The Home Owners Warranty program, which has paid off a large number of claims since it was set up seven years ago to provide protection against defects to buyers of new houses, has been divorced from its founder, the National Association of Home Builders.
The NAHB board of directors voted this week to permit the HOW program to become an independent mutual insuring company owned by participating builders. They now number 16,000. In effect, the action will permit HOW to be set up as a separate insuring corporation, financed by members who will have total responsibility for its operation.
HOW president Robert J. Ried said the financial involvement will give builders a direct stake in the success of the program. Some members are not affiliated with NAHB.
As the result of some heavy claims against HOW for builder liability, INA (a private insurer) restricted its coverage to major structural damage during three to 10 years after a house is built. Since February, HOW has been handling claims against builders for a wide range of defects covered in the first two years of the warranty.
However, Reid said that major HOW losses resulted mainly from problems related to residential construction on bad soils in Colorado and from builder bankruptcies. He said corrective measures were taken to prevent soil problems by implementing higher engineering standards and inspections.
More than 950,000 houses worth more than $50 billion now are covered by HOW warranties. The program is used by scores of builders in the Washington area and has been operating at what HOW officials described as a low level of claims in the Washington area.
A spokesman for NAHB said that it was inevitable that HOW had to go on its own because of the difference between operating a trade association and an insurance company. It is expected that HOW Corp., which will be set up as a separate entity withing the next few months, will have to raise $15 million in the next five years to handle its role as a mutual insurer against claims for housing defects.
NAHB has 123,000 members but less than 16,000 of the 41,000 who build houses are involved in the HOW program. Although HOW was set up to provide safeguards for buyers, some widely known builders here and throughout the nation have contended that they prefer to handle their own service complaints. An estimated 45 percent of houses built by NAHB members are under HOW.
Originally, HOW participation cost each builder $2 for each $1,000 of the purchase price of a house. However, the costliness of the How program caused rates to be increased considerably on a regional basis earlier this year. Also, since February HOW is co-insuring claims during the first two years of the contract along with individual builders.
The HOW program was tightened to provide a $250 first-time deductible item for accepted claims during the first two years of the warranty. The deductible level is 1 percent of the original sales price during the third to 10th year.
An estimated 26 percent of all new houses, including those built by individuals for themselves, now have HOW warranties. About 32,000 Washington area houses are covered.
Dallas builder David E. Fox, who heads one of the country's largest home-building firms, is HOW chairman. When HOW becomes a separate corporation its members will elect their own officers and directors. That has been a function of NAHB's president.
The HOW program, which had been located in the NAHB building here, is moving to separate quarters at 2000 L St. NW.
Last year it also established regional offices in Philadelphia, Chicago, Dallas, San Francisco and Atlanta. On a local level each HOW council also has a separate office covering its jurisdictional area. There are HOW council offices in Northern Virginia, suburban Maryland and the District. All are now under the jurisdiction of the regional office in Philadelphia.
HOW's Reid said the regional offices are staffed with persons who handle claims and underwriting. They process policies, claims and inspections for the 116 local HOW councils around the nation. Reid insisted that each builder registrant is now carefully judged, prior to acceptance in the program, on prior customer service, professional ability and financial stabilit