When your builder raises a contract, they also need to raise insurance. The policy that is most important is the Home Warranty insurance.
Home Warranty insurance is issued to the developer/homeowner to protect them against loss due to non-completion, defects and breach of statutory warranties by the builder. It is legally required and is only triggered if a builder dies, disappears or becomes insolvent before completing the home or fixing the defects.
I’ll repeat...you can only claim on this policy if your builder dies, disappears or becomes insolvent. These are pretty drastic outcomes really for the builder but can also have dire consequences for you.
I think we all understand what ‘dies’ means. ‘Disappearing’, well I’m not sure how this is legally defined, I couldn’t find an explanation. How long does he have to be gone for? Does a three month trip to Vegas count? What I do know more about is the process of ‘becoming insolvent’ and it can be quite drawn out.
If you find yourself in the situation where your builder has gone into voluntary or court appointed liquidation, the good news is…you are most likely covered by Home Warranty insurance. The bad news is…your cover may not be enough to complete your building works.
I’m going to let you into a little known fact: Your Home Warranty insurance policy only covers 20% of the builder’s contract and up to a maximum of $300,000 for incomplete work. So the stage your builder goes broke is very important, but totally out of your control. I’ll come back to this.
Going into liquidation is not easy for anyone. For voluntary liquidation the builder needs to acknowledge that they just can’t keep trading. There can be a period of denial as he comes to terms with this. Hopefully, he won’t be trading whilst insolvent because that’s against the law. Signs of distress may include; delays in completing the stage of build and disgruntled tradies who have not been paid or are continually having to chase payment and the builder being over anxious for their next drawdown. So when the builder finally faces reality and goes into liquidation, he needs to appoint an accounting firm to manage this process. They will be known as the liquidators. Their job is to notify all ‘creditors’ of the situation. A creditor will be you if you are under construction with the builder and anyone else he owes money too like staff, contractors and suppliers.
The builder may be put into Court Appointed or Official Liquidation. This is when someone applies to the court that a company should be wound up in insolvency. If this happens the court will appoint a liquidator.
Either way, before you can make a claim under the Home Warranty insurance policy, the status of the company must change from “registered” to “Under External Administration and/or Controller Appointed” on the ASIC website. Once the company’s status has been changed, you can lodge your claim.
When you make your claim, you’ll be asked to complete a schedule of payments you’ve made to the builder up to this stage. You’ll know how much you have left in your construction loan account. So then it’s a roll of the dice to see if you can complete the works with the insurance payout.
The insurance company will appoint an assessor who will inspect the site and put a building schedule together for the works that are outstanding. This is sent out for tender to builders on the insurance company’s panel and you can also get your own quotes. This is when you may discover that the works required to complete the project may not be covered by the claim and what’s left in your construction loan. With just 20% of the original builder’s contract to play with, there really isn’t a good time for your builder to shut down.
How can you avoid the situation of a builder going broke? Well you can certainly do your research on them before signing up. Get a list of their tradies and talk to them about how they are treated by the builder. Does he pay on time? Is he good to work for? How long have they been working with him? Talk to past clients and ask how their experience was? Check the Department of Fair Trading website for any past complaints and the ASIC website to see how long the builder’s been trading and his status.
At the end of the day, you will need to trust yourself and go with how you ‘feel’ about a builder. After all, we cannot know everything that is going on with a company. When you find a good builder, stick with them!