The Value Of An Insurance-Backed Home Warranty

Authored by Joan M. Riordan And William R. Warnock Jr.

This article is written in response to an article published in the January 2013 edition of the South Carolina Lawyer entitled That New Home Warranty, Now You See It, Now You Don’t. The prior article missed the basis and purpose behind the insurance-backed new home warranty product. An insurance- backed warranty is a valuable product that meets many requirements of the residential construction industry. For more than 30 years, 2-10 Home Buyers Warranty (2-10 HBW) has been the industry leader in providing the insurancebacked structural warranty. The 2-10 HBW warranty insurer has paid more than $214 million in claims on behalf of member builders.

2-10 HBW warranty program complies with HUD requirementsThe 10-year insurance-backed warranty concept grew out of U.S. Congressional hearings in 1973 investigating poor construction practices in the residential construction industry and lack of builder warranties on their product. As a result of these hearings, the Department of Housing and Urban Development (HUD) established a standard for the insurance-backed warranty plan and required that certain newly constructed homes be protected by a 10- year insurance-backed warranty in order to be eligible for mortgage insurance from the Federal Housing Administration (FHA). The requirements of the 10-year insurancebacked warranty plan are codified in the Code of Federal Regulations at Title 24 C.F.R. § 203.200 et seq. 2-10 HBW incorporates these requirements verbatim in its insurancebacked warranty program. Hence, the 2-10 HBW warranty program has been approved by HUD since 1983.The most prominent features of the HUD “Insured Ten-Year Protection Plan” are defined in Title 24 C.F.R. § 203.200. These features include (1) the coverage of the oneyear workmanship warranty, the coverage of the two-year systems warranty (wiring, piping and ductwork) and the coverage of the 10-year structural defects warranty and (2) the insurance- backing coverage requirements for the builder’s obligations under the warranty. Because 2-10 HBW uses the same warranty coverage and insurance-backing coverage as defined in the CFR, these same features are the most prominent features in the 2-10 HBW warranty program.2-10 HBW warranty program complies with state statutory regulations

In some states, the builder’s warranty obligations are defined by statute. In those states, the builder may waive the common law implied warranty obligations if the builder provides a warranty that complies with the statutory requirements. California, New Jersey, Maryland and Indiana have such a statutory scheme.1 Both New Jersey and Maryland require submission and approval of the warranty document by the Department of Community Affairs and the Maryland Office of the Attorney General, respectively. The same HUD approved 2-10 HBW warranty has been and is approved by the appropriate regulatory agency in New Jersey and Maryland.

A “whole home” or “bumper to bumper” warranty

The requirements contained in 24 C.F.R. § 203.200 et seq. Do not define the guidelines for determining when the quality of the workmanship or systems is defective. In the 2-10 HBW warranty, the coverage guidelines for workmanship and systems are adopted from the Residential Construction Guidelines published by the National Association of Home Builders. A comprehensive “whole home” or “bumper to bumper” warranty is not provided because it would be prohibitively expensive, increasing The consumer’s cost of the home. To date, there has not been a demand for a more expensive, comprehensive product.

The prior article does not take issue with the workmanship and systems standards and is instead disturbed by the structural defect warranty coverage. The definition of a structural defect contained in the 2- 10 HBW warranty is identical to the HUD requirement for a 10-year insurance-backed protection plan contained in 24 C.F.R. § 203.200. As specified in Title 24 of the Code of Federal Regulations (and thus in the HBW warranty), in order to qualify for repairs, there must be actual physical damage to the designated load-bearing elements of the home; that damage must be caused by failure of such load-bearing elements that affect their load-bearing function to the extent that the home becomes unsafe, unsanitary or otherwise unlivable.

As the prior article correctly notes, the structural defect warranty excludes non-load bearing elements. These non-load bearing elements are the very same items expressly excluded from 24 C.F.R. § 203.200. Both the CFR and the 2-10 HBW warranty provide that the following elements of a home do not qualify for coverage:

Damage to the following nonload- bearing portions of the home is not considered a structural defect: Roofing; drywall and plaster; exterior siding; brick, stone, or stucco veneer; floor covering material; wall tile and other wall coverings; nonload- bearing walls and partitions; concrete floors in attached garages; electrical; plumbing, heating, cooling and ventilation systems; appliances, fixtures and items of equipment; paint; doors and windows; trim, cabinets, hardware, and insulation.2

That simply means a defect limited to non-structural elements alone is not covered by the structural warranty— hardly a surprise. It does not mean that the homeowner’s remedy for a qualified structural defect is strictly limited to load-bearing elements. As required by HUD regulations, the insurance-backer not only repairs the qualified structural defect, but also repairs surfaces damaged by the defect, such as cracked non-load bearing drywall. This damage to the non-load bearing drywall is also known as resultant damage due to the construction defect. Surfaces and other elements that must be disturbed in the course of repairing the structural defect are also restored. The intent is to restore the home to the condition that existed prior to the defect:

The repair and cosmetic correction of only those surfaces, finishes and coverings, original with the home, damaged by the structural defect, or which require removal and replacement attendant to repair of the structural defect, or to repair other damage directly attributable to the structural defect. It is the intent of this section to ensure the repair of a covered home to a condition approximately the condition just prior to the defect, not to a like new condition. It does not require refinishing of all interior or exterior surfaces if only one or two surfaces are damaged. It does not cover personal property items, not a part of the structure, which are damaged by the defect or as a result of the defect. It excludes damage covered by a homeowner’s casualty insurance policy.3

Claims are paid under the 2-10 HBW warranty

But let’s get to the bottom line— claims are paid under the 2-10 HBW warranty. For more than 30 years, the 2-10 HBW warranty program has actively served the residential housing industry resulting in claims payments by the insurance backer of more than $214 million. More than $112 million dollars have been paid on homes enrolled in the 2-10 HBW program since 2000. The pay-out on these claims includes approximately $5 million paid to homeowners whose builders were bankrupt. Since 2000, South Carolina homeowners have benefited from the warranty insurer paying out on behalf of builders participating in the program more than $2.7 million in claims, with an additional half million plus currently set aside to pay for claims that have been accepted but where repairs are not yet complete. This represents a total incurred in excess of $3.2 million. Without the 2-10 HBW warranty, these homeowners may not have received anything.

Perhaps it will be asked why even more money has not been paid under the 2-10 HBW warranty program. There are several reasons. 2-10 HBW screens every builder who seeks to join the 2-10 HBW program and again on the builder’s annual renewal. Builders enrolling in the program must demonstrate financial stability in their credit scores, experience in the construction industry and the requisite volume of construction. 2- 10 HBW does not stop there. Before a builder’s home is enrolled in the program, the builder must demonstrate that he has satisfied the program’s risk management requirements. Inspections during a minimum of three phases of construction are required in areas that do not have an experienced building department. In addition to constructing the home in compliance with state and local building code requirements, the program requires the builder to construct his home in accordance with the advice of a geotechnical engineer whenever foundation elements are supported by fill soils. Hence, by the time a home has been enrolled in the 2-10 HBW program, both the builder and the home have been vetted and the warranty insurer is willing to stand behind the builder’s product.

South Carolina courts have repeatedly considered what construction defects may be covered under a builder’s commercial general liability (CGL) policy.4 Recently, the S.C. Legislature enacted S.C. Code Ann. § 38-61-70 to clarify what portion of defective construction work is covered under such policy. Despite the statutory clarification, the coverage provided by a builder’s CGL policy is still subject to debate. Nevertheless, it is clear that a South Carolina builder and homeowner may find relief for Faulty construction such as a qualifying structural defect if a 2-10 HBW Warranty is in effect for the home.

Construction of a home involves the expertise of many tradesmen and a good construction manager. Despite the best intentions and years of experience, mistakes do happen. There is value in securing the protection of an insurance backed structural warranty from 2-10 HBW.

Arbitration of warranty claims

The 2-10 HBW warranty requires the arbitration of warranty claims in the home so that the homeowner can show the arbitrator (rather than describe to the arbitrator) the defect. Contrary to the assertion in the prior article, there is no chance of arbitrating a South Carolina home defect claim in some distant state such as New Jersey. Arbitration is favored under the Federal Arbitration Act and allowed in all states because it is an alternate form of dispute resolution that is faster and more economical than a lengthy court trial.

In the 2-10 HBW program, less than six percent of all insurance claims go to arbitration because in the majority of cases the claims are promptly settled between the homeowner and warranty insurer. Of the claims that go to arbitration, the warranty insurer’s determination is upheld approximately 60 percent of the time. Half of the remaining cases (approximately 20 percent) are decided in the homeowner’s favor and the remaining half reach a compromise settlement.

The prior article cites several cases for the proposition that the arbitration agreement is “unconscionable.” A careful reading of those cases demonstrates that in each instance the homeowners were not given the warranty and arbitration provision at the time they signed a sales agreement, whereas the builder’s sales agreement contained conflicting procedures for dispute resolution. 2- 10 HBW repeatedly reminds member builders to present the warranty and the arbitration provision at the time the homeowner agrees to buy the home. 2-10 HBW never advocates surprising the homeowner several months later, at closing.

The comments above are based upon the coverage provided under the 2-10 HBW warranty and do not reflect the views or claims payment experience of other new home warranty products. As noted in the prior article, the coverage provided by the different warranty companies varies. HBW believes the reason 2- 10 HBW is the largest new home warranty company in the country and has protected more than 1.5 million homes in 30 years is because HBW provides a superior product.

Joan Riordan is a licensed attorney in Colorado. Bill Warnock is a partner with Womble, Carlyle, Sandridge & Rice, LLP in Charleston.

Endnotes

1 See CAL. CIV. CODE § 895 et seq. (West 2007 & Supp. 2013), N.J. STAT. ANN. § 46:3B-1 et seq. (West 2013), MD. CODE ANN., REAL PROP. § 10-601 et seq. (LexisNexis 2010), and IND. CODE ANN. § 32-27-2-1 et seq. (LexisNexis 2002).

2 24 C.F.R. § 203.200 (2012).

3 Id.

4 See, e.g., Crossmann Communities of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 717

S. E.2d 589 (2011).

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