HOW -- the Home Owners Warranty Corporation -- will be charging builders a higher one-time premium for new home warranty insurance as of Feb. 1. The rate rise reflects a six-year record in which HOW and its underwriter, Insurance Company of North America (INA), became victims of their own warranty program.
Since 1974, builders have been charged a single premium of $2 per $1,000 of the sale price of a warranted home. But INA has been paying out $4.60 in claims for every $2.00 collected in premiums -- a 230% loss.
Begun in 1974 the HOW 10-year warranties cover about 850,000 single-family homes and town houses -- close to $40 billion worth of new housing. Major structural defects are covered through the 10 years. Defects in the electrical, plumbing, heating and cooling systems are covered in the first two years. Defects in workmanship and materials are only covered in the first year, when they would most likely appear, and the warranty stays with the home when resold.
Financial trouble began in the program, when serious and costly structural defects -- mainly foundation damage -- first appeared. HOW and INA, therefore, have entered a high pay-out period, taking heavy losses on warranted homes sold by unreliable builders who were signed up in the early days of 1974 and 1975. Some of those builders have left the program; others have gone out of business.
The new HOW approach has five rates (or "categories") based on the program's experience in different geographic areas, plus a schedule of consumer deductibles: a one-time $250 deductible to cover builder performance claims during the first two warranty years and 1 percent of the sale price during the third to 10th warranty years.
The HOW leadership believes these deductibles will reduce a large number of consumer "nuisance" complaints that have burdened the program with high administrative and investigative costs.
The lowest of the new rates will be $2.60 per $1,000 of the sale price. Eleven of the 122 HOW councils qualify, places like Seattle, El Paso, and the state of North Carolina. The highest rate -- $3.90 per $1,000 -- is reserved for four councils: Atlanta, Ft. Worth, all of Colorado, and Philadelphia, INA's own headquarters city.
"Those four areas have special problems," says Jane M. Snow, speaking for HOW. "In Colorado and Ft. Worth, for example, they have 'expansive soil' that expands when wet and damages home foundations. We believe that specially designed foundations that HOW now requires in those areas can help."
Builders in nine HOW councils will pay a $2.90 premium for the HOW coverage. Two of the nine are the Northern Virginia and the Suburban Maryland HOW Councils.
Paul Fouche, Director of Inspection Services for the Northern Virginia council, doesn't see the new rate having any impact on the final sales price of new homes in his area. "An upgraded appliance or wall-to-wall carpeting could affect price, but not the warranty."
The average sales price for a new home in Northern Virginia is now about $100,000. "At those prices you don't even see the $290 for the warranty. On the other hand, we know the presence of the warranty helps sales."
Fouche points to the fact that from 1979 to 1980, HOW member-builders in Greater Washington increased their share of the new-home market from 43% to 69%, the third-best increase among all HOW councils.
"But despite this growth," Fouche said, "we've kept a low loss ratio.It's a good record for a council that began in those hard-sell days of 1975."
Part of the reason for the low-loss ratio is the degree of control his HOW council exercises over its members. The Northern Virginia council was the first to have a committee of builders screen applicants and then re-check the products of every council member at least once a year -- more often, if necessary.
"We've been the trend-setters in this program," Fouche says, adding that the "committee members don't care to let another builder jeopardize the good record set by this council as a whole."
Brenda Page, administrator of the Suburban Maryland HOW Council, agrees."We've had a system for over a year that puts our members in different categories so we can help some if they need help -- or get them out of the program if there are real problems."
Page's council has not only ejected builders, but it has taken action to reclaim losses of $40,000 from one builder, $28,000 from a second, and a still-to-be-negotiated sum from a third. (In England, where the home warranty idea began, the names of errant builders are made public. Not so in the U.S.)
The D.C. HOW Council will have the new mid-range rate of $3.25 per $1,000. It shares that rate with 96 other councils like Yakima, Washington, and the state of Alabama. But there's a difference.
"We got that rate because our members build less than 2,000 new units a year, which is sort of a threshold for the HOW program," says D.C. HOW Council President Ernest Leming. "But in all the 2 1/2 years we've been in business, we have had zero losses."
Leming attributes that unique record to "absolute top-notch volunteer counciliators" who bring together the angry homeowner and the accused builder. "They talk it out and if the builder sees it's his mistake, he pays to correct it," says Leming, recalling that "only one case ever got as far as binding arbitration -- and even then, the HOW program did not have to pay to achieve customer and builder satisfaction, as in other councils."
Nevertheless, there are some complaints about the program. A few Northern Virginia builders believe they might have better quality control and lower rates with their own warranty/insurance program outside HOW. A few HOW members have already been to Richmond to discuss legislation to enable a competing underwriter to offer state programs in New Jersey and Minnesota, the Virginia proposal would be voluntary and mainly spell out standards for the underwriter.
Paul Fouche admits such talk has been heard in Richmond and is cautious about the future. But Maryland's Brenda Page is less and then" as an option for the 150 HOW members in Montgomery and Prince George's counties.
"But we've been building the value of the HOW program for six years," says Page. "Consumers call us all the time for names of builders. They want to buy homes with HOW coverage. Another carrier and program could try to come in, but they'd have a long, difficult period in which to build the kind of acceptance we already have."
Page feels there will be even less restiveness among her members after Feb. 1. "We're being charged according to how well we do, not how much we have to contribute to cover some bad apples in other councils. I think it's fair."
That sentiment is echoed by Robert J. Reid, President of HOW. "I predict that, by the end of this decade," says Reid, "it will be extremely difficult to sell a house without a written, insured warranty such as HOW's. The consumer will expect it, will consider it an intrinsic part of the house, like the roof."