Purchasers of new homes will generally be supplied with a warranty covering structural defects for a period of 10 years; cover that extends to subsequent owners. The market leader in this respect is the NHBC Buildmark Cover, which claims a 80% market share (but may be as much as 90%). Leaseholders impacted by fire safety defects have turned to their warranty providers, but many have been disappointed to be told they are not covered (for an illustration of how strongly providers may resist paying, see the Court of Appeal’s decision in Manchikalapati v Zurich Insurance plc) Another not uncommon response appears to be that the warranty providers simply don’t respond to claims being made; indeed, in at least 2 instances the insured parties have resorted to issuing High Court proceedings in the face of alleged silence from NHBC. Estuary Housing Association issued proceedings in September 2020 claiming that NHBC failed to respond to its request for £3.6million for repairs to an 8 storey apartment block with combustible external walls and missing cavity breaks. Leaseholders in a 56 flat development in London have also issued proceedings in respect of a claim in excess of £2 million for fire safety defects alleging NHBC’s failure to engage adequately.
The current version of the Buildmark Cover, applying to homes registered from 1 October 2019, differs in several respects from the 2011 version, including as to what is covered during the extended warranty period. This blog post focusses on the earlier, 2011, version, basing it on a copy in the authors’ possession. (It is difficult to trace the different versions on the public NHBC site).
The Buildmark Cover for homes registered from 1 April 2011
Once the building is completed, the obligation is generally on the builder to remedy any defect or damage during the first two years (section 2). The NHBC’s role during this period is to step in if the builder does not fulfil its obligations, primarily by offering a resolution service, leading to a ‘resolution report’. This report is described as binding on the builder, but if that does not lead to a satisfactory outcome then the NHBC guarantee scheme kicks in. The end date of this builder warranty varies according to whether the defect affects shared common parts.
For an 8 year period after the building warranty, provided building control was by the NHBC inspector, NHBC provides insurance if:
- ‘Your Home does not comply with the requirements of certain Building Regulations; and
- Because of that there is a present or imminent danger to the physical health and safety of the occupants of your Home and
- You notify us of a claim under this section within the relevant notification period…’
Regulation of Insurance Contracts: some preliminaries
In the second post we will consider two potential routes to challenging the NHBC Inspector requirement, but here we need to discuss some preliminary points: the knowledge of the purchaser, and explaining that Buildmark Cover is, indeed, an insurance contract.
The Purchaser’s Knowledge
Buyers commit to the purchase on exchange of contracts. At this point they should have been been informed that they will have the NHBC Buildmark cover, but the overwhelming majority will not have seen a copy of the cover policy (anecdotally, the authors have been told by a solicitor acting for claimants in a claim on an insurance policy that more than 95% have not seen the policy by exchange). On completion, most buyers will be given a copy of the policy, although in practice this may be delayed for several months. Anecdotally, seldom is any explanation or analysis of the policy provided. It may be that in high-rise developments the purchaser has used a solicitor recommended by the developer, and concerns have been expressed by both the Law Commission (p11) and the CMA (p19) about the quality and independence of advice sometimes given by these conveyancers. Dr Oakley and Prof Vaughan have explained that, in situations where a corporate player is able to highly influence which solicitor is appointed, the ‘influencer’ is a ‘shadow client’, and that this creates a challenge to professional independence (more colourfully explained elsewhere as the ‘poodle problem’).
Of course, much of this is anecdotal but the picture emerging is that few purchasers have a copy of the policy detail before committing to buy the new home, they are unlikely to know who conducted building inspection, and they are unlikely to have the ‘NHBC Inspector requirement’ explained to them.
Buildmark Cover as an Insurance Contract
The explanation for the FCA ‘warranty’ claim may be based on section 2 of the Cover (discussed above). There is no doubt, however, that Section 1 (insurance against the builder’s insolvency before completion), and Section 4 (the extended warranty) are insurance. Defining insurance may not be straightforward but the FCA’s regulatory regime (created by the Financial Services and Markets Act 2000, and delegated legislation under that (the snappily named Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544)) defines a contract of insurance in Art 3 as:
‘… any contract of insurance which is a contract of long-term insurance or a contract of general insurance, and includes—
(a) fidelity bonds, performance bonds, administration bonds, bail bonds, customs bonds or similar contracts of guarantee, where these are—
(i) effected or carried out by a person not carrying on a banking business;
(ii) not effected merely incidentally to some other business carried on by the person effecting them; and
(iii) effected in return for the payment of one or more premiums’.
Performance bonds (such as the Buildmark Cover) offered by non-banks that are not merely incidental to some other business and paid for by way of premium are insurance. Payment for home warranty insurance is generally by the developer as a block fee at the outset, but will be factored into the sale price of the flats. It does not matter that they are also a guarantee, or labelled as such. For regulatory purposes, this is insurance.
Section 2 of the policy includes a resolution service. The 2011 Buildmark contract treats this part of the agreement as ‘not insurance’ and outside of review by the Financial Ombudsman Service (FOS), but it does acknowledge FOS jurisdiction for the other parts, including the guarantee. FOS was created by the same statutory regime that gave rise to what is now the Financial Conduct Authority and provides low cost consumer redress.
The NHBC is, therefore, normally to be treated as acting as an insurer for regulatory purposes and within FCA control and FOS review, and importantly, the specific FCA rules on insurance claims.
Regulation itself is discussed on the next post.
How to cite this blog post (Harvard style)
Bright, S & Davey, J. (2021). Remediation costs through the NHBC Buildmark Cover (Part 1: Scope). Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2021/02/remediation-costs-through-nhbc-buildmark-cover (Accessed [date]).