If you own a construction company and work on residential projects, you need to understand Home Owners Warranty insurance (aka HOW).
This insurance exists in Australia to protect homeowners financially, should their builder go insolvent, be suspended or cease to operate for another reason.
Home Owners Warranty insurance makes sense because building a home is a huge financial undertaking. Unfortunately, there are builders who don’t do the right thing or find themselves incapable of doing the right thing. The risk of homeowners being out of pocket by hundreds of thousands of dollars is high, which makes having warranty insurance a necessity.
Here is some helpful information about Home Owners Warranty insurance from an accountant on Sydney’s north shore.
What is Home Owners Warranty insurance?
When you’re working on a project to the value of more than $20,000 in NSW (amounts differ in other states), you need to show your clients a certificate of insurance.
Generally speaking, your insurance will offer financial protection from the following setbacks:
- Non-completion of the building contract or defective works which are deemed by law to be the builder’s responsibility, for a nominated warranty period.
- Where their builder has died, disappeared or become insolvent
- A builder’s failure to comply with a tribunal or court order
- The suspension or cancellation of their builder’s licence due to a tribunal decision
- The cost of accommodation or storage of their belongings
Basically said, this insurance is in place to protect home owners from ‘shonky’ operators or building companies that run into extreme financial difficulty. Your clients should always wait to see your policy before they pay you a deposit on their project.
In some states, this insurance is referred to as Home Warranty Insurance/ Home Owners Warranty Insurance. Other parts of Australia call it Builder’s Warranty Insurance.
How to obtain Home Owners Warranty insurance
To be eligible for this type of insurance, you need to prove your construction business is in a strong financial position.
When you apply, you may have to share accurate evidence of the following:
- Gross profit margin
- Debtor collection days
- Creditor payment days
- Turnover growth
- Changes to work in progress
- Builder size and areas of construction activity
- Length of time in the industry
- Adverse commercial and claims information
- Frequency of financial reporting
- Job costing system
You can then apply to an approved insurance broker to negotiate insurance for your company. Check this link for further information: https://www.icare.nsw.gov.au/builders-and-homeowners/builders-and-distributors/find-a-broker-distributor
How to increase your Home Owners Warranty Insurance
When you’re going through the process to apply for Home Owners Warranty insurance, you will need to share your business balance sheet and give an indication of what your business is worth with your broker and insurer.
You need to have achieved the delicate balance of being able to pay yourself and any other shareholders but also have good profits in the business as well as plenty of working capital and perhaps assets such as machinery or vehicles.
The exact formula of what insurers are looking for can be complicated. While it helps to have an idea about the important points, you don’t have to be across everything.
Work with an accountant on the north shore who understands the complexity of applying to increase your Home Owners Warranty Insurance. They should know how to track and present your finances so you can give a clear picture of your eligibility.
Your accountant will be able to demonstrate revenue and profits as well as forecasts with the click of a few buttons because they have been working with you and using digital accounting systems to keep track of your numbers.
Talk to your accountant about staying organised with your finances so that when the time comes to expand your business, you will have a smoother insurance application process. Your broker will thank you for being up to date and be able to deliver the results you need sooner.
Want help to organise your finances and apply for Home Owners Warranty Insurance? Speak to an expert from Imagine Accounting today. We are an accountant firm on Sydney’s north shore that specialises in working with construction industry clients.