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Ontario should adopt ‘multi-provider insurance system’ for new home warranties: Cunningham


April 3, 2017   by Canadian Underwriter


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Warranties that new homes in Ontario are free from defects should be available from multiple providers and treated as insurance products, former judge J. Douglas Cunningham recommended in a recent report.

Warranty coverage currently available from Tarion Warranty Corp. “should be an insurance product,” Cunningham wrote in his final report on a Review of the Ontario New Home Warranties Plan Act and the Tarion Warranty Corporation.

“Some private sector insurance companies have expressed interest in participating as warranty providers should a competitive market replace today’s monopoly structure,” Cunningham wrote in the report, released March 28. Cunningham is former associate chief justice of the Ontario Superior Court. He was appointed in November, 2015 by the Minister of Government and Consumer Services to examine and make recommendations regarding Tarion and the new home warranty program, established in 1976.

“Delivering warranty protection as an insurance product would facilitate participation by private sector insurance companies and introduce financial sector oversight and accountability,” he wrote in his report on Tarion.

The province’s New Home Warranties Plan Act stipulates that Tarion administers the act. Tarion is mandated to protect consumers when builders fail to honour their warranty obligations.

“Tarion is providing an insurance-type product to homeowners but neither Tarion nor the warranty protection are subject to the oversight that would ordinarily apply to an insurance company delivering a similar insurance product,” Cunningham wrote.

In his report, Cunningham recommended that new home warranty protection be delivered “through a competitive model.”

Cunningham was previously appointed, in August, 2013, by Ontario Finance Minister Charles Sousa to review the auto claims dispute resolution system. He delivered a report, with 28 recommendations, the following year.

In his report on home warranties, Cunningham suggested that the government pass legislation stipulating minimum standards for mandatory warranty protections.

“New home warranty protection should continue to be a mandatory program,” Cunningham wrote. “Warranty coverage would move from today’s monopoly, with Tarion as the only provider, to a multi-provider insurance system.”

Making new home warranty protection an insurance product “would facilitate participation by private sector insurance companies and introduce financial sector oversight and accountability,” Cunningham wrote.

Under the current system, “Tarion acts as a surety, stepping in when the vendor has not satisfied the warranty obligation,” Cunningham explained. “Under the Act, it is the vendor who warrants to a new home owner that the home is constructed in a workmanlike manner, free from defects in material, fit for habitation, built in accordance with the Building Code, and free of major structural defects.”

If new home warranties in Ontario were treated as insurance products, and subject to the same oversight as insurance products, that oversight would include requirements for minimum capital, Cunningham suggested in his report.

Among other things, it would also include “reporting requirements to a designated statistical agency and to the Superintendent of Financial Services regarding claims and premiums” and a “requirement to contribute to a compensation association that compensates policyholders who suffer loss when an insurer becomes insolvent.”

Cunningham also recommended mandatory warranty coverage for new homes built by the owner and intended for personal occupation.

“Currently, someone building a home for their personal use is not required to enroll the home for warranty protection under the Act,” Cunningham wrote, adding this exemption “has given rise” to problems.

“The home might be sold on the resale market during the 7-year warranty period that would have applied to the home if it were not an owner built home,” he wrote, suggesting there is also a problem with people who constructs homes for resale “knowing that they should be registered as a builder with Tarion but were not” and also with people who “build new homes that they claim they are building for their personal occupation to take advantage of the owner built exemption but who intend to sell the home.”

“Tarion has been working with municipalities to proactively respond to the problem of unregistered and disguised builders but it continues to be a problem,” he wrote.

He also recommended that the condominium specific-provisions of new warranty coverage be reviewed.

“The role of the condominium board in the warranty claims process for common elements may not always be well understood by a unit owner,” he wrote. “Condominium corporations are required to have a performance audit of the common elements completed within one year of registration. This performance audit is filed directly with Tarion and a copy provided to the corporation. The performance audit identifies defects in the common elements and constitutes a claim for warranty purposes. A proper performance audit requires timely access to the appropriate supporting documentation, including drawings and plans. Measures should be in place to support that access.”