Taxpayers bear brunt of insolvency costs

A growing number of home builders going insolvent in Victoria and NSW has required insurers to pay out more than $300 million over the past decade for unfinished or substandard work. There is the same amount in outstanding claims yet to be settled.

The scary part is that, as of January 1, taxpayers in Victoria and NSW bear all new risks from this growing trend. Insurance minnow Calliden was the last private sector player to underwrite so-called builders warranty insurance, but after mounting losses it stopped doing so at the end of last year.

In NSW, the last of the big underwriters departed the market in 2010, leaving the taxpayer-sponsored NSW Home Warranty Insurance Fund to take on all new risks. It hasn't started well. In the past two years the fund has racked up more than $165 million in losses.

''The future building cycle is uncertain, especially the length and the severity of future economic downturns, and this will impact the emergence of future builder insolvencies and hence future claims costs,'' the fund said.

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Administrators of failed builders typically attribute the collapses to poor management, inadequate cash flow and trading losses, but insurers also blame so-called phoenix companies, where a builder will prefer a trading entity to become insolvent rather than meet the cost of rectification work only to re-emerge to start new projects under a new trading entity.

''The building industry is a particular hot spot for phoenixing as reported in last year's Collins Inquiry into Insolvency in the NSW construction industry,'' says Shaun Bailey, a partner at law firm Corrs Chambers Westgarth.

Mandatory home warranty insurance schemes are supposed to provide a safety net to home owners where a builder is unable to complete the contracted work or rectify defective work because of their death, disappearance or insolvency. In reality, builder insolvencies caused by whatever reason are the source of the vast majority of claims.

In announcing proposed reforms late last year, NSW Minister for Fair Trading Anthony Roberts emphasised that prospective home owners deserved protection when embarking on the biggest investment of their lives, but he didn't spend much time on the exorbitant cost to taxpayers of providing that protection.

There are good reasons why the likes of Vero, CGU and Lumley no longer assume such risks.

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Taxpayers bear brunt of insolvency costs