A warranty may, or may not, avert a new-home nightmare -- Page 2
By Jennie L. Phipps • Bankrate.com

Even when there is an accepted defect, builders are rarely in a big hurry to fix it. The longer they delay, the more likely that the unhappy homeowner will give up and pay someone else to fix the problem or settle for a patch rather than a more-costly solution. The practice even has a name: lulling.

Here's how it works, according to Bruce K. Packard, litigation trial and appellate lawyer for Davis Munck in Dallas: "The washers in all 5,000 houses the developer built have a faulty connection to the water. Fixing the problem costs $100 per home or $500,000. If the builder can, he draws it out, so some people get sick of not having a washer. Sixty days later instead of 5,000 claims, it's dropped to 1,000. And it only costs him $100,000. That's a big savings."

Warranty rules, wants and "won't happens"
To avoid many of these kinds of costly claims and improve their image, about 30 percent of home builders buy each of their customers an insurance-backed warranty. (New Jersey is the only state that requires builders to provide insurance-backed coverage, although other jurisdictions do demand the builder offer some type of make-good guarantee for a year.)

A warranty costs a builder about $300 a policy and usually the company passes along the cost to the home buyer, who rolls it into the mortgage. When a homeowner has a problem, he turns to the warranty company instead of the builder. (Home buyers can't purchase these warranties on their own. They have to ask the builder to buy one for them, because the policy warrants the builder's work.)

The policies are a combination of insurance and service contracts. Generally, they cover structural defects that become apparent after the first year. The largest providers are Home Buyers Warranty Corp. and Aon Warranty Group.

Home Buyers Warranty says that one in about 700 new homes has a major structural defect, costing more than $30,000 to repair. And about 50 percent of warranty claims concern houses whose builders have never had a claim before, says Stephen Graham, national warranty administration manager for the company. So even buying from a reputable builder won't protect a buyer completely.

The policies are very detailed and spell out their limitations. Home buyers are often disappointed by these limitations, says Packard.

Homeowners Against Deficient Dwellings Inc., which lobbies for legislation to protect new-home buyers, examined a number of builder-backed and insurance-backed warranties and determined that while the policies may cover defects in things such as paint, flooring, cabinets, roofing and the like during the first year, it is unlikely they will cover such problems after that. In general, HVAC (heating, ventilation and air conditioning) and electrical defects are covered through the second year and after that only major structural defects are covered under these warranties.

"These warranties are loaded with exclusions and limitations that prevent the owner of a defective house from getting any relief," says Nancy Seats of Eureka, Mo., national president of HADD.

Even warranties issued in New Jersey where they are mandatory aren't particularly inclusive.

"Warranties are very restrictive. The defects aren't apparent until five or six years down the line. By then you're probably out of luck," says Lee Seglem, executive assistant to the New Jersey State Commission of Investigation, which examined construction defects in that state.

Arbitration issues
These policies also are controversial because they demand that buyers agree to accept arbitration instead of litigation if there's a dispute.

HADD and other critics of arbitration say that even big companies like the nonprofit American Arbitration Association handle so many builder claims that arbitration has a builder bias.

Packard doesn't see such a bias: "I don't think that's true in the consumer arena where you are talking about claims of $5,000 to $20,000 tops."

Some experts advise refusing a warranty that requires you to waive your right to litigate. But Packard, even though he's a trial lawyer, believes that having a builder's warranty requiring arbitration on a new home is a good thing for most buyers since most people can't afford protracted legal action.

"Most homeowners don't have the cash to pay a lawyer on an hourly basis," says Packard. "And the small dollar amount of most claims makes it unlikely the lawyer will take a case on contingency. So it is very difficult for homeowners who end up in serious disputes to even get to court, let alone end up with a satisfactory result."

While they won't solve all repair problems, even with their drawbacks, insurance-backed warranties still can provide some help to the owner of a problem-plagued new home -- as long as the owner understands the coverage limitations. At the very least, you can expect a prompt hearing and evaluation from the warranty company.

"The builder has paid the money for the policy; he's out of the picture and he's not viewing your complaint as a costly aggravation," says Packard. "The risk of bankruptcy or stonewalling on complaints is much higher if you don't have an independent warranty."

Jennie L. Phipps is a contributing editor based in Michigan.