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Published: June 2009

Warranties for new homes force consumers into arbitration

Public Citizen has issued a report that finds millions of new home purchasers are unaware they are signing binding mandatory arbitration clauses in their home warranties. These warranties are particularly insidious because consumers often do not learn of their details until after moving into their new houses.

Download the report from Public Citizen entitled "Home Court Advantage: How the Building Industry Uses Forced Arbitration to Evade Accountability"

Below is an excerpt from the report:

New home buyers are told (often at the last minute) that they will receive a warranty, which is often characterized as a “gift” or a “bonus.” When buyers actually receive the warranty (often after they move into their house), they learn that whole classes of problems are excluded from coverage. Home warranties typically forswear coverage for mold, violations of local building codes or “consequential damages,” such as financial losses suffered by buyers who are forced to move out of their houses while repairs are made.

The warranties also dictate that any disputes between buyers and builders must be settled through mandatory binding arbitration, or forced arbitration. This privatized adjudication system provides the ultimate home court advantage for builders and warranty companies. Arbitration firms rely on builders and warranty firms for their business. They have every incentive to keep builders and warranty companies happy.

HBW Insurances Services LLC tells builders that its “2-10 HBW warranty requires mandatory and binding arbitration with every homebuyer. The arbitration is critical in the event of a dispute between you and the homeowner.”

For home buyers, forced arbitration is often a nightmare. They are pitted against a cabal of builders, warranty companies and arbitration firms. These companies are often interconnected in complicated and opaque ways and seem to have a limitless ability to generate “heads-we-win, tails-you-lose” scenarios. Secretive arbitration tribunals provide very few checks against misconduct, conflicts of interest, ignorance of the law, or even deliberate disregard for the law. Indeed, an arbitrator’s failure to adhere to the law is specifically precluded as a ground for appeal. The system is also costly. Consumers are often charged fees many times greater than those they would pay in court – and they run the risk of being charged tens of thousands of dollars to pay for the other sides’ lawyers.

The report details real-life victims of these warranties, including:

• In Georgia, an arbitrator seemed to accept Leslie and Scott Kimbell’s assertion that their floor was sinking but inexplicably blamed them for the problem rather than the builder who had failed to install proper supports under their stone fireplace. The arbitrator provided no relief and instead hit the couple with $12,950 in fees.
• Jordan Fogal and her husband were forced from their Houston townhouse because of mold caused by a leaky roof. An arbitrator ruled that the builder had engaged in fraud. But she awarded the Fogals just $26,088 – less than 8 percent of what they paid for a house they were forced to abandon.
• Army helicopter pilot John Rechtien and his wife, Michelle, of Savannah, Ga., filed for arbitration after battling their builder for nearly two years over myriad problems. The arbitrator cited technical language in the warranty to dismiss complaints over leaks, mold, broken trim and unfinished drywall, among other problems. On the items for which the arbitrator held the builder liable, he based his award primarily on repair estimates that the builder obtained and submitted to the arbitrator. When Michelle called the same contractors to make the repairs, they refused to honor the prices that formed the basis of the award.
• Houston couple William and Jennifer Falbaum convinced an arbitrator that the foundation of their house was flawed. The arbitrator agreed but ruled against the couple in large part because he personally disagreed with an opinion of a Texas Court of Appeals. After the arbitration, the couple learned that the arbitrator had even signed a brief submitted to the Texas Supreme Court on behalf of the Greater Houston Builders Association seeking to overturn that very court decision.

For More Information

Fair Arbitration Now

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Consumer Protection   ♦   Crime/Legal   ♦   Housing   ♦