Delivery of warranty protection for new homes

Competitive model

I am recommending the introduction of a competitive multi-provider model for warranty protection.

Introducing competition should encourage continuous improvement and innovation. This in turn can lead to better consumer outcomes such as enhancements in warranty protection beyond minimum amounts. It would provide builders with a choice of providers. A builder’s choice of provider can in turn affect a new home purchaser’s choice of builder.

New home warranty protection is delivered by multiple providers in a competitive market in Alberta, British Columbia and Saskatchewan as well as internationally.

Some insurance companies with experience and expertise in providing new home warranty protection in Western Canada have expressed interest in offering services in Ontario should the opportunity present itself. Insurance companies have access to a variety of funding mechanisms and large reserves, making them well suited to respond to extreme financial demands such as a “black swan” event - an unexpected large scale failure. Any risks and costs of introducing new providers can be managed through implementation, including effective regulation of warranty providers.

Minimum warranty protections provided for in legislation

There should continue to be minimum standards that apply to all new home warranty protections. These should be established by government and set out in the act itself or the regulations made under the act. The regular and inclusive consultation process I am recommending for rule-making in Recommendation 29 would support decision making on future amendments and refinements to the warranty protections.

Insurance product

I am recommending that the warranty protection be clearly characterized as an insurance product and made subject to Ontario’s Insurance Act^{footnote 3[3]}.

Warranty coverage today is described and operationalized by Tarion as a form of surety^{footnote 4[4]}. 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^{footnote 5[5]}. The guarantee fund is available to satisfy that obligation where a vendor fails to do so. Tarion acts as a surety, stepping in when the vendor has not satisfied the warranty obligation.

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^{footnote 6[6]}. In some jurisdictions where new home warranty protection is provided by insurance corporations, it is identified as a separate class of insurance. In Alberta, there are three separate classes of insurance related to new home protections^{footnote 7[7]}. In these other jurisdictions, while the warranty provider (insurance company) is ultimately responsible, the builder still plays a role in responding to a homeowner’s warranty claim.

Clearly characterizing the warranty protection as an insurance product, would reflect what happens operationally when warranty protection is provided.

An insurance-based warranty protection product would also introduce new oversight by the insurance sector regulator^{footnote 8[8]}.

That oversight includes:

• requirements for minimum capital
• corporate governance rules
• investment restrictions
• reporting requirements to a designated statistical agency and to the Superintendent of Financial Services regarding claims and premiums
• obligation to refrain from defined unfair and deceptive practices
• requirement to contribute to a compensation association that compensates policyholders who suffer loss when an insurer becomes insolvent and
• obligations to comply with various requirements regarding the insurance policy and the handling of claims.

In addition, as an insurance product, new home warranty protection would benefit from other oversight measures currently in place for insurance companies, including a mandatory complaint process^{footnote 9[9]}. Complaints against an insurance company can be made to the Financial Services Commission of Ontario. For insurance companies that are members, complaints can be made to the national level General Insurance OmbudService^{footnote 10[10]}.

Existing warranty fund and current enrolments - new not-for-profit corporation

There are over 365 000^{footnote 11[11]} new homes in Ontario with warranty protection under the Act. Each one has coverage that extends over seven years. At the time of transition to a competitive model, a corporate entity would need to be in place to assume responsibility for existing enrolments. I am recommending that a new not-for-profit corporation be created to assume responsibility for the delivery of warranty protection for homes enrolled under the existing regime.

This new warranty corporation should be allowed to participate in offering warranty protection in competition with private sector providers on a not-for-profit basis. Consistent with the obligations on competitors, it would be subject to oversight of the regulator, currently the Financial Services Commission of Ontario^{footnote 12[12]}, and would have a range of responsibilities, including:

• assessing the amount needed for reasonably foreseeable contingencies
• considering the distribution of liability for a major building failure
• receiving and assessing claims and,
• providing consumer education

This new not-for-profit corporation would not be the regulator of builders.

Oversight standards should be consistent across all warranty providers. Regulation under the Insurance Act would ensure that all providers, including a new not-for-profit corporation, are subject to the same oversight.

There are examples of similar and successful transitions in Ontario. LAWPRO, a not-for-profit corporation, administers insurance coverage for lawyers and paralegals. In 1995, insurance coverage was the mandate of the Law Society of Upper Canada. Today, LAWPRO describes itself as “a successful, solid insurance company cited for its principled claims management, proactive risk management and innovative approaches to technology for the legal profession.”^{footnote 13[13]}

Before Alberta introduced its mandatory home warranty program in February 2014, the Alberta New Home Warranty Program was in place for builders voluntarily providing warranty coverage. This voluntary program made changes to adapt to the mandatory requirement and compete with private sector insurance companies providing warranty protection. A new corporation, the New Home Warranty Insurance (Canada) Corporation, was incorporated October 8, 2015, becoming a licensed insurance provider governed by the provisions of the Alberta Insurance Act. On December 1, 2015, that new corporation assumed all warranty liabilities and obligations of the previous voluntary program with underwriting and claims assessment responsibilities. In its published material, the program describes the transition process as follows:

“Throughout 2015, the Program worked diligently to lay the groundwork for a company that now serves as insurance underwriter for the Program’s new home warranty, renovation warranty and related products.”^{footnote 14[14]}

I note that decisions will need to be made about the existing warranty fund if there are funds remaining at the expiry of the current enrolments and after accounting for preparing the new not-for-profit for ongoing participation in the competitive market. I am confident that the funds can be appropriately dealt with at the appointed time.

Board governance will be an important matter for the new not-for-profit corporation. It will require a level and mix of skills that is appropriate to the oversight of a fund of approximately half a billion dollars^{footnote 15[15]}.

Moving to a separate corporation to manage the existing warranty fund can provide an opportunity to strengthen and enhance participation by individuals with backgrounds in financial management, accounting, insurance and other warranty fund related skills – skills typically in place for an organization managing a fund of this magnitude. A new corporation focused on warranty protection would be able to ensure a critical mass of expertise internally for overseeing the approximately $500 million-dollar fund; develop internal capacity to assess and retain investment advisors and managers; provide a deeper level of oversight of the investment operations of the fund; increase external professional oversight of the fund; and be more transparent about the investment operations and performance of the fund.