'It's the worst suffering, it's financially draining, it's destroyed their relationships, their homes. It's so repugnant to what Australians would expect," says Catherine Cusack, the NSW opposition spokeswoman for fair trading. "How have these people that I deal with had all their suffering ignored for so long?"

Cusack is talking about the nightmarish limbo faced by people who are locked in dispute with their home warranty insurers. Unable to move into their homes, get defects repaired or sell as is and start again, many are tens of thousands of dollars worse off because they tried to make a claim against their home building warranty insurance when something went wrong.

Most consumers think that the mandatory home building warranty scheme in place in NSW and Victoria will cover them for substandard building work. But the reality is very different. And consumers groups are concerned.

"No rational consumer would choose to buy this insurance if it wasn't mandatory," Choice's Gordon Renouf says.

In Victoria and NSW, government regulations compel home owners to buy the privately administered insurance, which is exempt from oversight by the Australian Prudential Regulatory Authority.

Voices condemning the mandatory scheme are getting louder following the collapse earlier this year of Beechwood Homes, NSW's biggest home builder, throwing up new doubts about its worth to consumers.

"It has no value whatsoever, in a nutshell," says Gerard Brody of the Consumer Action Law Centre in Victoria. "You can only make a claim when the builder is dead, disappeared or insolvent. So a consumer basically has to exhaust all their legal avenues before they can claim on the insurance. That's not really insurance."

In all states except Queensland (see box), home warranty insurance is only a "last resort" scheme which does not cover all instances of shoddy work.

It's meant to be a safety net for consumers when a builder dies, disappears or becomes insolvent but the unlucky consumers only discover its limited application when things go wrong.

What many don't know is that consumer protection for renovators and home building has never worked well and has been a running sore for years.

There have been more than 30 government inquiries into the system's flaws. Six years ago there was a national review, led by Professor Percy Allen, which was meant to fix the problems.

Since then it is estimated that about $225 million has been collected by the six private insurers in NSW alone, with only a fraction - about $16 million - paid out in claims.

In the Victorian Parliament last year, an answer to a question on notice said premiums in the state were between $90 million and $120 million a year. Vero, owned by Suncorp Metway, has between 60 and 75 per cent of the home building warranty insurance market.

Now, following the release of a highly critical Productivity Commission report in May, an all-party Senate inquiry is investigating the scheme - again.

At the Sydney hearing on June 13, several people who have fallen into the black hole of protracted disputes around home building warranty insurance gathered to hear the submissions. Irene Onorati, who has dedicated years of her life to lobbying on this issue, spoke first.

"The lives of many honest families have been shattered," she told the committee. "We've had enough, we need a new system." There were murmurs of "hear, hear" from the gallery. Onorati has spoken at many of the previous government inquiries into the area. "I'm getting very angry now," she told the Herald later.

"All these cases were in the NSW parliamentary inquiry in 2006, and tell me, what did that get us?"

Submissions to the Senate inquiry suggested a deliberate policy by the insurers, particularly Vero, of dragging out litigation to minimise payouts and force inadequate settlements on claimants - "litigation for harassment", as Senator Christine Milne summarised it. (Vero has not attended the hearings yet but Vero spokeswoman Sue Repanellis says the insurer has not ruled out appearing at a later date.)

Brody says, "You can't claim the legal costs on the insurance at the end of the day, so most consumers get advice and rationally decide not to proceed and don't claim on insurance and are just left out of pocket."

There are horror stories of those who refused to give up, such as Rob Siebert, who is $70,000 worse off after following all the processes necessary to claim on his insurance after his builder refused to remedy defects in his Lismore home.

"From a consumer perspective, it's hopeless," says a Victorian builder and lobbyist, Phil Dwyer.

"It's crucifying people. It's not only the cost and the legal costs but the frustration and the never-ending litigation. One thing rolls into another and it goes on for years. That's why a lot of this hasn't come to a head, because the consumers are only coming out the other end now as broken people. For God's sake, a $2 item in Coles is afforded better consumer protection than what we've got for people's homes. That's why we're so angry about it."

The scheme is also bad news for small-to-medium builders, says Dwyer, the national president of lobby group the Builders Collective Association.

For years, after a claim nearly ruined his business, he has been lobbying state and federal governments to ditch the mandatory scheme, as the Tasmanian Government did earlier this year.

Builders of residential premises under three storeys must obtain home warranty insurance before they begin a project. For a home costing $230,000, the insurance costs about $3000 for a policy in NSW and slightly less in Victoria, Dwyer says. (Vero claims the average premium is less.) This cost is typically passed on to the consumer.

Based on the average cost of the insurance and the number of building permits issued, Dwyer estimates the insurers are raking in about $358 million a year nationally. In order to get the mandatory insurance, builders must sign a deed of indemnity and often get a bank guarantee as well.

"The builder himself becomes the underwriter of the insurance through the indemnity or bank guarantee," Dwyer says. "We have to undertake to repay to the insurer within 28 days of demand any claim plus all costs to the insurer. It's a bit like having car insurance and having to pay for any accident you have."

From figures provided to the inquiry by the chairman of the Home Building Warranty Scheme Board, it has been calculated that in NSW insurers are paying out a mere 7 per cent of revenue in claims. Vero disputes this. Repanellis says Vero's loss ratio is in line with the accepted premium-to-claim ratio for most consumer protection insurance (about 65 to 80 per cent) but she did not give Money exact figures.

"There's a lot of misinformation out there," she says. "If it was such a profitable business, why were we the only insurer who stayed in the market when HIH collapsed? You'd think all the other insurance companies would drive right in if it was really so profitable."

The present Victorian and NSW schemes came into force after the 2001 collapse of HIH insurance, then the majority provider of home building warranty insurance. When that was followed by the September 11 terrorist attack, the insurance industry contracted and it was harder to obtain insurance.

Under pressure from builders and insurers, in 2002 the Victoria and NSW governments agreed to change the home building warranty legislation to make it

"last resort", shortening the period of cover and limiting maximum payouts.

Then the Federal Government changed the corporations regulations to effectively convert home building warranty insurance from a retail to a wholesale product, stripping out consumer protection requirements and oversight by APRA. That is why the exact figures on premiums taken compared with commissions and payouts made are not publicly available.

"What is of interest in this whole situation is how the regulations came to be put there in the first place," Cusack says. "It's not an oversight; it's a carefully crafted set of words that's devastating in its impact, removing the scheme of any accountability. It removed it from any independent authority looking at consumer complaints. To me that's why it has been allowed to run rampant for so long."

However, the NSW Office of Fair Trading defends the scheme against charges of being "junk insurance".

"It's very valuable insurance," says spokesman Graham Humphreys. "It is a last resort scheme ... If a claim is declined [people] have appeal rights to the tribunal and to courts. So a person does get a chance to have their claim fully assessed. At least there is this form of insurance ... If the builder was to go bankrupt, imagine a situation where there was no insurance. These people would be essentially out of pocket."

Humphreys says that 1250 claims had been settled in NSW as at December 2007 under the scheme but figures about any difference between the payouts and the actual costs incurred in each case were not available.

"We'd like people to make a judgment on the scheme after Beechwood," he says. "We're right in the middle of a process here. If people have criticisms, we'd need to evaluate that at the appropriate time. We'd point to the 1250 cases were the scheme has worked."

Repanellis says: "The problem arises when builders refuse to come back and fix defects, when people are paying the biggest amount of money most of them ever do in their lives. It's the one side of this argument that people seem to forget. "Insurance companies need to be profitable and it's not [as has been suggested] 'obscene' profit. You have to be profitable so you can pay out claims such as Beechwood's collapse. You're looking at millions of dollars here."

Have you had a bad experience with home warranty insurance? Send your stories, with contact details, to newsdesk@smh.com.au

How to protect yourself if you're building or renovating

For now, people building or renovating their homes in NSW and Victoria are stuck with the mandatory home building warranty scheme. That raises the question of how you can protect yourself when renovating or building.

"Consumers have to wonder whether it's worth building. It's one of the biggest risks for consumers and they can't in essence insure against it, because of the limited application of building warranty insurance," says Gerard Brody from the Consumer Action Law Centre in Melbourne.

Some people mistakenly think they are covered by their general insurance - their home building policy - but these policies specifically exclude building defects.

For instance, NRMA's home building insurance cover excludes inherent defects and structural defects; settling, shrinkage or expansion in buildings, foundations, walls or pavements and faulty design or workmanship.

That means consumers have to be defensive in their thinking and rely only on highly recommended builders.

As a start, they would have to be licensed. Phil Dwyer, builder and national president of the Builders' Collective of Australia, says: "Probably the best thing you can do is find a builder that represents himself, ask the builder for the last three jobs they've done, and get references from owners.

"Check his credentials - not through websites, but through the people he's just worked for. Until such time as we get proper consumer protection, that's the best thing that can be done. It gives you a year's track record for the builder, from people who will know if there will be any issues. And a good builder will be happy to give you his last three jobs."

Real estate consultant and consumer advocate Neil Jenman says progressive payment is key to managing construction work - make sure you hold some money back.

"My wife and I built our house eight years ago. I found that when you pay the tradesmen you wouldn't see them again. So I got them together and said, 'I like spending time with you guys but there's only one way to keep you coming back and that's to not pay you.' So always hold something back, to keep them coming back. Keep control of the purse strings.

"In general, home owners don't understand that you're the boss and the boss calls the shots. When we hire tradesmen or real estate agents we tend to get intimidated. They say, 'It's our policy.'

"Home renovators and home builders themselves should say, 'Let me tell you about our policy; our policy is we don't pay until we're happy the job is done properly. If you don't like it then too bad, go find another job.'

"The way the economy is tightening up, home renovators are in a much better position than they used to be. Home owners don't realise how much power they've got."

Make sure your documentation is as detailed as possible and don't leave anything vague so there is no wriggle room to cut corners or push up costs.

"If you have any trouble later, bring them back to it and say, 'This is what we agreed to'. And always ask, 'Is there anything else I should know?' Later on when they raise something new you can say you asked and they didn't bring it up at the time," Jenman says. KM

QLD leads the way

Consumer advocates and builders want a Queensland-style home building insurance scheme to be implemented nationally.

There, the government underwrites home warranty risk and the Building Services Authority regulates it.

The insurance is mandatory and there's a binding, low-cost dispute resolution system where a builder's licence may be at risk if he doesn't rectify defects.

Queensland company Real Property Constructions suffered a Beechwood-style collapse in February this year, leaving 233 uncompleted homes.

Under Queensland's "first resort" scheme, the responsible minister, Rob Schwarten, reported that all complaints received by the authority had been assessed and 70 per cent had been finalised - all within three months.

Ian Jennings, general manager of the authority, says: "You're covered for defects, subsidence and non-completion up to $400,000. It works because of the integrated model. You need dispute resolution, a licensing regime, the ability to get rid of a builder, plus you've got to have the insurance. It all comes as a package."

In the event of a dispute with a builder, the Queensland consumer has a clear, simple set of steps to take to have it remedied.

"For example, the house is finished but the roof is leaking," Jennings says. "They've got to raise it first with the builder." If the builder doesn't fix it, the consumer can lodge a complaint with the authority, which will inspect the site with both the consumer and the builder present and determine whether the work complies with the building code and Australian standards. If not, the builder must fix it and, if he refuses, a formal demerit goes on the public register against his licence. Then the insurance kicks in and the authority supplies a rectifying builder to fix the defects then recover costs from the original builder.

"If a house isn't finished," Jennings says, "and a consumer legally terminates a contract because the builder's not performing, then we apply the insurance contract and finish their home. In NSW and Victoria, they'll only pay 20 per cent of the contract price; we will finish their home and then recover from the builder. The consumers' problem has been fixed."

However, the Housing Industry Association, which represents builders, trade contractors, manufacturers and suppliers but also benefits from commissions as the home warranty insurance broker, dismisses the Queensland approach as expensive and unmanageable.

"Queensland's scheme is more expensive than [that of] any other state," it says in its submission to the inquiry.

Jennings disputes this. "It doesn't cost the government," he says. "We're self-funded. All our current liabilities are funded for the next 61/2 years. Our revenue comes from licence fees and insurance premiums. The regulatory business is funded through licensing income and the insurance business is funded through payment of premiums."

The authority's premiums vary according to contract size. The insurance premium for a $200,000 contract is $1580. KM

The victims who lost thousands

For the past 20 years Irene Onorati has fought for the rights of consumers and the victims of shoddy building and bureaucratic indifference. She's spoken at every hearing into the lack of consumer protection. And she's still fighting.

Onorati's volunteer lobby group, the Building Action Review Group, has helped hundreds of consumers left with nowhere else to turn. Here is a small sample of those let down by the scheme.

Yasmin Fahri is a single mother who contracted a builder for $160,000 worth of renovations on her Sydney home in 2005. The builder was licensed by the NSW Office of Fair Trading. Fahri paid $68,500 for work that was defective, incomplete and could not be certified. The dispute escalated and, after receiving threats from the builder, Fahri took out an Apprehended Personal Violence Order against him. She paid for mandatory home building warranty insurance but never received the certificate from her builder. In any case, it is useless to her as it only applies when the builder dies, disappears or becomes insolvent.

FairTrading has no power to force the builder to rectify defects but disqualified him for one year. Meanwhile, Fahri, who can't afford a lawyer, faces a demolition order from her local council. It has cost her $450,820 - more than three times the original contract - and the dispute continues.

"I compare it to a form of torture," she says. "Your builder can take your life savings and have a holiday in Greece! This should not happen in Australia."

In 1993, Redfern pensioners Prokopios and Kalipso Frantzis signed a contract to extend their home. The first builder abandoned the job and left them without a working toilet or hot water for more than three months. Statutory insurance applied at the time and was quickly invoked. But then successive rectifying builders only made the defects worse. In each case the Frantzis family relied on the Fair Trading assessments and used licensed builders. When defects reappeared after the third builder's work in 2001, the insurer, Royal Sun Alliance (now Vero), denied liability, saying it was Fair Trading's responsibility. The botched jobs have together cost them $226,898.

In 2005, Fair Trading's home building service approved demolition and reconstruction but only to a value of $100,000, when the repairs would cost significantly more. This year, the minister, Linda Burney, offered $167,000 for the cost of demolishing and rebuilding the defective works. It's not enough for the job and the family is still trying to get Fair Trading to fix their house.

Then there's Cabramatta man Minh "Charlie" Tran. More than six years ago, dodgy building work left him with a house beset by structural problems, sinking on one side. He now lives in a caravan on his property, with mortgage repayments of $4200 a month, and faces orders from the Land and Environment Court to repair the building under threat of contempt of court or jail.

In 2006, it would have cost $450,000 to fix. Desperate and out of money to pay his lawyer, Tran went to mediation but refused Vero's offer of $75,000 (Vero spokeswoman Sue Repanellis disputes this amount and says their offer was "far in excess of $75,000").

There was no written agreement. Vero took him to the Supreme Court to try to force him to accept the offer. The case was dismissed. The insurer is appealing.

"I did nothing wrong," Tran says. "I've lost five years of my life and $300,000. And instead of paying me $200,000 [then the full amount under the policy], Vero spent $1 million dollars taking me to court. The only thing I suspect is that, if they pay me, there may be another thousand people behind me."

The NSW opposition spokeswoman for fair trading, Catherine Cusack, says: "The revelation of Mr Tran's case is that the insurers are bullying people to accept inadequate payment and saying, 'If not, we'll take you to court.'

"It's deliberate and predatory. I find it difficult to believe that such a thing can happen but it's real. I've spoken to these people and I've seen their documents. The victims can't reconcile themselves to the injustice of their situation.

"In Australia you'd think there would be consumer protection to curb this behaviour but there is none in relation to home warranty."

Onorati agrees: "They're trying to force people to go into mediation when they have no more money to continue in court. The smallest building repair ends up the biggest nightmare of your life and destroys completely your health and financial livelihood. The whole system needs fixing." KM