Commitments and Contingencies

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of these limited warranties vary depending upon the market in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes, or customer service practices could have a significant impact on our actual warranty costs in the future and such amounts could differ from our current estimates.

The changes in our warranty liability are as follows (in thousands):



	Three Months Ended
	February 28, 2013			February 29, 2012
Balance at beginning of period	$	47,822		$	67,693
Warranties issued	2,766			1,317
Payments	(8,929		)	(4,436		)
Adjustments	1,674			33
Balance at end of period	$	43,333		$	64,607

Central and Southwest Florida Claims. During 2012, we received claims from homeowners in certain of our communities located in central and southwest Florida that primarily involved framing, stucco, roofing and/or sealant matters on homes we delivered between 2003 and 2009, many of which have resulted in water intrusion-related issues. While we initially believed these issues were isolated, after additional investigation, we determined in the fourth quarter of 2012 that more homes and communities may have been affected. During the three months ended February 28, 2013, through our continued efforts to identify, examine and repair homes that may have been impacted by these issues, the number of identified homes and our estimate of the total repair costs were revised. Based on the status of our investigations and repair efforts, our overall warranty liability at February 28, 2013 included $15.9 million for estimated remaining repair costs associated with homes in central and southwest Florida that have been identified as having water intrusion-related issues. As of February 28, 2013, we had identified a total of 969 homes requiring more than minor repairs and resolved repairs on 207 of them. During the three months ended February 28, 2013, we paid $5.4 million to repair identified homes. As of February 28, 2013, we had paid $9.4 million of the total estimated repair costs of $25.3 million associated with all identified homes. The majority of the total estimated repair costs as of February 28, 2013 relate to two attached-home communities. We consider warranty-related repairs for homes to be resolved when all repairs are complete and all repair costs are fully paid.

As discussed below, due to the increased scope of these water-intrusion issues, we recorded a charge, net of estimated recoveries, during the three months ended February 28, 2013 to increase our overall warranty liability for all of our previously delivered homes that are covered under our limited warranty, including the homes in central and southwest Florida identified as having water intrusion-related issues. As our investigations and repair efforts in central and southwest Florida are continuing, at this time we are unable to determine whether we will need to record additional charges for repair costs on the homes we have identified or on homes that may be identified in the future.

As of February 28, 2013, based on our investigation into the central and southwest Florida water intrusion-related claims, we believe it is probable that we will recover a portion of our total estimated repair costs associated with identified homes from various sources, including subcontractors involved with the original construction of the identified homes and their insurers. Accordingly, we have reflected estimated probable recoveries of $9.4 million in our overall warranty liability as of February 28, 2013. Our evaluation of identified homes and potentially responsible parties is ongoing and our estimate of probable recoveries may change as additional information is obtained.

Other Claims. With respect to potential recoveries on claims regarding other homes previously delivered, we have tendered claims with responsible liability insurance carriers, seeking reimbursement of costs we have incurred to make repairs and to handle claims. We intend to continue to undertake efforts, including legal proceedings, to obtain reimbursement from various sources, including subcontractors, suppliers and their insurers, for the costs we have incurred or expect to incur to investigate and complete repairs and to defend ourselves in litigation. We have not recorded any amounts for potential future recoveries as of February 28, 2013 related to these claims regarding other homes previously delivered.

Global Settlement Regarding Allegedly Defective Drywall Material. As of February 28, 2013, we were a defendant in eight lawsuits relating to allegedly defective drywall manufactured in China. Seven of the lawsuits are “omnibus” class actions purportedly filed on behalf of numerous homeowners asserting claims for damages against drywall manufacturers, homebuilders and other parties in the supply chain of the allegedly defective drywall material. We are also a defendant in one lawsuit brought in Florida state court by individual homeowners. On February 7, 2013, a final global settlement of claims relating to the allegedly defective drywall material, including the seven omnibus class actions in which we were named as a defendant, was approved by the federal court judge overseeing a multidistrict litigation case — In re: Chinese Manufactured Drywall Products Liability Litigation (MDL-2047). The global settlement resolved all current claims against us and bars any future claims against all participating defendants, including us. Our total obligation as a participating defendant under the global settlement was $.3 million, which we paid on March 25, 2013. We also expect to receive certain amounts under the global settlement in 2013 based on repairs we made to homes of certain settlement class members. The plaintiffs in the Florida state court case opted out of the global settlement, and we will defend that case. While the ultimate outcome of that case is uncertain, based on the current status of the proceedings, we do not believe the outcome will be material to our consolidated financial statements.

Overall Warranty Liability Assessment. In assessing our overall warranty liability at a reporting date, we evaluate the costs for warranty-related items on a combined basis for all of our previously delivered homes that are under our limited warranty, which would include any such homes in central and southwest Florida identified as having water intrusion-related issues. As of February 28, 2013, based on our assessment of our overall warranty liability, we recorded an adjustment to increase our overall warranty liability by $1.7 million in the first quarter of 2013 with a corresponding charge to construction and land costs in our consolidated statement of operations. This adjustment was comprised of a $12.4 million increase in our estimated warranty costs, net of $10.7 million which represented the estimated probable recoveries for water intrusion-related issues in central and southwest Florida and other adjustments.

Depending on the number of additional homes in central and southwest Florida identified as having water intrusion-related issues, if any, and the actual costs we incur in future periods to repair such homes and/or homes affected by other issues, including costs to provide affected homeowners with temporary housing, we may revise the estimated amount of our liability, which could result in an increase or decrease in our overall warranty liability. However, based on the rate of new homes that we have identified since the end of the first quarter of 2013 to the date of this report in central and southwest Florida that have or that may have water intrusion-related issues, we believe we have identified the majority of such homes as of February 28, 2013 and anticipate resolving repairs on such homes by mid-2014.

Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales that may be affected by Accounting Standards Codification Topic No. 460, “Guarantees.” Based on historical evidence, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.

Insurance. We maintain, and require the majority of our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a wrap-up policy, where eligible subcontractors are enrolled as insureds on each project. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. We record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under our insurance policies, and the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and include an estimate of construction defect claims incurred but not yet reported. Our estimated liabilities for such items were $91.7 million at February 28, 2013 and $93.3 million at November 30, 2012. These amounts are included in accrued expenses and other liabilities in our consolidated balance sheets. Our expenses associated with self-insurance totaled $1.8 million for the three months ended February 28, 2013 and $2.3 million for the three months ended February 29, 2012. These expenses were largely offset by contributions from subcontractors participating in the wrap-up policy.

Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At February 28, 2013, we had $284.7 million of performance bonds and $43.7 million of letters of credit outstanding. At November 30, 2012, we had $286.1 million of performance bonds and $41.9 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.

Land Option Contracts. In the ordinary course of business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At February 28, 2013, we had total deposits of $21.6 million, comprised of $21.4 million of cash deposits and $.2 million of letters of credit, to purchase land having an aggregate purchase price of $534.4 million. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.