Bonded Builders Warranty: a Risk Management Tool

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By John Hubbard
Director of Business Development
Bonded Builders Warranty Group

The Bonded Builders Warranty is one of the most effective risk management tools in existence. Combined with the correct CGL policy and good subcontractor agreements, the Bonded Builders Warranty provides builders with effective transfer of risk management options and homebuyers with peace of mind.

Risk

Risk is inherent in the homebuilding industry. In most states, residential construction is held to a higher standard than almost any other manufactured product. Not only are the construction methods held to highly detailed standards, but the short- and long-term performance of the a builder’s work product are held to specific “performance” standards as dictated by state and federal statutes. The performance standards become the builder’s warranty and the homebuyer’s expectation of how their home should perform over time. The homebuyer’s expectations (real or imagined) are the source of most misunderstandings and conflicts between the builder and homebuyer.

Realities

All new homes come with a warranty. It is either express (a written document) or implied (no written document). Implied warranties are usually determined by litigation and the legal process is seldom settled in the builders favor, because the layman’s interpretation of residential performance standards is usually based on emotional issues, not acceptable construction methods and standards.

Express written warranties should comply with state and federal statutes as well as reasonable and customary local building practices. Builders must understand that they are the warrantor of their work product. They are the warrantor for one year’s workmanship, one- and two-year systems, and 10 years (states may vary) for structural as defined by the Code of Federal Regulations 24CFR203.200.

Unless a builder wants to assume 100 percent of this risk, then they have no option but to transfer that risk to someone else. That someone else can be general liability insurance, but CGL is usually only triggered when litigation is involved regarding liability and/or property (the house) for that state’s statute of repose (latent defects litigation). It can also be via subcontractor agreements which contractually transfer liability away from the builder to the subcontractor. This transfer of risk should also require that the builder be made an additional named insured on the subcontractors CGL insurance policy. Again, litigation is usually the trigger in activating this type of defense.

A Better Option: The Bonded Builders Warranty

Builders who issue a Bonded Builders warranty on their new homes make a very wise risk transfer decision. The Bonded Builders warranty, in addition to satisfying HUD requirements, provides builders with an express written warranty that disclaims implied warranty statutes. In addition, the homebuyer receives written performance standards that are based on the National Association of Homebuilders nationally recognized standards for residential performance. Homebuyer expectations can be answered by referring to the performance standards in the warranty booklet. The standards in the warranty booklet set expectations and repair responsibilities for the home. If disputes arise, then the warranty can be used as a method for directing and solving disputes.

How Does This Work?

In order to avoid unconscionable contract issues, builders should always utilize the Bonded Builders Acknowledgement form at the time of contract, insisting on homebuyer signatures. This key risk management document established that the Bonded Builders warranty is the express warranty being issued by the builder and the homebuyers agree to the terms and conditions of the warranty including the dispute resolution provisions contained in the warranty contract. At closing, when the application for home warranty is completed, the homebuyers are required to sign again restating that they agree to the Bonded Builders warranty and the terms and conditions for the dispute resolution procedures as stated in the warranty.

What Does This Mean?

It means that if there is a dispute, the homebuyer has agreed to go through conciliation, mediation and arbitration before litigation. Most disputes are settled in conciliation utilizing the professional Bonded Builders Claims team. If the homebuyer ignores the agreement and files a lawsuit, the builder’s attorney can utilize the arbitration provision in the contract between the builder and the homeowner to force the dispute into arbitration thus abating the suit. You can never stop law suits, but using the Bonded Builders warranty dispute resolution provisions, they can be managed and/or deflected. In addition, if the home suffers a structural failure as defined by the warranty, then Bonded Builders Warranty Group will facilitate repairs as defined by the warranty and in compliance with HUD structural failure definitions.

For more information about Bonded Builders Warranty Group and its risk management services, contact your local representative by clicking here.

Bonded Builders: Protecting the American Dream

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