New Zealand’s residential construction industry is approaching its most significant regulatory reform in recent years.
Through the Building Amendment Bill, the Government plans to shift liability for residential construction from the current system of joint and several liability to proportionate liability. It also proposes requiring building warranties or building insurance for new homes and qualifying major residential renovations.
With the bill due to be introduced to Parliament, the market is also seeing new developments. The Ministry of Business, Innovation and Employment (MBIE) recently revealed that insurance providers and underwriters from Australia, London in the United Kingdom, and Paris in France have expressed interest in entering the New Zealand market. This means more international competitors could enter New Zealand’s building insurance market before compulsory building insurance formally takes effect.
From councils footing the bill to each party paying its share
The central change in this reform is a realignment of how liability for residential building defects is shared.
New Zealand currently operates under joint and several liability. Put simply, when a home develops serious quality problems, such as leaks or structural defects, all parties responsible for the project may be held liable for compensation.
In practice, however, some builders or subcontractors may have closed down, become insolvent or simply lack the means to pay compensation. The party still able to pay—usually the local council responsible for issuing building consent—can ultimately be left bearing most or even all of the compensation, with the cost ultimately falling on ratepayers.
Building and Construction Minister Chris Penk has said that councils, with their “deepest pockets”, often pay for other people’s mistakes, and that this system has long been unfair.
Under the Government’s new proposal, proportionate liability would apply instead. Builders, designers, engineers, surveyors and councils would each pay compensation only in proportion to their actual responsibility, without any single party having to provide an unlimited financial backstop.
For councils, this could substantially ease longstanding compensation pressures.
Building insurance will gradually become standard
Alongside liability reform, another closely watched change is that building warranties and building insurance will gradually become standard for new homes.
Under the Government’s proposal, new homes of three storeys or fewer, along with residential renovation projects costing NZ$100,000 or more, would require a building warranty or building insurance.
Cover would include a year of defect repairs and up to ten years of protection for the main structure. Even if a home is sold several years after completion, its new owner may still be able to benefit from the remaining cover.
For consumers, this means that if a builder goes out of business and cannot carry out repairs, homeowners could still receive protection through a building warranty or insurance, reducing the risk of having to fund repairs themselves.
Data shows that around 46% of new homes in New Zealand currently come with a building warranty or related insurance. That proportion is expected to rise further once the new system takes effect.
International insurers take an interest in New Zealand
In fact, an insufficient supply of building insurance has been one of the Government’s biggest concerns as it advances the reform.
New Zealand’s building warranty market has long relied on a small number of providers, including the Master Build Guarantee from Registered Master Builders, the Halo Residential Guarantee from New Zealand Certified Builders, and building insurance products from Stamford Insurance. The limited number of participants has also raised government concerns that, if insurers reduce cover or leave the market, a shortage of products could make compulsory building insurance difficult to implement.
That situation is changing, however.
MBIE recently told Parliament’s Transport and Infrastructure Committee that, since the Government announced its reform direction, insurance providers and underwriters from Australia, London in the United Kingdom, and Paris in France have proactively expressed interest in entering the New Zealand market.
Although discussions remain preliminary and the Government has not named the companies involved, officials believe this points to the prospect of stronger competition and potentially a wider choice of building insurance products.
For international insurers, making building insurance a legal requirement would create more stable demand and a more commercially attractive market, bringing New Zealand into focus.
Why is the Government retaining a suspension mechanism?
Despite the positive market signals, the Government has retained a precautionary tool within the new system.
The bill proposes allowing the Government, through an Order in Council, to temporarily suspend compulsory building insurance and related professional indemnity insurance requirements if building insurance products become unavailable for significant reasons. These could include insurers collectively withdrawing from the market, sharp increases in premiums, major global disasters tightening the reinsurance market, or other circumstances affecting insurance availability.
Compared with the proposal announced at the start of the year, the latest version makes further adjustments, allowing a suspension of up to four years.
Chris Penk stressed that the mechanism is only a “precautionary tool”, intended to prevent a sudden interruption in insurance supply from disrupting the entire construction industry, rather than to remove consumer protections.
The Government also says any suspension should be a last resort and subject to appropriate oversight.
Uncertainty remains in global insurance markets
The Government has reasons for taking such a cautious approach.
New Zealand’s building insurance relies heavily on the international reinsurance market, which is itself distinctly cyclical.
IAG New Zealand chief executive Phil Gibson recently said that the global reinsurance market remains relatively soft overall, making it easier for insurers to obtain risk cover.
However, a major natural disaster or large claims event anywhere in the world could prompt a rapid withdrawal of international capital, sharply increasing reinsurance prices and potentially tightening insurance supply.
In fact, the insurance industry warned the Government several years ago that Lloyd’s of London continually adjusts its building insurance underwriting capacity in response to global financial conditions, claims experience and regulatory policies. Its underwriting capacity should not be assumed to remain at the same level indefinitely.
Lloyd’s previously withdrew from the relevant New Zealand market for a time before later resuming underwriting support for Stamford Insurance. This also illustrates that, even if more international insurers enter New Zealand, the building insurance market will remain exposed to changes in global insurance markets.
Both support and scepticism
The Government believes the new system will both reduce councils’ disproportionate compensation burden and help improve construction quality across the industry.
Chris Penk said that when builders need insurance cover or must join an industry organisation with a quality assurance system, insurers and guarantee providers themselves become an additional quality checkpoint, encouraging construction businesses to raise their standards.
However, consumer advocacy organisation the Home Owners and Buyers Association of New Zealand (HOBANZ) has reservations.
The association believes that meaningful consumer protection requires a stable, enduring building insurance system.
If compulsory insurance requirements are suspended because of market conditions, consumers may ultimately be left relying on the implied warranties in the Building Act and pursuing liability through civil litigation. High legal fees and litigation costs often deter ordinary households from taking that route.
Consumer advocates are therefore calling on the Government to establish a more stable, long-term protection mechanism, rather than relying entirely on the private insurance market.
A regulatory overhaul affecting the entire construction industry
From the allocation of liability to building insurance and the potential entry of international insurers into New Zealand, this reform will change how risk is borne in residential construction and could also reshape the environment for the country’s new-home market.
For councils, the longstanding risk of bearing liability for others could diminish. For construction businesses, stricter insurance requirements and quality management would become the norm. For insurers, a new market is taking shape. And for consumers planning to build or buy a new home, opportunities to secure long-term quality protection would also increase.
As the Building Amendment Bill is formally introduced to Parliament and enters the legislative process, this major reform involving builders, design professionals, councils, insurers and homebuyers is reaching a critical stage. If the bill passes, the way risk is shared in New Zealand’s residential construction industry will undergo its biggest adjustment in almost twenty years, with effects lasting for years to come.
The era of compulsory building insurance really is approaching. Will it offer greater peace of mind when buying a new home, or push construction costs even higher? Do you see this reform as a boost for New Zealand’s housing market, or another source of pressure?