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Note 17 - Warranty Costs

12 Months Ended

Oct. 31, 2014

Product Warranties Disclosures [Abstract]

Product Warranty Disclosure [Text Block]

17. Warranty Costs

General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The availability of general liability insurance is limited due to a decreased number of insurance companies willing to underwrite for the industry. In addition, those few insurers willing to underwrite liability insurance have significantly increased the premium costs. To date, we have been able to obtain general liability insurance but at higher premium costs with higher deductibles. Our subcontractors and suppliers have advised us that they have also had difficulty obtaining insurance that also provides us coverage. As a result, we have an owner controlled insurance program for certain of our subcontractors, whereby the subcontractors pay us an insurance premium (through a reduction of amounts we would otherwise owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction defects regardless of whether we or our subcontractors are responsible for the defect. For the fiscal years ended October 31, 2014 and 2013, we received $2.3 million and $2.2 million, respectively, from subcontractors related to the owner controlled insurance program, which we accounted for as a reduction to inventory.

We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 2014 and 2013, our deductible under our general liability insurance is $20 million per occurrence for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2014 and 2013 is $0.25 million, up to a $5 million limit. Our aggregate retention in fiscal 2014 and 2013 is $21 million for construction defect, warranty and bodily injury claims. In addition, we establish a warranty accrual for lower cost related issues to cover home repairs, community amenities, and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. Additions and charges in the warranty reserve and general liability reserve for the fiscal years ended October 31, 2014 and 2013 were as follows:

	Year Ended October 31,
(In thousands)	2014		2013

Balance, beginning of period	$131,028		$121,149
Additions – Selling, general and administrative	18,839		18,676
Additions – Cost of sales	11,115		13,529
Charges incurred during the period	(18,241	)	(22,511	)
Changes to pre-existing reserves	(2,600	)	185
Additional reserves where corresponding amounts are recorded as receivables from insurance carriers	37,867		-
Balance, end of period	$178,008		$131,028

Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty and construction defect data, worker’s compensation data, and other industry data to assist us in estimating our reserves for unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and workers compensation programs. The estimates include provisions for inflation, claims handling, and legal fees.

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $6.4 million and $9.7 million for the fiscal years ended October 31, 2014 and 2013, respectively, for prior year deliveries. For the fiscal year ended October 31, 2014, we settled a construction defect claims relating to the Northeast and West segments which made up the majority of the payments. For the year ended October 31, 2013, payments were made up of a number of smaller construction defect claims, primarily in the Northeast. Additional reserves related to claims that are expected to be recovered from insurance carriers of $37.9 million were recorded in fiscal 2014, which were comprised of claims where we exceeded our deductible in those years. When reserves for claims are recorded, the portion that is probable for recovery from insurance carriers is recorded as a receivable. As a result, there was no impact to the Consolidated Statement of Operations for these reserves.