Building an Effective Warranty Strategy: Part 1

Why Every Home Builder Needs a Third-Party Warranty

Every builder warrants their work, whether they know it or not. What is included in that obligation? Who governs that warranty? Who is responsible if something goes wrong? Those details really matter for home builders.

This article will be the first of a 3-part series on Building an Effective Home Warranty Strategy. Today, we start at the most basic questions: Why do I need a third-party warranty at all?

In this article, we’ll cover:

  1. What is a warranty?
  2. The “implied” warranties that courts and legislatures impose upon home builders
  3. Pitfalls of a builder providing their own warranty and Why a third-party warranty contract better protects Home Builders

 

When we’re done, you’ll understand why all builders – large and small– need a third-party warranty contract as an integral piece of their ‘risk protection’ plan. 

What is a new home warranty?

A warranty is a guarantee that the provided workmanship and goods are covered from damages. With new construction, there are a number of elements that can (and often do) require repairs. Including but not limited to:

  • Paint
  • Carpeting
  • Tiles
  • Roofing
  • Plumbing
  • Electrical
  • HVAC
  • Drywall
  • Stucco
  • Other cladding
  • Load bearing elements
  • And more

 

A warranty consists of three key elements:

  1. Terms and conditions for what the warranty does and does not cover
  2. The Administration & Remediation Process if something does go wrong
  3. Determination of the Responsible Party for the repairs

Implied Warranties

Home warranties hit the scene in the 1970s, during a time of steady real estate growth. These contracts were soon acknowledged as the best way to protect both the builder and the homeowner – while introducing a level of expectations about what is and is not the builder’s responsibility after closing.

In only a few years, the idea of structural warranties became hugely popular. As the home builder is the ‘home expert,’ consumer protection courts began to implement “implied warranty” obligations on builders to ‘level the playing field.’ These Home Builder/Homebuyer court cases essentially mandated warranties on all new home sales. A warranty was an appropriate implied obligation. Leave an innocent consumer homeowner high and dry? Not a chance.

As a result, each state – via the courts and legislature – now has its own implied warranties [common law] or statutory requirements, or both. Each state is different, but it’s generally accepted that the home should be habitable and free from construction defects. However, because these warranties have been developed from court cases over time, they are vague and unclear on their requirements. Was the Home Builder negligent? Do you want that to depend on what a jury decides?

The Dangers of Implied Warranties for Builders

This vagueness and lack of contractual clarity creates exposure for builders. When items are not clearly defined, those issues end up NOT resolved by an express contract, but as a nebulous TORT: meaning lawsuits, expensive repairs, and an unknown limit of liability. It’s a time-consuming public process, ruining a builder’s reputation. There is truly NO good news with this option.

An Express Written Warranty – Defining the Terms

An Express Written warranty is one that is clearly defined and documented. This express written warranty agreement – acknowledged by the homebuyer – specifically outlines what is and what is not covered under the builder’s warranty.

More importantly, a fairly-written Express Written warranty can take the place of Implied Warranty obligations – creating clarity and helping the builder avoid court.

A written warranty allows the builder to define what is covered and to dictate alternative dispute resolution, as opposed to litigation. Most claims happen years down the road, but the rules can only be defined upfront.

A written warranty is clearly the best option for everyone involved. Litigation is ten times as expensive as ‘alternative dispute resolution’, which includes conciliation, mediation, and arbitration.

Of course, a home warranty won’t cover every issue of the new home. It’s not designed to. It will cover ‘your work’ and qualified structural defect claims’, items specifically excluded by a General Liability insurance policy. Similarly, ‘resulting damages’ and bodily injuries are covered by an insurance policy and NOT by a warranty. Too, Appliances are generally not covered by a new home structural warranty. Appliance manufacturers provide their own warranties, and there are companies who specifically will offer warranties after the manufacturers’ warranties expire.  

The most standard contract – commonly called the 1-2-10- provides for a one-year warranty for labor and materials, a two-year warranty for systems, and a ten-year warranty for structural defects. The ten-year structural exposure is often transferred to the warranty company’s insurer, while the 1 and 2-year obligations remain with the builder, BUT the exposures are expressly stated in the warranty contract. The warranty insurer stands behind those obligations in the event the builder is unable to repair. Most builders prefer a third-party handling dispute resolution; from an express contract that is in black and white. Implied warranties are shades of gray. [in addition to being expensive and time-consuming and public!]

Issuing Your Own Warranty – The Dangers of Self-warranting

Why NOT do it yourself? Home Builders can be tempted to provide their OWN warranties. Courts usually don’t like that idea for several reasons:

Self-Serving; is the builder attempting to establish their OWN liability? To the detriment of the Home Owner? It’s easy to see why that won’t work.

Contract of adhesion; an ambiguity in a contract is construed against the drafter. Courts are adept at finding inconsistencies.

Unconscionable: did the expert Home Builder dictate NO COVERAGE in an area that could clearly be covered? That may be ruled Unconscionable.

Unlevel playing field; the Home Builder is deemed to have the expertise. NOT the Innocent consumer/homeowner.

[if you are a builder in court, and hear one of these terms, in BOLD; you just lost]

Third-Party Warranty Contracts and Why You Need One

A third-party warranty is a contract issued by an entity that is not the builder; that party provides the guarantee to the buyer and does so in a written CONTRACT [called an “Express Warranty”], meaning protections for the buyer and builder. IF it’s a contact matter, it’s NOT a TORT claim. 

With a third-party warranty, builders receive an objective contract, which benefits both parties, with a third-party administrator and proven alternative dispute resolution expertise (to keep you out of court). This can save builders time, money, and headaches – and has been supported by hundreds of court cases for decades.

More Likely to Stand Up in Court

Courts protect the consumer and don’t like it when a business (builder) attempts to establish its own liability. Courts are always wary of an unequal bargaining position: the commercial builder/business versus the innocent consumer/homeowner. Home Builders (B: Business) vs. HomeOwners (C: Consumer) is a danger zone, for B! And, since the Home is the largest asset most people own, it’s B vs. C, on steroids! Three court cases demonstrate the issue:

Vasquez vs. Glassboro

In 1980, a migrant farmworker named Natividad Vasquez worked for Glassboro Service Association, Inc. Living quarters were provided as a condition of his employment. When Mr. Vasquez was later terminated, he was immediately dispossessed without notice. A lawsuit followed.

Ultimately, the courts ruled in favor of Mr. Vasquez. It was determined that the bargaining powers between Natividad Vasquez and Glassboro were uneven. Therefore, there was an implied provision that a terminated employee be given reasonable time to find alternative housing.

The lesson learned: When an agreement is made under unequal circumstances, it may not hold up in court. If you offer a warranty that is written in your favor and at the disadvantage of the buyer, it may be legally disputed. Note the next two cases and the business vs. consumer components:

Lucier v. Williams

In 1999, newlyweds Eric Lucier and Karen A. Haley bought their first home after it passed an inspection from Cambridge Associates, Ltd. At the time of the inspection, Lucier signed paperwork provided by Cambridge Associates, Ltd. 

In his own words, Lucier describes the wording of this agreement as “unfair and confusing.” The inspector stated that he would not change any provisions of the agreement, and Lucier agreed to sign.

Later, Lucier testified that he relied upon the inspector’s resume and stated that he was unaware the company was uninsured. 

After Lucier and Haley purchased and moved into the home, they began to notice that their roof was leaking. A new inspection revealed that the roof was defective and that the first inspector should have caught the problem. The repairs amounted to $10,000. 

Later, it was revealed that the inspection agreement had a limited liability threshold of $129.50, only half of the cost of the inspection. In court, this threshold was deemed to be “unconscionable” in terms of liability.

Because the inspector had been in business for 20 years, he had more bargaining power than the unknowledgeable buyer. Ultimately, it was deemed that this individual was liable for the fact that he missed such a clear and devastating issue.

The lesson learned: Inspectors, and Home Builders, will be held responsible in court for their mistakes, and courts will side with the consumer when “B” ‘over reaches’ or takes unfair advantage of ‘C’.

Another example of a B to C over-reach:

DR HORTON vs. Smith, South Carolina, 2016

DR Horton drafted contracts that were deemed heavy-handed, and one-sided. The court ruled that the Smith family was effectively not allowed a proper remedy. Large builders take a risk when they draft their OWN contracts. The uneven playing field is even more pronounced.

Providing Clarity for Both Parties

When you trust a company that specializes in these types of warranties, you invest in documentation that is highly clarified. A third-party provider will have drafted and issued hundreds of thousands of similar warranties in the past.

As a result, such a contract provides a clear explanation of what the warranty does and does not cover. This is ultimately beneficial to both the builder and the buyer.

For example, a professional warranty provider can specify where these gray areas stand on the warranty:

  • Clarifies wear and tear
  • Damages; a contract specifies, instead of nebulous court decisions
  • Damages caused by the homeowner
  • The natural corrosion of materials, like paint or stucco

Clear documentation of the warranty will help both parties avoid an unnecessary lawsuit. In fact, the contract usually AVOIDS litigation; it in fact, stipulates alternative dispute resolution.

Selling the Home Faster

Selling a home faster means making more money. Industry studies have consistently shown that homes with a third-party warranty sell much faster.

The sooner you move on to your next project, the faster you can grow your business.

Does This Idea Apply to Both Large Builders and Small Builders?

As noted above, absolutely. Small and large builders face the same implied warranty laws and self-dealing risks.

In fact, large builders are perhaps even more in need of a third-party warranty partner. Due to their size, larger builders are the target of plaintiff lawyers, and they are especially susceptible to the rules of ‘contracts of adhesion’ (inconsistencies construed against the drafter). For example:

TOLL BROTHERS vs. WANG family, 2018 

Toll Brothers drafted BOTH their warranty and sales contract. BOTH contracts called for arbitration, BUT the language was not consistent. The matter was ultimately litigated. Toll Brothers’ excellent lawyers argued persuasively and ultimately lost.

Third-Party Warranties Are Not One-Size-Fits-All

It is most likely small, and large builders will have different risk tolerances. For this reason, these two groups need different products – but all governed and administered by a trusted third-party warranty provider. NOTE: our next Blog focuses on risk-sharing options for Home Builders.

Summary

Builders today are more exposed to litigation than ever. That is why a strong warranty program is a critical first-line of defense for a builder. From this article, we hope you’ve learned that:

  1. Every builder warrants their work, whether they know it or not
  2. A warranty serves 3 key purposes: 1) Defining the coverage terms, 2) Setting the Administration & Rectification Process, and 3) Clarifying the Responsible Party for costs
  3. Self-warranting is frowned upon by consumer protection groups and courts
  4. Third-party warranty contracts offer objective, proven agreements which can keep you out of court – and give your buyers more confidence in your work (to sell the house faster!)
  5. All builders need third-party warranty contracts – but everyone has different risk-sharing needs (see next Blog!)

Contact Centricity to Obtain a Third-Party Warranty Today

Do you have any questions about contracts of adhesion, a third-party structural warranty, implied versus express warranties, contact versus tort, or any other subject covered in this post? Get in touch with the team at Centricity today. Our products and services have protected thousands of builders and homeowners for over 35 years. Both parties want efficient dispute resolution and the clear benefit and reduced liability from a third-party warranty.

With the right protection on your side, you can focus on doing what you do best — building fine homes and serving the local community — rather than fighting expensive legal battles. Take control of your construction business and limit your legal exposure by reaching out to Centricity to learn more.