Towards defect insurance

NST-PROP 07/09/2001 By Nicholas Mun

POOR quality and shoddy workmanship are two issues the property industry has been wrestling with since the boom in mass housing began in the early 80s.

Delivering defect-free properties that are examples of good workmanship is akin to the industry attempting to hit a moving target. Defect liability periods imposed by statute for residential properties have been unhelpful, as defects in many instances have only emerged after expiry of the period.

While the industry gets its act together, purchasers are left without recourse for compensation, save for the long and expensive route of litigation. Under such circumstances, having the option to purchase an insurance policy to cover such defects becomes an appealing alternative.

Property industry players and consumers' interest groups have expressed support for such an option. Real Estate and Housing Developers' Association (Rehda) president Datuk Eddy Chen Lok Loi said it is a good idea, but the manner in which it is implemented is crucial to its success.

"Such a scheme cannot be implemented on a voluntary basis. As insurance companies make their profits based on statistics, one claim alone could wipe out the scheme if insufficient numbers purchase the policy," Chen said. The questions then, are whether there is a demand for such policies and what premiums should be imposed.

 
Federation of Malaysian Consumer Associations (Fomca) deputy president N. Marimuthu said such a move would be well-received by purchasers as they will know which party they can claim from when a defect occurs.

"Most defects occur after the 18-month defect liability period. When this happens buyers who purchased such policies won't have to sue the municipality, engineers or the developer. They can go straight to the insurers," said Marimuthu.

"Premiums are not a problem as buyers are not likely to mind paying a little more on top of what they would already be paying in the form of the purchase price," he added.

This sentiment was echoed by Chen. According to him, the scheme, if adopted, should be implemented along the lines of how it has been done in Australia, where premiums are built into the pricing.

"In effect every purchaser will be taking a policy and such schemes then become viable for the insurance industry," said Chen. The Rehda president also suggested a method of implementation.

"Purchasers can execute the relevant insurance policy forms to cover their properties upon signing the SPA or when collecting the keys to their properties.

"Developers can also work out with insurance companies to enable purchasers to have back-to-back cover starting with the 18-month defect liability period, which upon expiry will be followed by the insurance cover," he added.

Providing a twist to the issue is chartered surveyors and valuers Pakatan Property Consultancy Sdn Bhd director Sarkunan Subramaniam.

According to Sarky as he is popularly known, such policies should be purchased by developers and not buyers.

"Why should the purchaser bear the burden of paying the premium when the defects are caused by the developer?" asked Sarky who took the view that due to this it would be difficult to get purchasers to take up the policy.

"The developer should be the one to take out the policy for the entire scheme. When a defect arises, purchasers would make a claim against the developer whose insurers will step in," said Sarky.

He also does not see the likelihood of litigation as being a disadvantage as this will act as a safeguard to frivolous claims. Sarky suggested that the purchase of such policies should be compulsory by making it conditional for the issuance of the developers' license and advertising permit.

Persatuan Insuran Am Malaysia (Piam) could not be reached for comment. But an industry source said such a scheme is not workable. CGU Insurance Bhd assistant general manager for marketing and development Chua Kim Soon said the Fire Tariff upon which building insurance premiums are based does not cover building defects, which is a problem the property industry needs to resolve.

"The poor construction quality that exists will bring about a high number of claims and because premiums in this country are based on claims experience, the costs for such policies will increase, making the whole scheme unviable," said Chua.

Property players, however, were optimistic on the positive impact of such a scheme. "Developers whose projects attract too many claims or payouts can be blacklisted. This will force them to improve on the quality of their products. The industry as a whole will want to avoid earning a reputation for poor quality that such insurance schemes will reveal," said Marimuthu.

Chen on the other hand, suggested that premiums be charged according to the rating of the developer. "Developers with a good track record will have better ratings and will be able to capitalise on this in selling their products while developers with a poorer rating may find this working against them. On the whole such a move will help the industry even though it is just by default."

It is obvious that many issues have to be worked out before such policies become a reality. For a start, we can assume that such schemes will have to be compulsory before they can be considered viable by the insurance industry. Among the other considerations to be ironed out are the definitions of defects, duration of cover and more importantly, the premiums involved.

Chua said that by virtue of the fact that such a scheme involves buildings and latent defects within, any coverage would logically be an extension of the Fire Tariff.

"Putting together some form of claims experience upon which to determine the premiums is difficult for the simple reason that there is none," said Chua. The Fire Tariff has been extended before. Chua cited windstorm and flood damage as examples but explained that such schemes were based on the common occurrence of such events where the damage caused were easily assessed.

"What is required is for the relevant industries to sit down and work it out," said Chen who added that Rehda is willing to work with the relevant parties on this.