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Building an Effective Warranty Strategy: Part 2

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.

In part two of Building an Effective Warranty Strategy" we will discuss:

  1. The pitfalls of a builder providing their own warranty
  2. Why a thrid-party warranty contract better protects homebuilders
  3. Give you examples of specific court cases

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:

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:

Contact Maverick 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? Contact the Maverick team today.

If you didn't catch Part one of "Building an Effective Warranty Strategy" be sure to check it out here for must-know information on third-party warranty basics.

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 with a warranty from Maverick.

Please note: Our team can also assist you with builder insurance products. Let us streamline risk management for your business. Ask us about our insurance offerings today.

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We’re a trusted and experienced financial advisor to builder’s across the country. If you’re a homebuilder in need of structural warranties for your homes or insurance to protect your business, reach out to our team.