Impacts on those Buying, Building or Renovating Residential Properties in WA?
Residential building work contracts in Western Australia are governed by the Home Building Contracts Act 1991 (the Act). If residential building work valued over $20,000 is to be undertaken (a WA Registered Builder is required) the Act requires that a builder take out home indemnity insurance in the name of the owner before accepting payment or commencing work.
1 What is Home Indemnity Insurance?
Home indemnity insurance (HII) protects owners against financial loss if a builder cannot complete residential building work or meet a valid claim for faulty or unsatisfactory building work because of death, disappearance or insolvency. So the first key point is that post construction the builder remains liable for the work and the insurance can only be claimed upon if the builder has died, disappeared or is insolvent.
The policy must cover potential claims for defective workmanship made up to six years from practical completion.
The policy must require the insurer to pay up to $100,000 or the value of the contract work (if it is less than that amount) and no more than $20,000 for loss of deposit. This is the maximum amount that the insurer must agree to pay out while the policy is in force. So the next key point is that the amount that will be paid out is limited to $100,000.
The insurance policy must cover the residential building work during the construction period and for six years from the date of ‘practical completion’ (the six year insurance period). Practical completion is when the building, extensions or renovations are completed and ready for occupation and is generally signalled by the builder notifying the local authority that practical completion has been reached.
The Act applies to all areas of the state, however, the provisions of the Act are different when a person builds, extends or renovates their own home as an owner-builder or a builder seeks exemption to build their principal place of residence.
2 When Is the Insurance Required?
Insurance is required when residential building work exceeds $20,000. Residential building work is defined in the law to mean:
- construction of a new dwelling;
- extension or renovation of an existing dwelling;
- placing a dwelling on land; or
- construction, extension or renovation of multi-unit grouped homes except for some multi-storey developments and fully leased retirement villages.
Insurance cover is required for all residential building work contracts including:
- A ‘cost plus contract’.
- Building or buying a ‘spec’ home. A home built by a registered builder on their own behalf and then sold as a completed home (usually by offer and acceptance). The builder must take out HII prior to the building permit being granted to protect purchasers and any subsequent owners for six years following practical completion.
- Placing a dwelling on land for the first time. The cover must include the cost of the residence as well as placement and any work to the dwelling after placement. An example of this might be a transportable home.
- Relocating an existing dwelling to a new site. HII must cover work connected with the relocation, placing the dwelling on the land and work to the dwelling after placement.
3 When Is the Insurance NOT Required?
Subject to the Home Building Contracts (Home Indemnity Insurance Exemptions) Regulations 2002, home indemnity insurance cover is not required for the following types of residential building work:
- multi-storey multi-unit developments, as defined by the regulations; or
- retirement villages that are intended to be leased.
4 Who Arranges the Builders Indemnity Insurance?
A builder carrying out residential building work on behalf of an owner is responsible for taking out HII and for giving the owner a copy of the certificate of insurance BEFORE:
- starting any residential building work;
- asking the home owner to pay a deposit; or
- asking the home owner to pay any other money under a residential building contract.
This protects subsequent owners, if the property is sold during construction or during the period of indemnity insurance.
The insurance premium is paid by the builder. Builders need to make provision in the contract price for the cost of the insurance policy and apply to the insurer to have the work covered. The premium is a one off payment. The policy will be in the name of the owner so that if the owner sells the residence within the six year insurance period, the benefit of the policy will pass to a subsequent owner(s).
5 Who Provides the Insurance?
Indemnity Insurance in WA is provided by private insurers that have been approved by the WA Minister for Commerce. The builder has the option of which insurer to select, provided that the insurer agrees to supply the cover.
6 What if the Builder Cannot Get Insurance?
If the Builder cannot obtain the required insurance, the owner should engage another builder who can.
7 The Administration
Before a contract for home building work is signed, or a deposit is paid, the builder must provide the owner with a copy of the ‘Notice for the Home Owner’ which summarises the main requirements of the Act, including the requirement to take out Insurance.
A copy of the certificate of Indemnity policy together with the application for a building permit is lodged with the permit authority. The permit authority is able to refuse the application if evidence of insurance is not provided
8 Special Rules for Owner Builders
A person who has owner-builder approval from the Building Commission and is granted a building permit, is the person responsible for the building work to his/her own home and is not required to take out indemnity insurance cover.
However, if the residence is sold or otherwise disposed of within seven years of the date the building permit is granted, the cover must be in place.
The prospective purchaser should be provided with a valid certificate of insurance before the sale contract is finalised. Failure to do so can lead to prosecution and a $10,000 fine. If Insurance cannot be obtained, the property cannot be sold within seven years of obtaining the building permit.
9 Special Rules for Builders Principle Place of Residence
The Act provides for a registered building contractor to build their own principal place of residence once every six years without having to obtain insurance. A builder may seek exemption under section 25B(3) of the Act by making a statutory declaration they have not obtained an exemption in the previous six years and undertaking to provide insurance to a subsequent owner(s) for seven years from the date the building permit was granted.
10 Exemptions and Key Issues for WA Strata Unit Purchases
Subject to the Home Building Contracts (Home Indemnity Insurance Exemptions) Regulations 2002, home indemnity insurance cover is not required for the following types of residential building work in respect of a multi-storey multi-unit development. A multi-storey multi-unit development means a building, comprising 2 or more independent dwelling units, any part of which —
(a) has a rise in storeys of more than 3; or
(b) has more than one basement storey;
Builders must issues the required notice to facilitate the exemption from HII, noting that the required notice is complex and it is dependent on a variety of factors and preconditions. Whn all of the conditions are met the Builder is not required to obtain the required insurances. The notice requirements are complex and expert advice should be obtained.
Bottom line, it is surprising that builder’s indemnity insurance is not required for properties over 3 storeys in WA, especially noting the number of strata property builders who have become insolvent in recent years (I.e. Diploma) and left strata owners having to fund significant remediation costs.
- Home Indemnity Insurance provides property owners with a key piece of insurances if the builder cannot complete the work as they have died, cannot be located or is insolvent.
- The insurance can only be called on in limited circumstances and is capped at $100,000.
- Unless the builder has died, cannot be located or is insolvent, they remain liable to the home owner to remediate construction defects.
- Owner builders, builders building on spec or their own home face similar obligations.
- Multi storey, multi-unit developments (strata buildings) and retirement villages that are intended to be leased, if certain procedures are followed, are exempt from the insurance requirement!
Home indemnity insurance is only one of the insurances that a builder should have. Property owners engaging builders should ensure that all of the other requisite insurances are in place prior to commencing.
13 Need More Information?
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