A few weeks ago, I wrote about why builder’s indemnity insurance was so important. Well I’ve recently received further information about the administrative burden builders face in maintaining said insurance. I’ve summarised this below and given my thoughts as to why homeowners should be concerned.
The administrative challenge in maintaining builder’s indemnity insurance
I mistakenly believed that builder’s indemnity insurance required the completion of a few forms. The type of information needed includes the following:
- Completed Eligibility Review Application Form
- Full financials for current and prior year, along with management reports (preferably prepared by an independent auditor)
- Director commentary on yearly budget progress
- Comprehensive work-in-progress pipeline
- Cash flow forecasting for the remainder of the year
- Schedule of all existing loan arrangements, including parties involved and the repayment schedules.
The above requirements need to be updated and maintained every six months. This is a considerable task for anyone, let alone most builders who are already resourced-strapped.
It is also worthwhile noting that most builders don’t maintain the necessary in-house capabilities to manage these requirements. Now there may be in-house legal and accounting teams that can manage this function. However, these teams primarily manage operational requirements (e.g. customer contract terms).
As such, external advisors must shoulder some of the administrative burden. In some instances, builders need assistance from accountants and other professionals to meet these requirements.
Finally, there is a high probability of human error in managing this process. Builders must maintain a significant volume of information. It is also not possible to automate some of this information. Given the natural time pressures that come with this profession, it is not unreasonable to expect there to be errors in the process.
Why Should You care About This
There are two likely options stemming from burdensome insurance requirements. Firstly, builders will likely make mistakes in meeting these requirements. This may delay the build process until the builder can correct the documentation.
The second option is that builders, particularly the smaller outfits, will turn you away. This is because they simply lack the resources to maintain indemnity insurance for a high construction volume.
In either case, the person wishing to build a home loses out.
The hope is that the documentation requirements become more manageable and simplified. This is not to say that the requirements can’t meet insurance standards. Instead, they should be straightforward enough that it doesn’t unnecessarily burden the builder, and consequently the homeowner.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.