16.

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

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, 2017

and

2016,

we received

$4.1

million and

$4.2

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

2017

and

2016,

our deductible under our general liability insurance is a

$20

million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal

2017

and

2016

$0.25

million, up to a

million limit. Our aggregate retention in fiscal

2017

and

2016

$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, 2017

and

2016

were as follows:

	Year Ended October 31,
(In thousands)	2017			2016

Balance, beginning of period	$	121,144		$	135,053
Additions – Selling, general and administrative		10,870			17,363
Additions – Cost of sales		15,835			17,397
Charges incurred during the period		(28,019	)		(29,965	)
Changes to pre-existing reserves		7,872			(9,199	)
Changes to reserves where corresponding amounts are recorded as receivables from insurance carriers		-			(9,505	)
Balance, end of period	$	127,702		$	121,144

Warranty accruals are based upon historical experience.

We engage a

third

-party actuary that uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but

not

reported claims reserves for the risks that we are assuming under the general liability and construction defect programs. The estimates include provisions for inflation, claims handling and legal fees. During the

fourth

quarter of fiscal

2017,

we recorded a

$12.5

million adjustment to increase our construction defect reserves related to litigation. We also recorded a

$4.6

million reduction in our warranty accruals during the

fourth

quarter of fiscal

2017

and we had minor reductions in our warranty accruals during the

fourth

quarter of

2016

based on recent warranty claims history. As a result of reductions in our construction defect claims in recent years and the impact of those reductions on the actuarial analysis of our total reserves, we recorded a

$9.2

million reduction in our construction defect reserves during the

fourth

quarter of fiscal

2016.

These reductions are reflected in the changes to pre-existing reserves in the table above.

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were

$0.9

million and

$4.0

million for the fiscal years ended

October 31, 2017

and

2016,

respectively, for prior year deliveries. During fiscal

2016,

we settled

two

construction defect claims relating to the Northeast segment which made up the majority of the payments.