Another industry insider has claimed vested interests are propping up the unpopular builders warranty insurance scheme.

FRANCES BELL, PRESENTER: Victoria's controversial insurance scheme for people building their own home has come in for more criticism. A former branch chair of the industry's peak body, the Housing Industry Association, has attacked the organisation, claiming it has ignored members' concerns about the builders' warranty insurance. Cheryl Hall reports.

PHOTINI PELLETIER, HOMEOWNER: On 3rd May this year, we had a fire in our ceiling. The electrical works are all illegal or non-compliant and it was a time bomb waiting to go off. ...We could have actually died. Our daughter's bedroom is across this way. Had the fire started and the ceiling collapsed, there was just no way that we could actually get hold of our daughter to get her out of there. We don't know what we would have done.

CHERYL HALL, REPORTER: Photini Pelletier has discovered what many other homeowners in Victoria have been surprised to find out: that their builders warranty insurance will not pay up. As last resort insurance, the builder must die, disappear or become insolvent for her to be able to make a claim.

PHOTINI PELLETIER: I'm quite desperate actually at this point because nobody can help us. So, I've called them, I've spoken with a gentleman there who advised me that there's no way you can claim. Your builder is not dead; he's still working, the company's still alive and he hasn't disappeared. However, what you can do is go to Consumer Affairs, go to the Building Commission and take the builder to VCAT.

CHERYL HALL: An Victorian Upper House inquiry has been told the same story by other frustrated homeowners. Now a former official in the housing industry's peak body, the Housing Industry Association, has also given evidence.

RUSSELL JOSEPH, FMR HIA BRANCH CHAIR: Now I contend that HIA have misled all governments regarding their members' actual support of HIA builders warranty policy over the last decade. And as a result of this perceived support, government has understandably been reluctant to reform their policy and for some reason has kept this dog of an insurance product on the books.

CHERYL HALL: As elected chair of the peninsula branch of the HIA, Russell Joseph represented 800 members. He says the vast majority did not support the builders warranty insurance scheme.

RUSSELL JOSEPH: From my experience in my branch this fear of retribution was why 99.9 per cent of the builders refused to make any public or private comment critical of either government, insurer or HIA last resort BWI policy.

CHERYL HALL: That claim was supported by a major Victorian building company, Glenvill Homes, which gave evidence to the inquiry three months ago.

STEPHEN BLOCH, GLENVILL HOMES, (April 9): We were advised by two very senior insurance brokers that unless we pulled our heads in, so to speak, and - that our chances of getting insurance for this year was gonna be compromised.

CHERYL HALL: A letter from Glenvill's insurers, Lumley, after it saw comments by the company, warned, "I hope this does not prejudice other insurers against you. If I were underwriting for another insurer, I would now be a lot more wary on taking on the Glenvill facility."

Russell Joseph told the inquiry that the HIA had made millions of dollars from the scheme. According to evidence at a Senate inquiry, it has made up to $2.7 million a year since 2002, or a total of $18.9 million in the last seven years. It also made $6.1 million a year in licence fees - a total of $42.6 million since 2002.

During the same period, the financial ombudsman's service reports that only 273 consumers have successfully claimed and received a total of $9 million.

RUSSELL JOSEPH: The will needs to be a political will to fix it and I don't understand why it's not there. Suffice to say that I do hold the HIA accountable to some degree. They are by their own confession the peak industry body in Australia, and governments do listen to peak bodies when it comes to this sort of thing. And the HIA have consistently supported last resort builders warranty insurance, even in the face of overwhelming criticism from their own members.

CHERYL HALL: The HIA would not be interviewed about Mr Joseph's claims, but said in a statement the figures were grossly exaggerated. It says in 2007 the HIA received $2.35 million in commissions from home warranty insurance. This was 2.6 per cent of HIA revenue of $88 million.

The HIA says it has surveyed its members and the majority support the current policy.

The Master Builders' Association also supports the last resort system, but says the system's response to disputes could be improved.

BRIAN WELCH, MASTER BUILDER'S ASSOCIATION: There have been issues to do with the three trigger points - death of the builder - that's fairly certain; disappearance or insolvency - probably slightly - some slight issues about those. I think there's scope that the Government could move to tighten those arrangements up to make it a better system.

CHERYL HALL: The State Government took over the building warranty insurance in April after insurance companies pulled out of the market. Brian Welch said it's time the State Government streamlined the process.

BRIAN WELCH: Frankly I'd take this as an opportunity with government bringing it under its control to shift responsibility for the dispute resolution entirely to the Building Commission. There's too many government departments fiddling in this at the present time.

CHERYL HALL: The State Government supports the existing system and says only four per cent of consumers experience a problem with their builder and about 2,000 people seek mediation through building advice and conciliation Victoria each year.

But it's a system that hasn't worked for people like Photini Pelletier who says it would cost her even more money if she went to VCAT.

PHOTINI PELLETIER: Consumer Affairs cannot do anything. They've already told me their hands are tied. I have looked at previous cases where I have found that people have gone to VCAT, either have spent a lot of money and they've copped out, they've said, "OK, I'm dropping the case 'cause we've already spent $100,000."

CHERYL HALL: The Victorian Upper House inquiry is expected to make its recommendations in the next few months. Photini Pelletier is hoping the State Government will act quickly to help her.

PHOTINI PELLETIER: It's regulated, endorsed, supported by the Government. The Government knows exactly how it is, knows exactly what the consumer can and cannot do with this insurance, knows that cowboy builders can actually get away with things. And of course we are left alone, literally neglected, abandoned, every single one of us, and it's pot luck if you get in this position or not. Devastating.

FRANCES BELL: Cheryl Hall reporting there.