Ontario's Auditor General Misses the Boat on Tarion

Published in The Lawyer's Daily 


Ontario's Auditor General, Bonnie Lysyk, after extensive review of the existing structure and inner workings of Tarion Warranty Corporation, issued a report ( https://tinyurl.com/y65bf6ph ) on Halloween with 32 recommendations for major changes to the Corporation, in addition to the restructuring of the Corporation that is ongoing to divide the regulator from the warranty administrator. 

A number of the key inclusions and recommendations from Auditor General, include the following:

1. Tarion has too close a relationship with the OHBA that has "created an imbalance over the years that favour the interest of builders at the expense of homebuyers."The Auditor General took issue with the requirement that Tarion give OHBA advance notice of new regulations and also that OHBA had 8 of the 16 seats on the Tarion Board.
2. Tarion's processes and practices do not always conform to the spirit or intent of the "Ontario New Home Warranties Plan Act".The Auditor General used the practice of requiring homeowners to deal with their builders first to rectify defaults before approaching Tarion as an example. They also criticized the process of imposing the two 30-day windows for addressing and identifying defects in order for purchasers to have valid warranty claims.
3. Tarion is too strict with homebuyers and too lenient with builders.The report criticizes the fact that security deposits obtained from builders were less than the amount of payouts to homebuyers over the last 10 years (i.e. only 30% of payouts were covered by security).
4. Exceptionally high salaries and bonus structure for Tarion executives with bonuses representing 30-60% of annual salaries. (On this issue, I make no comment.)

   Tarion was originally set up as an organization known as HUDAC which was a voluntary organization run by developers to create a backup new home warranty program supported by home builders for purchasers and to set standards for the industry in 1976.  Back then, there were no statutory guidelines for warranties or processes for enforcement and builders recognized that purchasers would need this kind of protection, failing which the government would legislate same.

   HUDAC was later rolled into a separate corporation known as the Ontario New Home Warranty Corporation and is a delegated governmental authority.  It too was set up to establish statutory warranties for new homes and provide insurance for purchasers where builders did not honour these warranties.

   Over the years, Tarion (it subsequently changed its name) has evolved into what essentially is a consumer protection organization for the province on new home sales and services, creating structures and regulations and warranties without the need to go through the cumbersome legislative process if it was a governmental department.

   The report unfortunately ignores the realities of the industry, the purpose of Tarion and the need for having builder involvement in the creation of regulations and processes because it is the builders who must implement them.  Here are my thoughts on some of those key report items:

   1. Closeness of the OHBA/Tarion Relationship:

      Tarion cannot create regulations in a vacuum without having discussions with the industry.  If these regulations were being prepared at the legislative level, there would be several readings, committees and in-depth input from all affected groups.  Currently, regulations are posted on the Tarion website for comment by all concerned.  The discussion with the industry at the early sage is a healthy one and does not mean that the industry decides what the regulations are.  Tarion takes into account the realities of building and balances them with the rights of consumers.  Under the new structure of Tarion, the regulation-making arm will be divorced from the administration and registration arm of Tarion and have an independent Board.  It still will need the input of builders and other qualified professionals to review proposed regulations and get their input.

      Similarly, having builders on the Board does not mean that Tarion has a close and cozy relationship with builders.  It merely gets their input on industry issues.  I have been involved with BILD for over 20 years and served on the Tarion/.OHBA Liaison Committee almost as long.  Taking into account builder concerns does not mean that the builders control Tarion.  In my experience, builders on the Tarion Board take serious responsibility for their fiduciary duties.  However, it is inconceivable to have only non-industry directors totally running the corporation without builder representation.  Input is received from governmental and consumer groups represented on the Board as well.  It is clear to me that Tarion has conducted itself impartially and if anything, has always landed on the side of homeowners and consumer protection.

   2. Tarion Warranty Process:

      The process of having a 30 day obligation to provide defects after occupancy and a further 30 day update 1 year after occupancy effectively protects builders and consumers.  Without having a structure in place, the warranty process becomes a free-for-all for the first year.  This process has resulted in detailed lists of deficiencies being provided by all consumers.  Tarion is exceptionally diligent in ensuring that all consumers know of their rights.  Builders are required to provide detailed information to the purchasers on occupancy of the process so that purchasers can utilize these rights where required.  There is now a portal on the website for inputting information and tracking information.  Does the Auditor General suggest defects should be submitted at any time during the 1 year period?

   3. Deficiency in Funding Tarion Payouts:

Again, the Auditor General totally misses the boat in assessing the financial position of Tarion.  Tarion gets revenues from premiums which are available for use in warranty payouts.  That would be the primary source for any insurance company.  It takes in premiums and then it pays out claims and makes a return on its capital investment.  Tarion has tremendous reserves from the premiums and has fully covered all warranty payouts with a huge reserve left over.  Security requirements are a unique process for the building industry that is not usual in insurance situations.  Builders provide security on both low-rise and high-rise projects, and the fact that 30% of claims have been paid out from this security alone leaves the Tarion funds from premiums even higher and well positioned.  I, therefore, take a strong exception with the Auditor General's approach that Tarion is lenient with builders and strict with consumers.  Tarion is a regulator and has to administer the process fairly for both sides.  There is no reason to necessarily increase the security beyond what is required.  A detailed review is in the process of being completed.

The Auditor General does not address whatsoever as to how the barriers to entry that these high levels of security and the stringent registration and operating requirements that Tarion imposes are impacted.  These certainly limit entry and competition.  The Auditor General did not address this issue.

Tarion's structure and operations went through a massive review by Mr. Justice Cunningham several years ago, which has resulted in the new structures splitting the regulatory and administration processes.  This review already investigated and addressed similar issues as are in the report. 

The Auditor General has some good thoughts in her review, but overall, is out of touch with the commercial reality of the building industry in assessing Tarion's history to date and its achievements.  Ontario has one of the best new home warranty programs in the world, with the strongest and lengthiest warranties, and the healthiest of insurance funds to support the warranty program.  It remains to be seen how these recommendations "will be implemented" in the new Tarion structure, as the government and Tarion have suggested.