New Zealand Certified Builders (NZCB) recently said in a statement that some clients of its member builders had concerns about their Homefirst building guarantees, underwritten by CBL Insurance.
According to information released by the Reserve Bank of New Zealand, CBL Insurance paid NZ$55,000,000 in breach of the regulator’s directions. The substantial payment went to overseas companies at a time when CBL Insurance’s solvency was under serious scrutiny.
CBL Insurance had previously confirmed that it would continue operating despite falling below the regulatory minimum solvency requirement. The Reserve Bank required CBL Insurance to consult it before undertaking any significant transactions. However, the insurer paid a total of NZ$55,000,000 to two other companies without the Reserve Bank’s consent.
The Reserve Bank of New Zealand therefore asked the High Court to place CBL Insurance into interim liquidation.
The New Zealand Herald reported that people who had built homes over the past 10 years could face the risk of their policies becoming invalid as a result. New Zealand builders typically provide a 10-year guarantee on the homes they build. These guarantees are underwritten by insurers to cover losses if problems arise with a home after the builder has gone out of business.
CBL Insurance operates internationally, and its New Zealand business includes underwriting builders’ guarantees. The New Zealand Herald reported that guarantees held by as many as 10,000 homeowners could become worthless.
Builders’ association changed insurers two years ago
NZCB previously worked with CBL Insurance, but that relationship ended in January 2016. NZCB switched to Lloyd’s of London, a London-based insurer rated A+ by Standard & Poor’s. The new insurer underwrites the guarantees on new homes built by the association’s members.
This means homes built after the association began working with Lloyd’s of London will not be affected by CBL Insurance’s troubles.
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NZCB also noted that major claims over building defects generally arise within the first two years of a 10-year guarantee. This could lessen the impact of CBL Insurance’s troubles on affected homeowners to some extent. After all, NZCB changed insurers more than two years ago.
The implication is that even if homeowners were unfortunate enough to have obtained a CBL Insurance-backed 10-year guarantee just before January 2016, any major defects in their new home would usually have emerged within the first two years and entered the resolution process.
NZCB advises consumers with concerns about a new-home guarantee provided by an NZCB member builder and underwritten by CBL Insurance to contact CBL Insurance’s liquidators first. Their next contact should be Builtin, the broker responsible for the product at the time.
Stamford steps in with 3 options
CBL Insurance’s business troubles could leave many homeowners suddenly without protection. Independent New Zealand building guarantee provider Stamford Insurance sought support from the British insurer Lloyd’s of London, mentioned above, and received a response.
On 6 March, Stamford Insurance announced a new arrangement to take on CBL Insurance’s clients.
The details include:
1. For buyers who have signed a contract and paid a deposit but whose construction has yet to begin, Stamford will cover the risk of losing their deposit if the builder becomes insolvent.
2. If construction has already begun, Stamford will cover the risks arising from the builder’s insolvency, as well as problems with the home for 10 years after completion.
3. For homeowners who have taken ownership in the past 12 months and may have lost insurance cover for problems with their homes, Stamford will offer a new 10-year policy.
The CBL Insurance case also serves as a warning to consumers. When buying insurance, choosing an insurer with sufficient capital and strong solvency is crucial. Insurance policies often provide cover over a long period, and the insurer’s ability to remain in business determines a policy’s validity and value.