ALTHOUGH ROUGHLY HALF OF THE STATES have passed notice-and-opportunity-to-repair (NOR) laws, which let builders offer to repair a defect before the homeowner can sue, some states have found that more is needed to help counteract rising defects lawsuits and general liability insurance rates.
That's why Oregon is studying a minimum warranty policy similar to the one in New Jersey, nine other states, and British Columbia.
“Oregon is an NOR state, and while NOR gives the builder the opportunity to offer a repair, the homeowner can turn that offer down,” says Scott Barrie, government affairs director for Oregon's HBA.
“In some cases, builders may have problems with flashing or small siding issues, and the insurance company settles for $100,000,” Barrie says. “There's no incentive for the homeowner to repair under those circumstances,” he continues, adding that the Oregon HBA generally supports the concept of a minimum warranty policy because it really spells out what is and isn't covered.
“At this point, the HBA is willing to discuss and explore a minimum warranty policy, but we have some serious questions about the specifics of such a policy,” Barrie says.
According to Sue Palkovic, vice president of marketing for Harrisburg, Pa.–based Residential Warranty Co., rates on policies are based on the home's price, the builder's experience, and the total sales volume the builder enrolls in the program. She says builders in New Jersey can pay $250 to $500 per home for a 10-year warranty on an average-priced home.
The laws in New Jersey have teeth: Garden State builders can have their licenses revoked if they fail to meet the state's warranty requirements.
Barrie says Oregon's push to study home builder warranties stems from a broader effort by the state to address ongoing issues in its construction industry. Complaints from homeowners statewide about poor construction coupled with builder concerns over rising general liability insurance rates led the state to create the Construction Claims Task Force.
The task force, which is charged with developing a list of recommendations and preparing a report for the state's 2007 legislative session, is studying the relationship between construction defects and rising general liability insurance rates. The group is interested in a minimum warranty in the hope that such a program would lead to builders fixing problems before homeowners file lawsuits. Fewer lawsuits could then lead to reduced insurance rates.
“While we haven't endorsed anything yet, there are two primary arguments for adopting a minimum warranty policy,” says Joel Ario, insurance administrator with the Oregon Insurance Division, which is working closely with the task force.
“First, it encourages a relationship between the builder and the home buyer in which they can work together, and the builder can get buyers to understand maintenance issues,” says Ario. “The other plus is that states can decide for themselves how long to cover each item.”
The HBA's Barrie says one of the main concerns the trade group has with a minimum warranty policy is that it would take up to 10 years before insurance companies had enough historical data to determine whether a decrease in general liability insurance rates was justified.
“So if we go down this path, we may not know the impact on insurance rates for 10 years,” says Barrie. “If I'm a builder and I'm paying $500 for a warranty, what's the sense if I don't get a reduction in general liability insurance?”
Learn more about markets featured in this article: Harrisburg, PA.