities of the builder and need to ensure that they comply with their statutory obligations.  Owner builders have obligations under the NSW Workers Compensation Act 1987 and the Occupational Health & Safety Act 2000.  The Occupational Health & Safety Act 2000 extends to include any employees of theirs or anybody who visits the site at any time during the course of construction. Owner builders need insurance to protect both themselves and the site works which can be done by effecting:

  1. home warranty insurance;
  2. workers compensation insurance;
  3. contract works insurance; and
  4. public liability insurance.

Home Warranty and Workers Compensation Insurance are required by law.  As for contract works and public liability insurance, they are optional and often bundled together and sold as a contractors all risks policy.  Essentially the protection under any one of them is not duplicated by the others as they all fit together to provide cover. 

It is important to recall that with home warranty insurance it is not issued on a general replacement value basis but is subject to either a limit of indemnity of $300,000 as from 1.3.07 (previously $200,000) or a limit specified and agreed to by the insured to cover the cost of construction.  It should always be remembered that this limit may prove to be inadequate because building costs often escalate for any number of reasons including variations and therefore this is something which needs to be watched closely by the home owner.  Sometimes builders deliberately understate the actual construction costs to obtain a cheaper premium.  It is worth noting that although this area falls under the control of the Office of Fair Trading as home warranty insurance is a matter dealt with by the States, this does not automatically exclude the operation of the Trade Practises Act.

From 1 January 1999 any licensed contractor who contracts with an owner builder to undertake residential building work must provide home warranty insurance from an approved insurer.  Currently insurance is required where the work to be performed by that tradesperson exceeds $12,000.  For the sake of completeness where an owner builder decides to sell his/her home within a period of six years of completing the work they will need to take out home warranty insurance where the value of the works performed exceeds $12,000.  Currently, under home warranty insurance an approved insurer is taken to have admitted a claim after 90 days if they have not obtained an extension of time either from the OFT or the tribunal.  Three months or more is a long time to wait for an insurer to respond to any claim particularly given the history normally associated with these matters. Insurers in this area are trying to minimise their financial exposure and although there are a number of safeguards under the legislation these can be easily circumvented. 

Legislative changes have also had an impact in regard to making sure that where a property is sold by an owner builder within the six-year period then the contract for sale must include a note that an owner builder permit was issued in relation to the work; that the work done under the permit required home warranty insurance; and attach a copy of the home warranty insurance certificate.

Whether you be home owner, builder or owner builder and encounter any problems associated with building and construction or home warranty insurance please do not hesitate to contact LAC Lawyers on 1300 799 888 to arrange an appointment.  Remember, matters only get worse the longer you leave them and the more they cost to resolve.  Further reforms are contemplated in this area.

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Phone LAC Lawyers on NSW 1300 799 888 or VIC 1300 734 638 or send us an email

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