A warranty may, or may not, avert a new-home nightmare
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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,
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.
These policies also are controversial because they demand that
buyers agree to accept arbitration instead of litigation if there's
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
Jennie L. Phipps is a contributing
editor based in Michigan.