Master Painters Australia
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Master Painters Australia |
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INQUIRY INTO NSW HOME WARRANTY INSURANCE SCHEME
Submission from
MASTER PAINTERS AUSTRALIA, NSW ASSOCIATION INC.
Protection for Consumers versus Costs to Consumers
In neither its present “last resort” form, nor in its former “first resort” form does nor did the scheme do anything at all to contribute to the quality of buildings, nor to encourage contractors to maintain high standards of workmanship, nor to penalize contractors for failing to maintain such standards.
For a consumer to make a claim against a painting contractor’s home warranty insurance two things must occur within a prescribed two year window of opportunity after the works are completed: there must be a failure of the painting and decorating works which can be proven to be attributable to faulty workmanship AND the contractor must have either died, disappeared or become insolvent. In the case of painting and decorating works, the probability of all those circumstances coinciding is extremely remote. Most failures in workmanship become evident within three months of the job being completed: the probability of the contractor having died, disappeared or become insolvent within that three month window is even less.
The cost of warranty insurance protection adds to the cost of painting and decorating works. Master Painters Association encourages its contractor members to show the cost of warranty insurance as a separate item on tenders, quotes, contracts and invoices. When our members explain to their customers just exactly what benefits the extra cost of the insurance provides, VERY few consumers respond positively. It is a relatively high cost for scant protection against a highly improbable set of circumstances.
Many consumers conspire with contractors to either ignore (illegally) the requirement for insurance on contracts over the $12,000 insurability threshold, or to artificially structure the scheduling and/or costing of works to (illegally) avoid the requirement for insurance. At least two of the major property management companies (directing repaint projects on thousands of strata-titled residential properties) no longer require warranty insurance and refuse to pay for it. Those property managers that do insist on warranty insurance now find themselves with VERY few contractors on whom to call for tenders.
Claims Experience – Painting and Decorating
The data demanded of insurance providers under the NSW scheme does not require disaggregation by trade. Therefore reliable data regarding claims against particular classes of trade contractors is unavailable in NSW. However, to the knowledge of Master Painters Association, there have been no claims at all, neither made nor paid, against painting and decorating contractors’ warranty insurance policies since the scheme was introduced in NSW six years ago.
Insolvency Risk
The incidence of insolvency among painting and decorating contractors is, in the experience of Master Painters Association, highest among contractors who work as sub-contractors to builders on new construction work and relatively rare among painters who contract mainly to home owners, directly, on repaint work. Most frequently, it is when builders go broke that their sub-contract painters go broke. A factor in this is that sub-contract sums on new construction work tend to be higher than contract sums on domestic repaint projects. The failure of a builder to pay a large contract sum can indeed send a painter under, but it is much less likely than the failure of a home owner to pay a bill for a single project will send that painter under.
Insolvency of painting contractors doing mainly or solely domestic repaint work contracted directly with home owners does not present a serious risk to homeowners.
Contractor Participation/Compliance
In the first year after the scheme was introduced in NSW six years ago, approximately 25 per cent of Master Painters Association contractor members in NSW applied for and were granted warranty insurance cover. At that time, the eligibility criteria, application procedure, premium costs, annual blanket structure, lack of absolute subrogation rights for the insurer (usually an “excess” was demanded, rather than total subrogation), and not-too-stringent financial security requirements were considered by Master Painters Association and most of its members to be reasonable.
However, much has changed with the withdrawal of some insurers and more stringent eligibility, subrogation and security requirements of the remaining insurers.
In the six months since 1 January 2003, only 17 painting contractors known to Master Painters Association in NSW have applied for and qualified for home warranty insurance. Given that there are nearly 9,000 licensed painting and decorating contractors in NSW, this level of compliance with the warranty insurance scheme effectively means that the scheme might as well not exist at all.
Risk to Insurers – Subrogation
The complete subrogation rights enjoyed by insurers now mean that they are exposed to relatively little risk. What risk they may indeed be exposed to is normally covered by elaborate bank guarantee arrangements which are cumbersome, expensive, onerous and odorous for contractors. And yet, as the risks to insurers have fallen, and the benefits to consumers eroded, so have the premiums risen.
The Association’s insurance brokers have recently withdrawn from offering home warranty insurance. There experience over the past six months has been that the procedures and paperwork demanded by the insurers imposes an administrative cost of nearly $400 on the broker’s office every time an application has to be processed.
Consistency with Schemes in Other States
If one of the aims of the most recent amendments to the scheme in NSW was to bring some consistency between the various state schemes, then there is one important area where that aim has not been achieved. NSW is the ONLY state in which painting and decorating contractors are required to have home warranty insurance.
Criteria for Approval of Insurance Providers
Since the scheme was introduced, Master Painters Association has argued for an arrangement that allowed the required and entirely justifiable level of consumer protection to be provided by industry-based mutual fund arrangements. However, the requirement that “insurance” providers meet APRA requirements has our proposal impossible to implement. Moreover, it has proven impossible to find an insurance underwriter to provide cover against the unlikely event that a “catastrophic” incidence of claims might exceed the capacity of the mutual fund to pay. The underwriters for such cover must, after all, come from the same pool as the existing insurers providing regular home warranty insurance.
Recommendations
EITHER
Treat painters in NSW the same way they are treated in all other states, and remove altogether the requirement for warranty insurance in NSW for non-structural, single trade domestic works (ie where the painting contractor is the SOLE contractor engaged by a home owner, and the painting contractor does not engage any other trade contractors)
OR
Remove the requirement that warranty insurance providers meet APRA criteria and allow for industry-based, mutual funds with a stronger, first-resort “fix the workmanship problem first” orientation AND if necessary provide government guarantees to back such funds in their early years while they accumulate sufficient reserves to provide for (highly unlikely) “catastrophic” claims. |
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