Protecting homeowners behind the scenes

This is part one of a three-part series on how icare has responded to challenges in the home warranty insurance industry.

Home building site

Few people think about how they would cope if something happened to their builder during their all-important construction project.

Often there are more pressing matters to worry about, such as the colour of tiles, tap fittings and the placement of walls. So, it’s good that homeowners are protected, even though many don’t know how.

This is the job of icare’s Home Building Compensation Fund (HBCF). HBCF protects homeowners who undertake residential building projects in NSW worth more than $20,000 if their building contractors are unable to honour their commitments due to insolvency, death, disappearance or suspension of licence.

The fund insured more than $14.6 billion in residential projects during 2015–16, during which time there were 322 claims and 332 loss notifications.

From the ashes

Total value insured of $14.6 billion; $5,333 million (36%) for major projects over $15 million; $1,721 million (12%) for medium projects over $7 million; $2,585 million (18%) for small projects over $3 million; $3,225 million (22%) for small projects over $1 million; $1,687 million (12%) for small projects $1million & less;
Major builders accounted for 36 per cent of the total insured value while pools and very small builders accounted for 12 per cent.

HBCF General Manager Jon East has a depth of knowledge about home warranty schemes, having set up the first in Western Australia in 1985. He talks in detail about their history in NSW. “As a private voluntary insurer, it was difficult to get the pool of funds needed in a turbulent market.”. The WA Scheme ultimately became compulsory in 1997.

The government insurer in NSW, the former Building Services Corporation, covered the liability until the NSW scheme was privatised in 1997. “The building industry is quite volatile, with a boom-bust cycle,” says East, who was part of the Housing Industry Association Insurance Services (HIAIS) firm that stepped into the market at that time. “What you must do in the boom cycle is to get your house in order so you can weather any downturn.”

Then the failure of HIH Insurance (HIH) in 2001 changed everything. In 1998, HIH had taken over Fixed Asset Investment (FAI), a major insurer in the sector and an aggressive competitor to HIAIS, but HIH collapsed in 2001 with losses of $5.3 billion. In the post-HIH reforms, the NSW government converted the home warranty scheme from first resort to last resort in an attempt to resurrect the home warranty insurance market.

From first resort to last resort

First resort meant homeowners could claim on their home warranty insurance and pursue their builder concurrently. Consequently, the private insurers continually found themselves in litigation alongside the builders, which added cost and complexity for insurers.

Then the reinsurance market was savaged after the 9/11 terrorist attacks in the US. With reduced reinsurer interest, the requirement for home warranty insurance for new projects above three storeys was removed. The NSW Government briefly became the reinsurer for high-rise buildings, which proved expensive.

“High-rises were removed and first resort insurance was removed, and the scheme has been openly criticised as being Mickey Mouse,” East says. “It didn’t protect the high-rises, it didn’t protect clients who were in dispute with their builder.” However, at the same time insurers were paying out millions of dollars for losses that were covered by the scheme

Between 2002 and 2009, the scheme was monitored by NSW Fair Trading and an advisory board oversaw the private insurers. Actuaries appointed by the board confirmed that none of the private insurers had ever made any money from the product. By 2009, the scheme was considered unviable and most private insurers withdrew.


East, as one of the foremost experts in the field, joined the NSW public service in 2010 to help run the scheme in government hands following the failure of the private market. The HBCF became the sole provider of home warranty insurance in NSW for all new residential construction in July 2010 under the Home Building Act 1989. HBCF was then folded into the newly created icare (Insurance & Care NSW) in September 2015 through the State Insurance and Care Governance Act.

As a result of East’s efforts, the scheme is now on more solid footing thanks to some innovative solutions, including state of the art IT capability, raising the standard of builder financial accountability, and reducing the incidence of failed businesses resurfacing under new identities.

Part two of the series covers how the HBCF has achieved the turnaround and part three covers the innovative solutions that are helping both homeowners and builders.