What happens if your builder goes broke halfway through your build?

Short answer: Home building compensation cover is the safety net that pays out when your builder cannot. In NSW it is required on residential building work over $20,000. It is not general insurance you claim on whenever something goes wrong. It answers four specific situations: your builder becomes insolvent, dies, disappears, or has their licence suspended for not complying with a court or NCAT order. If one of those happens, the cover can pay for the deposit you lost, the cost of finishing the work, and the cost of fixing defective work. The limit is $340,000. Major defects are covered for up to six years from completion, other defects for two years. It is last-resort cover, and that is the part most people misunderstand. If your builder is still trading and still licensed, this is not the thing you use.

The part most people get wrong

Most people think of this as a defect warranty with a government name on it. It is not.

It is last-resort cover. It sits behind your builder, not beside them. While your builder is still trading and still licensed, the person who fixes your problem is your builder, and the cover does nothing at all.

That matters, because it changes what you should be checking. A builder who is going to be around in three years is worth more to you than the policy behind them.

The four situations it answers

NSW's icare sets out exactly when the cover responds. Your builder has to have:

• become insolvent, for example bankrupt or in liquidation
• died
• disappeared and cannot be found
• had their licence suspended for not complying with a court or NCAT order

That is the list. If none of those has happened, the claim does not open, however bad the situation feels.

What it actually pays for

Three things:

• The deposit you lost, if work never started
• The cost to complete the work, up to the policy limit
• The cost to fix defective work, structural or otherwise

The maximum is $340,000 for policies issued from February 2012 onward. Older policies sit at $300,000.

Worth being plain about this: on a larger build, $340,000 is a floor under the disaster, not a promise that you finish whole.

How long you have

Measured from when the work was completed:

• Major defects: up to six years
• Other defects: up to two years

This is a separate thing from your builder's own warranty, and the two get confused constantly. The cover is what responds when the builder is gone. The warranty is what the builder owes you while they are still here. We wrote about what actually goes wrong after handover, and who pays. That post is about the second one.

What to do long before you ever need this

The work happens at the start, not at the claim.

The certificate has to be in your hands before you pay a deposit, and it has to be issued for your job, not a general statement that the company holds cover. We set out how to check that, and what else to check, in what to ask a builder before you sign, and you can practise on us at check us.

For our own jobs, we hand over the certificate for that job. If a builder asks for money before you have seen it, that is the wrong order, and the order is the signal.

Why we are writing about the thing that pays out when we fail

Because you should know it exists, and most builders would rather you did not think about it.

A builder telling you about the fund that covers you when the builder collapses is a strange piece of marketing. It is also the honest version. Every build is a bet on a company still being here in six years, and you are entitled to know what stands behind that bet if it goes wrong.

Questions we get asked

What happens to my build if my builder becomes insolvent?
The work stops, and your contract is with a company that can no longer perform it. If home building compensation cover is in place for your job, that is when it responds, and it can cover your lost deposit, the cost of completing the work, and defective work. Your first calls are the insurer named on your certificate and your own solicitor.

Is home building compensation the same as my builder's warranty?
No, and this is the most common mix-up. Your builder's warranty is what your builder owes you while they are still trading. The compensation cover only responds once your builder is insolvent, dead, missing, or suspended for not complying with an order. They cover different moments and you may need both.

Can I claim if my builder just does bad work and refuses to fix it?
Not on that basis alone. Refusing to fix defects is not one of the four trigger events, so the path there runs through NSW Fair Trading and NCAT rather than a claim. If the builder's licence is later suspended for not complying with an order, the position changes.

Does the cover apply to every job?
It is required on residential building work over $20,000 in NSW. Below that, it is not, which is worth knowing before you hand over money on a smaller job on the strength of a certificate that was never going to exist.

Home building compensation cover is set by NSW law and administered by icare, not by us. The figures and periods here come from icare and SIRA. Your own certificate and the current scheme rules are what govern your job, so check them rather than relying on a blog post. This is general information, not legal advice.