Post-Construction Liability and Insurance as Means of Protection for Homeowners (2002)
When a consumer buys a carton of milk or a new car, he can sleep soundly at night, knowing that the government has legislation and regulations in place to ensure that these products meet certain health or safety standards. The homeowner should be given the same sense of security when buying a home.
Applicable building standards
He should know that the developer is bound by legislation and regulations to ensure, for example, that his building will not leak or the tiles pop out within a relatively short time after its construction. He should also be comfortable knowing that the relevant government authorities have adequately inspected and enforced applicable building standards.
While the government and relevant professional bodies are gathered together under the Construction 21 programme to try to minimise defects in buildings, it remains inevitable that there will be defects as they can never be eliminated completely.
Furthermore, it is a problem that cannot be solved overnight and my best estimate is that it would take more than ten years for the building industry to improve to a level where defects are kept minimal. There has to be a major change in the mindset of the professional consultants and building contractors.
Emotional and financial burden
Meanwhile, the homeowner cannot be left unprotected to suffer the emotional and financial burden of proof that there are defects and then to go through an expensive legal wrangle to determine who is liable for the cost of rectification.
Even though the recent court decisions in Singapore have been in the favour of the homeowner, it is likely that they still have to go through the whole legal process of suing the relevant parties to obtain redress. It is quite unlikely that any party would accept responsibility for defects unless forced to do so.
Homeowners need more protection
The homeowner definitely requires more protection than what the current sales and purchase agreement provides. The costly expense of seeking legal recourse is untenable as it is an expensive and protracted method, not to mention the uncertainty of the outcome depending on the availability of evidence after a period of three to four years from the issue of the Temporary Occupation Permit.
The act of building is not without risks and, in case of damages occurring after construction, it is often hard to locate the responsibility.
There are three countries which I have researched that provide protection for homeowners by legislating post-construction liability and an insurance system as well. They are France, Australia and Canada. The French law achieves the highest level of protection for the owner. In the United States, the builders provide voluntary home warranty insurance to the buyers.
The French system
In France, legislation provides that professionals taking part in the design and execution of construction works are responsible for failure of these works. This responsibility is for a period of ten years. Beyond the ten-year period, the producers of the building (architect, consultant, contractor)) cannot be sued unless under other aspects of the building contract.
Only defects occurring to major parts of the construction fall within the scope of the ten-year responsibility. Damages occurring to minor parts and equipment are covered by a two-year period of liability
Although the French law presumes that the professional team and contractors are liable for defects, its application was fraught with lengthy litigations aimed at finding which member of the team was responsible for the defect. Also the distinction between major and minor defects was a source of conflicts.
In 1978, homeowners were protected as follows:
1. A "guarantee of perfect completion" makes the contractor obliged to make good defects observed by the homeowner at the time of handover, or within one year after handover. Only the contractor is indebted to do this, but he can have recourse against the other members of the team.
2. The ten-year liability imposed on the professional team and contractors protects the owner or successive owners against hidden defects which threaten the stability of the works, or which make them unfit for their use, or which affect equipment integrated within the structures.
3. A two-year guarantee of good operation, concerning minor parts and equipment of the building is given to the homeowner.
However the above guarantees are provided in the form of a mandatory insurance to be taken up:
1. Insurance of ten-year liability of the producers
2. Insurance against damages to the work for the homeowner
The damage insurance of the owner will allow a quick repair of the damages (within the ten-year period) without searching for responsibility. Within 90 days the insurance must send an expert and reimburse the owner. Then the insurance of the owner can have recourse against the insurance in the ten-year policy of the producers.
The Australian system
The National Model Building Act produced among others these reforms:
1. A ten-year liability cap provides that plaintiffs have ten years to issue legal proceedings from the date a building completion certificate is issued by a building surveyor.
2. Compulsory insurance for all key building practitioners such as engineers, building surveyors and builders. This means that when they retire, the insurer indemnifies them for the duration of liability exposure, that is ten years.
3. Proportionate liability for the members of the construction team. Each member is not jointly or severally liable for all the defects but are only liable for their proportionate responsibilities.
The reforms have been astoundingly successful.
The Canadian system
The provincial government of British Columbia, Canada, passed the Homeowners Protection Act, which became effective in 1999. The legislation and regulations regulate the residential construction industry and bring the warranty business under the supervision and regulation of the Financial Institutions Commission (Insurance Act).
Within the regulations, all residential construction, except owner-built, will be provided with third-party insurance as set out in the Act, that is two-year warranty on workmanship and materials; five-year warranty on water penetration; ten-year warranty on structural components.
Additionally, all residential builders will be required to register with an approved warranty insurance provider and licensed by the new provincial government agency called the Homeowners Protection Office (HPO).
In addition to licensing builders, the HPO will interpret building standards, assess licensing fees, determine warranty standards to be set out in warranty documents, assume responsibility and authority for industry research and education, and administer a Building Reconstruction Fund that provides no-interest loans to condominium owners and other homeowners with defective housing. There is a fairly strict means test for qualification for such loans. The purpose of the loans is to finance building envelope repairs.
The new regulations also provide for a dispute-resolution mechanism in respect of claims between homeowners and the warranty provider of warranty insurance. The homeowner at his sole election, can refer disputes to mediation. Either party can invite other participants, whether builders or design professionals, to the mediation. However the participation of these other parties is not mandatory.
The regulations for the warranty coverage stipulate that for individual homes, the minimum coverage is the lesser of $200,000 or the purchase price, and for individual strata titles, the minimum coverage is the lesser of $100,000 or the purchase price. For common property, the warranty coverage is the least of $1,000 x the number of units in the project, $2,500,000, or the total original contract price for a multi-unit building.
It is important to note that for the purpose of future leaky building and condominium litigation, the warranty providers retain subrogation rights to pursue the insured contractor, subcontractors, architects, engineers and others allegedly responsible for the building defects.
The American system
The American system is a voluntary insurance scheme taken out by the builder of the home. The home warranty insurance is given for a period of ten years from completion and its features are:
The builder is responsible for repairs or replacement of defective parts in a new home where defects become known within one year from the date of possession. If the builder does not perform, the insurance will pay.
For the first five years, the insurance will be responsible to carry out repairs to structural defects.
For an additional fee, the insurance may be extended for another five years.
The Singapore experience
It is not acceptable at all when a condominium is completed and handed over to the management corporation after four years with defects that were already apparent from the early days.
Yet there does not appear to be a concerted effort by the developer, architect, engineer or contractor to rectify the problem. We still have many instances of feeble attempts to solve the problem in the cheapest way possible or total contempt by the guilty towards the complaints.
The solutions to these problems usually run into hundreds of thousands of dollars. It is not right to leave these homeowners and their management corporations to spend huge sums of money to document, seek professional advice and litigate just to get a home that does not leak or have garden lights and master television antenna systems that do not fail whenever it rains, or a sauna that should have worked from day one.
Surely there must be a more satisfactory form of protection for the homeowners especially when everyone in the industry knows that there is no such thing as a defect-free building and that one has to rely on the goodness and mercy of the vendor and his team of professionals and contractors to come back and rectify the defects.
Compulsory insurance is the best way
Compulsory insurance appears to be the most satisfactory solution. There is no need for the homeowner to identify the defect or determine the responsible party. When the problem is reported to the insurance party, an expert will be sent by the insurance company to provide the survey and report and determine the cost of repair quickly. Compensation is quick and justice is done without any hassle.
Is the home more cherished than the car?
To argue that there are costs involved in obtaining compulsory insurance is equivalent to saying that one should not have compulsory insurance for cars and that the individual parties should then go and litigate to determine the liability of each party.
Meanwhile innocent victims who are maimed will also have to suffer the ignominy of such costly litigation. Surely the home must be more valuable than a car and the protection even greater.
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