Apart from help with building contracts, there are two main reasons why builders come to us for legal assistance. One is to recover some money from a client in a dispute situation. The other is to defend an allegation that the builder has done defective work. You can protect yourself in the first situation by holding onto a deposit and using the CBANZ building contracts. You protect yourself in the second situation, by using the guarantee.
Two major things happened with the guarantee during 2015-2016. The first is that the Board decided to increase the uptake of guarantees by CBANZ members. The second is that CBANZ went out to the market to check whether the existing arrangements were competitive. The brokers who offer the new guarantee (BrokerWeb Risk Services Ltd) left their competitors for dead in terms of their response. That is not to say that CBANZ does not value the relationship they have enjoyed with the previous broker over the past years, but in the end, they were left with little choice but to make the switch.
Why is a guarantee so important? Because it gives your dissatisfied customers a second option other than to claim against you, and it is an option they will generally take. Just to remind you, the guarantee is for the client’s benefit, although you benefit indirectly as well. The guarantee protects the client against the risk that you will run off with the deposit before starting work, or you won’t complete the work, or you won’t rectify any defects that emerge during the 10 years after completion.
If any of those things happen, the insurance company or “underwriter” (Lloyd’s of London in the present case) will step in and put things right, subject to the terms and conditions of the policy. In contentious cases where you feel you are being unfairly blamed for alleged defects in the home, the homeowner knows they are going to have a battle on their hands trying to pin the blame on you. It is a much easier win if they can simply claim against the insurer instead, and the insurer is much more likely to be good for the money than the builder is.
Sure, the guarantee requires the homeowner to try to resolve the dispute if the alleged defects emerge within the first year, before claiming on the guarantee. If they emerge after that, the homeowner can claim on the guarantee without having to prove their case against the builder, and the insurer will simply pay the cost of rectifying any genuine defects (and the damage they may have caused) provided the criteria under the policy are satisfied.
Having paid out, the insurer then has the option of recovering the money from the parties they hold responsible. This is called a “right of subrogation”. The parties they hold responsible may be the head contractor, the subcontractors, the designer, the building materials merchant, or the Council. In clear-cut cases, they will seek recovery. But in cases where the responsibility for the defective work or materials is unclear, they may well choose to avoid expensive legal proceedings and simply absorb the loss. After all, their insurance premiums are calculated so that they still make an acceptable return even if they have to pay out on a certain percentage of claims, and never recover the money.
There is always the risk, however, that the insurer will pay out to the homeowner and then seek to recover the money from you. Having a huge multinational insurance company coming after you isn’t much fun, and that risk normally doesn’t go away for 10 years after completion of the work. So even if the homeowner chooses to claim on the guarantee rather than pursuing you, you can still lose a lot of sleep for a long time to come. That is where one special feature of the new guarantee comes to the rescue.
When you take out one of the new guarantees and hand it to your client, the broker will give you what is known as a “waiver of subrogation”. That is a promise that if a defect emerges more than a year after completion of the works and it leads to a claim, the insurer will not come after you. That means you can sleep easy, 12 months after you complete each project, provided the homeowner chooses to claim on the guarantee rather than claiming against you. You can get similar protection if you take out an “errors and omissions” policy instead, because that protects you against a claim of defective workmanship or materials, but you might decide the guarantee option is better value for money even if the risk is slightly higher.
Of course, even if the insurer has promised not to come after you, they can still pursue a claim against the head contractor (if it wasn’t you), the subcontractors, the designer, the building materials merchant, or the Council. The first thing any of those parties would do is join you as a party, so you get dragged into the legal proceedings, and that defeats the purpose of the waiver of subrogation. For that reason, CBANZ has negotiated an arrangement whereby the insurer will indemnify you for any costs you incur. I don’t believe that any of the competing policies do that.
I have reviewed all of the main competing policies, particularly the new Homefirst-branded guarantee put out by CBANZ’s previous broker Builtin New Zealand, and in my opinion it is not as good in some respects as the new guarantee put out by BrokerWeb Risk Services, and in other respects it is better. The changes to the old guarantee were only made at the very last minute, in response to competitive pressure, and after the decision to switch had already been made. To make the new guarantee economical for the insurer (Lloyd’s of London), they ask that CBANZ maximise its uptake by encouraging all their members to use their product, just as Builtin New Zealand did previously. Personally, I think taking out one of these policies on every renovation project and every new build is a no-brainer, and I would support the new policy simply to make sure that it remains a success.