On Monday, Chris Penk, Minister of Building and Construction, announced that the Government would be making 10 year guarantees compulsory for all new residential buildings of up to three storeys and for renovations costing more than $100,000 (incl GST).
This is in response to planned changes to New Zealand’s liability regime that would benefit Councils (in their capacity as Building Consent Authorities) but dilute protections for homeowners. Under the current “joint and several” liability rules homeowners are often able to rely on their local Council (which inspected the works and issued the building consent) being the “last man standing” and having to bear 100% of the remedial costs if there is a problem with their home’s construction but the other responsible parties (such as designers, developers and builders) are no longer around.
Under the proposed new “proportional liability” regime, each responsible party would only have to contribute their share of the costs. This leaves a big potential gap in the compensation available to homeowners if those parties are no longer trading. That’s why the Minister is going to require builders to provide a home warranty. The warranty would cover all defects for the first year and structural defects for the full 10 years.
The Minister indicated the legislation would be introduced in 2026 with a 12 month implementation period before the requirements take effect.
Challenges for Builders
Currently there is only one independent provider of 10 year home warranty cover in New Zealand. Outside of that, builders must join the Registered Master Builders Association or New Zealand Certified Builders. However, by the time the new regime comes into place in 2027 there should be more home warranty options in the market, including from Builtin.
Builders wanting to build new homes or do renovations over $100k must be able to apply for these warranties. All warranty providers will have criteria that builders must meet. These may include:
1. Healthy financial accounts, cashflow and other key financial metrics
2. Employing staff and subcontractors that have the appropriate qualifications, skills and experience
3. A comprehensive quality assurance process
4. Only engaging in projects that meet acceptable design and product specifications
5. Providing personal guarantees or other security to satisfy warranty providers in the event of a claim
If builders are unable to meet these criteria they won’t be able to perform this work. That leaves the option of doing other work, like smaller renovations, or potentially contracting via another builder who can secure warranty cover.
What’s the real issue with relying on professional indemnity insurance for designers?
Another announcement by the Minister is that designers & engineers will be required to hold professional indemnity insurance. However, the real issue is not if they have it, but what difference it will make if a homeowner has to take their architect to court because of a serious defect in the design of their home.
A professional indemnity policy has to be in place when the defects are identified.
Professional indemnity insurance is different from home warranty cover because it has to be renewed every year, and if it isn’t in place at the time the defects are discovered (and a claim made against the architect and notified to their insurer) then there will be no cover available for the homeowner to benefit from. This is most likely to happen when an architect has closed their business or gone into liquidation.
The policy must also have been put in place before the design or engineering work was done and maintained continuously until the defects are identified and the claim made against the professional. Any break in cover after the work was done could also mean it won’t be covered if a future claim arises, even if a new policy has subsequently been put in place.
So, it’s all good if the architect is still trading (and hasn’t had a break in cover since the work was done), but what if they have closed up shop? If they haven’t renewed their policy, and why would they if they have closed their company or gone into liquidation, and hadn’t arranged run off cover (which a liquidator is very unlikely to have done) there will be no policy for an aggrieved homeowner to rely on!
If the architect has gone bust, moved to Australia or died and there is no current professional indemnity policy in place at the time the defects are discovered, that will leave the homeowner having to bear that proportion of the cost of remediation. There will be no professional indemnity insurance, no “last man standing” and no home warranty policy to cover the design defects.
Run off cover is one solution to this problem, provided the designer (or liquidator) takes it out. Another is project specific professional indemnity cover, which lasts for the required period of time (usually up to 6 or 7 years), but this is not widely available for residential contracts and may be prohibitively expensive.
In a Nutshell
The new regime certainly benefits Councils, who will only be responsible for their proportion of the liability. Will that result in faster consenting and inspection processes and lower costs enough to offset the cost of mandatory home warranties?
Who will cover the remedial costs of defects in renovations projects worth less than $100k, where warranties aren’t mandatory and if the responsible parties are not around to cover their share?
Who will cover the cost of design defects if an architect or engineer has gone bust and their professional indemnity insurance has lapsed or been cancelled by the liquidator? Or if they have died, closed their company or moved to Australia and their policy hasn’t been renewed?
