Warranties on New Homes May Fall Short
Some 53,000 new-home buyers in Southern California whose houses are protected by the Homeowner’s Warranty Corp. may find they have severely limited coverage if they have to file a claim for a structural defect or major repair bill.
Those Southland homes are among the 1.7 million covered nationwide by Homeowner’s Warranty Corp. (HOW) and are subject to a recent decision to pay claims at the rate of only 40 cents on the dollar.
HOW was ordered to stop selling new policies and was placed in receivership in October, 1994, by Virginia Insurance Commissioner Steven Foster after he and a special task force determined that HOW did not have sufficient funds to pay future claims.
HOW, which is based in Virginia and is regulated by the state, continues to process claims, but at greatly reduced payouts, under the receiver’s orders.
William Young, director of consumer affairs for the National Assn. of Home Builders in Washington, said policyholders have not been notified of the change.
“Of the 1.7 million policies in force, typically in one year there are 3,000 claims filed--a very small percentage,” he said. “There’s no point in sending out a letter to rile up the other 1.697 million people who won’t have claims.”
The National Assn. of Home Builders created the HOW program in 1973. Young said HOW was the first warranty program in the United States and grew to be the largest. It became independent from the NAHB, but the association continues to take an interest in helping builders who are involved.
Despite the tremendous amount of new construction in California over the past decade, the number of HOW warranty holders in the state is relatively low. California ranks about 20th among the 49 states affected by HOW’s financial crisis, said Ken Schrad, a spokesperson for the Virginia Corporation Commission, which regulates that state’s insurance industry.
“California wasn’t one of the big states,” Schrad said. “Texas, with 250,000 structures (covered by HOW) was the biggest. . . . But if you have a home that’s got problems, it doesn’t matter if it’s one or one of 150,000--you’ve got a problem.”
With two dozen projects under development throughout the state, Coscan Davidson Homes of Del Mar has used the HOW program in the past. Company representatives said they will provide new buyers with a builder’s limited warranty, to be backed and handled within the company.
Costain Davidson is encouraging current owners to submit any claims to HOW, but said it is willing to work with these homeowners to resolve their problems.
Aaron Kolkey, a former director of HOW and now the chief financial officer of Cameo Development in San Diego, currently has homes under HOW contracts. But he does not anticipate any problems because, he said, his company has never seen a claim filed under HOW.
Asked if he planned to provide special assistance to policyholders who may encounter a problem in the future, Kolkey replied:
“No, because the buyer didn’t really pay for the policy. It was something that came with the house. It’s something we gave. . . . It’s like auto insurance. If your insurance company decides not to renew, that’s it.”
California’s largest home builder, Kaufman & Broad Home Corp., operates its own warranty program. “Our warranties are based on the full faith and credit of the company and that’s how we back it,” said Mark Beisswanger, president of K&B;’s Coastal Valleys Division.
Other large California builders, such as Bramalea in Orange County and Fieldstone Communities Inc. of Newport Beach, also use their own internal system to deal with defects. “When our buyers have a problem, we fix it,” said David Dennig, Fieldstone’s director of construction. Similar to the HOW policy, the problem must be discovered within 10 years of construction and must be related to a structural defect, not a maintenance problem, Dennig said.
A Wall Street Journal article on home warranty programs written as HOW’s financial problems were surfacing in late November, quotes homeowners complaining about worthless warranties they received from various builders. One said hers was “not worth the powder to blow it to hell” while another man embroiled in a lawsuit called the entire industry “a national scam.”
Schrad and other officials believe that even though HOW and the Commonwealth of Virginia have no backup plan in place, the 40% payoff will be a temporary situation.
“The whole hope is to restore the situation back to where homeowners are protected as they originally were,” he said. “Hopefully, they can do better when this whole thing shakes out.”
The decision to put HOW in receivership was a difficult one.
“Apparently, they looked at the total amount of reserves available and tried to make an estimate of the number of claims that might be paid over the next 10 years. If anything, they have tried to err on the side of conservatism. What if they started to pay claims and ran out of money in year seven?” said Young, consumer affairs director for the National Assn. of Homebuilders. “They have not ruled out the possibility of going back retroactively and raising the amount paid to people.”
“The bottom line,” said Patrick Cantilo, a special deputy receiver for HOW, “is if (homeowners) have a defect or damage they believe is covered, they receive 40 cents on the dollar. We don’t know how much money we will need to pay all the claims for the next 10 years.”
For a larger number of reasons, Cantilo said, adequate provisions had not been made to meet future claims. Primarily, he found the rates were too low. Home builders made single premium payments to HOW, generally $1 or $2 for every $1,000 of home value, at the time the new home was purchased. Some builders who received volume discounts paid even less for the policies, which they used to increase buyer’s confidence and overall new home sales.
“We are not going to collect another penny in premium for those. Obviously, some of these will be expiring every year. . . . None of us has a crystal ball, but we believe we can faithfully pay at least 40%,” he said.
The incidence of claims for major structural defects in new homes arises mostly during the fourth to seventh years of homeownership, according to Young.
Cantilo said homeowners with warranties generally can still hold the builder responsible for structural defects. “The builder is not off the hook,” he said.
Consumers with questions can direct them to HOW’s operations center in Irving, Texas, (800) 433-7657.
Sumwalt is a reporter with Inman News Features, Oakland.
