Warranty Insurance

Jan 6, 2005
Contributor: joel randon

Keeping up to date with your homeowner's insurance needs is important because the insurance industry is changing constantly. And the advisory role that personal insurance agents used to play is disappearing. As a result, policy owners are left to battle insurance companies over coverage issues.

A recent illustration: With developers facing intense financial pressure in the current weak market, a growing number of new-home buyers demand insured warranty programs to pay for the cost of defective construction or unforeseen repairs to their new homes.

The policies usually cost several hundred dollars and cover major structural repairs for as many as 10 years and less severe problems for one or two years. But a series of lawsuits has raised concerns about whether owners of these policies have been getting their money' s worth.

With growing frequency, particularly in cases where the home builder has gone out of business, the warranties are leading to disputes between the new homeowners and the insurance company over whether the coverage applies under the contract. Usually such disputes are heard by arbitrators.

In a 1991 case challenging the practices of home-warranty companies, a federal appeals court in Virginia required Denver-based Home Buyers Warranty, the nation's largest such company, to abide by an arbitrator' s award of more than $200,000 to a policy owner. The company had sought to push the case into court.

The issue before the fourth U.S. Circuit Court of Appeals centered on whether an arbitrator's award of $206,605 in damages to a homeowner in one such dispute was binding, or whether it could be appealed by the insurer through the courts. National Home Insurance had argued that either party had the option of appealing if dissatisfied by the arbitration award.

But in a 12-page opinion, the appeals court ruled that Home Buyers Warranty's contract language specifically requires binding arbitration.

This conclusion shouldn't have come as a surprise. In 1990, a Texas jury ordered Homeowner's Warranty Corp., the nation's second largest home-warranty company, to pay $483,000 in damages to a policy owner whose house was falling apart because of a crack in the foundation.

Homeowner's Warranty, which denied coverage, had assured the buyers that all homes insured under its program were inspected on a continuing basis during construction--a point that was contested at trial. Of the total jury award, $325,000 was for punitive damages intended to deter future wrongdoing. The two sides agreed to settle the case out of court for an undisclosed amount.

For more information relating to "Warranty Insurance", please visit our liability insurance Warranty Insurance page.

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