Avoiding disputes and lawsuits with Walt Keaveny

Intro:

Welcome to “The Better Way,” a podcast by Buildertrend. Here you’ll learn to simplify and establish processes that will make meaningful changes to your company and help you achieve your goals. There’s a better way to run your construction business, the Buildertrend way. Tune in this season as Pro Services education coordinator, Zach Wojtowicz, chats with several experts about risk management.

On today’s episode, Zach’s talking about the tools you can use to avoid disputes and lawsuits. He’s joined by Walt Keaveny from 2-10 Home Buyers Warranty, to talk about this super important topic.

Zach Wojtowicz:

Welcome back everybody to “The Better Way,” this is Zach Wojtowicz. I’m here today with Walt Keaveny from 2-10 Home Buyers Warranty. Walt, how are we doing today?

Walt Keaveny:

Doing terrific, Zach, how are you?

Zach Wojtowicz:

Great, thanks for coming on, we’re really excited to have you. Walt works with 2-10 Home Buyers Warranty. They’re one of the oldest and largest new home warranty companies in the country, if not the oldest and largest. Walt, tell us a little bit about 2-10 Home Buyers Warranty for our listeners out there.

Walt Keaveny:

Yeah, 2-10 as you mentioned been around since 1980, so we are the oldest. And I’m based out of Denver. One out of every seven new homes in the country has our warranty on it.

Zach Wojtowicz:

Really?

Walt Keaveny:

Yeah.

Zach Wojtowicz:

That’s amazing. I actually think my first home had a 2-10 Home Buyers Warranty on it as well, so you have an old customer here. I’ve since moved on from that home but the name is out there.

Walt Keaveny:

Terrific, terrific.

Zach Wojtowicz:

Walt, what do you do at a 2-10 Home Buyers Warranty? And tell us a little bit about your role.

Walt Keaveny:

You know I wear lots of hats. Been there 15 years. I’m the risk manager, the underwriting manager, principal engineer. So, doing a number of things. My background is geotechnical engineering, a Master’s in geotechnical, and I’m a professional engineer. And so, they have me wearing several hats, and I really enjoy it.

Zach Wojtowicz:

Yeah. Every day is something different, right?

Walt Keaveny:

Yes, that’s what I love about the job. That’s why I’m still there after 15 years.

Zach Wojtowicz:

Yeah, just keeps it various just to get away from the monotony. So, Walt, the point of this podcast on “The Better Way,” the series, we kind of do it in seasons is about managing risks. So, we thought it’d be really great to bring on the leader in home buyer warranty out there. And there’s a lot of confusion and maybe we can get into some of the details of what a warranty looks like, so typically what does a home builder offer with a new home warranty?

Walt Keaveny:

Well, that’s a great way to start out Zack because there are a number of different options out there. I would say that the builders that aren’t using a third-party warranty company are typically offering a one-year sort of bumper to bumper warranty. So, basically in the first year they’re going to repair anything that comes up in the first year. Now, the concern about that is, is that every state has what are called implied warranties. And these implied warranties for concession defects were established by the courts in those states. So, the statute of repose or the other, that’s a fancy way of saying the term of those implied warranties, it’s typically 10 years, most states are using 10 years. So, the concern is that builders are offering this one-year warranty, at least they believe that they are, but in fact they really are liable for 10 years.

And what makes matters even worse, Zach, is that the standard of quality for those implied warranties is something that’s called good and workman-like. And you can imagine, you can imagine if a homeowner, imagine a homeowner is getting into a dispute with a builder. And the homeowner’s arguing that the home was not built in a good and workman-like manner, and the builder’s arguing that it was, well that term is just way too vague, right? That phrase good and workman-like. And so that leads to disputes and litigation unfortunately.

Zach Wojtowicz:

Yeah, it makes sense. I mean everybody’s got a different kind of expectation. We talked about in one of our previous episodes the idea of contracts and outlining the terms, and that’s a big thing that Buildertrend promotes as being clear, but you may not even be aware in your state that you’re kind of held to a certain standard is kind of what you’re saying, right?

Walt Keaveny:

That’s exactly right. And so what we have to do, Zach, is to avoid these disputes and litigation, right? And there are certain states where the courts are just choked full of construction defect litigation. And a state like Texas tried to implement a mandatory warranty for every home because of it, New Jersey has a mandatory warranty for every home. And they’re trying to clear out the courts from all this construction defect litigation. So what the warranty does, this is the key, it replaces that implied warranty that’s there, that’s unspoken and unwritten but it’s there, with an express written warranty. So, now we have an agreement between the homeowner and the builder in advance that says, okay, we’re going to use this express written warranty and even better, we’re not going to use good and workman-like anymore, because that’s way too vague and leads to dispute. So we’re going to use actual construction performance standards, okay?

And when I’m talking to builders I have to sort of remind them that there’s construction code standards which are used to build the house. Like the International Residential Code, that’s the code standard used to build the house. But what’s important to understand is construction performance standards are how the house is going to perform after you’ve sold it. And good and workman-like is a very vague way of doing that and leads to disputes and litigation. So. what the National Association of Home Builders does is they publish these construction performance standards, and warranty companies typically use something very similar to those. And so when we issue a warranty to a homeowner they receive a 43 page booklet, and that booklet has these construction performance standards in it. And so that replaces good and workman-like, and so that’s really the key to this. And then lastly, very importantly that warranty has arbitration to resolve disputes rather than litigation.

Zach Wojtowicz:

Got you. So I know we’re going to get into the arbitration piece a little bit, let’s take a step back and just kind of talk about this express written warranty. What is it actually covering? What sort of things does 2-10 provide then within that written warranty?

Walt Keaveny:

Yeah, good question. First of all just to be clear, we are an insurance product. So, the warranty is backed by an insurance provider and we’re regulated by the insurance industry, so that’s important to know. But the basic coverage, Zach, is there’s a one-year workmanship component first of all. And so, builders are used to getting that one year, as I mentioned earlier, used to giving that one year. So, there’s a one-year workmanship component, but it’s important to understand that the builder is primary coverage for that. So the insurer, the warranty company, the insurer is what’s called surety coverage, we’re in the secondary position. So, only if the builder defaults on their one-year workmanship obligations would the insurer step in and ensure that covered. Now, there’s also a two-year systems coverage for all the systems in the house. Same thing, the builders primary and the insurer is the surety coverage, the secondary coverage.

And those two are optional. The one year and the two year optional coverage is some builders like those, some don’t. Some just want the bread and butter, right? The ten-year structural coverage is the meat of the warranty, that’s where most of the liability lies. And that then the coverage varies, it’s different than the one and the two year. In that case the insurer carries a liability from day one, day one for 10 years they carry that liability. And it’s really important to understand that because that liability is so important. The average claim nationwide for a builder runs about $42,000, and in some states, it runs over $100,000 per claim. So, that’s really a major liability for these builders.

Zach Wojtowicz:

Yeah, for sure. No one wants to surprise $100,000 charge.

Walt Keaveny:

Exactly.

Zach Wojtowicz:

For something they did 10 years ago, no less.

Walt Keaveny:

No, that’s exactly right, you’ve hit it on the head. It’s a very long liability. I mean when you and I go to buy auto insurance or homeowners insurance, we’re signing up for a one-year policy, right? This is a 10-year policy essentially. It’s not insurance, it’s a warranty backed by insurance, but it’s important to note that it’s 10 years. And so, these builders, they want to pass that liability onto us. They don’t want that liability for the structural claims, they also would rather not reserve funds to pay warranties for 10 years. So, the large publicly traded builders in this country, they reserve about 1% of the sales price of the home for their warranty obligations for that 10 years. And so, at $300,000 home, that’s $3,000, right?

And so, if these builders buy this third party warranty they don’t need to reserve those months because they no longer carry that liability. And it can be substantial even for small builders if you think about it. If you have a small builder that’s building, let’s say 10 homes per year, times 10 years for that structural term. And that’s 100 homes that builder has this rolling obligation, this rolling liability for 100 homes at any one time. And if you take that 100 homes times $300,000 per home, that’s a $30 million liability these builders are carrying on their books. So they want to pass that liability onto the insurer.

Zach Wojtowicz:

Yeah, interesting. No, thanks for laying all that out, that makes a lot of sense. And I think when we have our builders and the Buildertrend client base, it’s probably something that honestly hasn’t even come up a lot in my own experience traveling. Warranty, I always kind of joke, is a bit of a dirty word in construction because it’s just something you don’t want to think about for everything you just outlined, the risk that’s associated with it. So, bringing it back to the customer, what is the most common claim that our homeowners are making in the warranty world?

Walt Keaveny:

You know we have a warranty administration department that fields these calls from homeowners, and they receive well over 10,000 calls a year. And by far the No. 1 greatest concern that these homeowners have is cracking, cracks in their house. They see cracks in their brick, or cracks in the stucco, the concrete, the drywall, the tile, the stone, and what have you. Any brittle materials in the house will crack, right? And so, they see all these cracks and they start to right away assume that that’s a structural crack.

Zach Wojtowicz:

The house is going to fall down.

Walt Keaveny:

It is, yeah. They think it’s going to fall on their head. And I can’t blame them for that because there are actually sometimes structural cracks and so, they don’t know the difference. But we have an old saying in this industry and that is, ‘If there’s one thing that every builder can guarantee, it’s that every home they sell will crack.’ Every home, you can’t find a home if you went looking for one that doesn’t have a crack in it. So, every home will crack, and it’s just very, very common.

Zach Wojtowicz:

Yeah. So, what are the main culprits of those cracks? What are the things that are causing this that lead clients into panic or thinking that there’s a structural defect with their home? And should they be concerned?

Walt Keaveny:

Well, the good news, Zach, is the vast majority of these cracks are cosmetic cracks, they’re not structural cracks, they’re cosmetics. And so, they are things that are easily repaired and no, the ceiling is not falling. Now there’s a number of things that cause these and that’s why they’re so common these cracks. The number one thing that causes them is soil movement. And a very interesting statistic in our business that we have found is that 80% of all structural failures, 80% are caused by the soils underneath the foundation.

So, those soils are moving, and as they move they move the foundation, and as the foundation moves it moves the framing or the superstructure of the home, and that causes cracking. And so these soils, they have water in them, they have air in them, they have organics in them, and they’re going to settle, they’re going to settle. And some soils even swell, expansive place soils will actually swell. And so, engineers can design foundations to move up to about four inches. And so, if you think about a house moving four inches let’s say seasonally going up and down four inches, that’s a lot of movement and that’s probably going to cause some cracking in the superstructure of the home.

Zach Wojtowicz:

Sure, sure. So, then you get into the conversation, they’re going to happen, there’s really no avoiding it. The engineering is doing what they can in order to prevent it, but it’s unpreventable. How do we know when the builder is really the one who’s obligated to go in and repair these cracks then?

Walt Keaveny:

Well yeah, I mean there’s, Zack, just to wrap up the prior discussion on what causes these cracks. The soil movement is a big one, I just want to touch on a couple of three others real quickly that … The reason I want to do this is because builders, this is the call they will oftentimes get in that first year workmanship. They’ll get this call and the homeowner’s concerned about cracks and the builders always say, well it’s just normal settlement cracks. Well, there’s just a lot of other things that can cause these, and I find that it helps the builders to be able to explain that a little bit further, so let me embellish just a little bit further.

Zach Wojtowicz:

Oh, absolutely. By all means.

Walt Keaveny:

Good. In addition to soul movement there’s moisture fluctuations. So, these construction materials like concrete, stucco, mortar, grout, they all have water added to them when you first use them to make them liquid. Well, when that water leaves they lose that volume of the water and they shrink and they crack. Framing lumber has moisture in it, when it leaves the mill as a certain moisture in it. And when it acclimates to local conditions that framing lumber will twist and contort and move. Temperature fluctuations cause cracking in homes where different materials are expanding and contracting next to each other at different rates, that causes problems. Wind loads causes problems when the wind is pushing on the walls of the home that that causes cracks. And one that we’re having a real problem with lately, Zach, I’ll share with you is these kitchen islands. Everyone wants an Island right now in their kitchen, right?

Zach Wojtowicz:

Yeah, the biggest slab of marble they can get on it.

Walt Keaveny:

Well, exactly. You’ve got this big kitchen, everyone wants the big kitchen now, we’re the entertainment center. You put this big island right in the middle of it, and like you said you’ve got this huge granite slab on the top of that island. And then what happens when they have the house warming party? Everybody comes and stands around that island, right?

Zach Wojtowicz:

Yeah, I’ve been at those parties.

Walt Keaveny:

Well yeah, exactly. And so, that’s where people entertain. Well the floor joists that are supporting the island for example, they are allowed to deflect or what we call bend. They actually will by code are allowed to bend a little bit with all those loads above them. And the problem is that any brittle surfaces on top of those floor joists such, as the granite countertop or such as the stone or the tile on the floor, they’re going to crack. So, anyway, those are all the reasons for cracks. So, thank you for letting me share those.

Zach Wojtowicz:

I feel like you’re really speaking our builder’s language. We could listen to that all day, they’d eat it up.

Walt Keaveny:

What you have to remember is I’m a nerdy engineer, right? So, I can’t pass up the really good technical stuff as quickly as most, so I had to embellish a little bit.

Zach Wojtowicz:

You’re not getting asked this at the Costco line when someone’s like, you happen to be an engineer?

Walt Keaveny:

I hope I don’t look that nerdy, but I can tell you that I sometimes act nerdy. So, anyway, you had asked me about, and this is a very important question, you had ask me about how does a builder know if they’re obligated to repair all these cracks?

Zach Wojtowicz:

Right.

Walt Keaveny:

We know the house is going to crack, well how does the builder know? Well, in that first year in that workmanship period, the builder as I mentioned is the primary coverage. So, the builder is obligated in that first year to repair cosmetic cracks, just cosmetic cracks. So, the homeowner calls up and says, hey, I’ve got this crack in my drywall. Will you come look at it? And then the builder comes to the house, brings the warranty booklet. Remember the 43 page warranty booklet with the performance standards in it? And the builder will look at that crack and determine whether it exceeds the performance standard, and if it does the builder is going to be obligated to repair it. If it doesn’t the builder’s not obligated to repair it. So, that’s the first year, so that’s kind of simple.

Now that’s cosmetic cracks for the first year. Now when we start talking about after the first year, there is no coverage for cosmetic cracks. That is routine maintenance, that’s the homeowner’s routine maintenance like painting, touching up calk, what have you, that’s routine maintenance. But where it gets tricky is that if it’s a qualifying structural defect over that 10 year structural period, remember the qualifying, the ten-year period starts on day one and lasts for 10 years, and the insurer’s on the hook for 10 years. And so, if there is cracking that is structural in nature, then the insurer is liable to not only repair the structural defect but to repair all the cracks, the cosmetic cracks that were caused by that structural defect.

Zach Wojtowicz:

So, when you are going and looking at all that, how do you determine if there’s a qualifying structural defect then? I mean how do we know that there’s a situation where we’re going to need to get our insurer involved?

Walt Keaveny:

Zach, it’s a very common question because it takes a certain amount of expertise to determine.

Zach Wojtowicz:

The engineer. Got to call Walt.

Walt Keaveny:

Yeah, you’ve got to get someone nerdy onboard to help you with that. So, it takes expertise. So, what happens is the homeowner calls in and they say, oh, I’ve got some structural cracks. Of course every homeowner thinks their cracks are structural, and many times they’re not but sometimes they are. And so, they’ll talk to our warranty admin experts, the warranty admin people will ask them certain questions. And if it does appear that they are likely structural cracks then we’ll send out a local professional engineer.

And that engineer will catalog and measure every crack separation out of plum, out of level surfaces, doors and windows that don’t work, all those things that are related to a potential structural problem. And the engineer will also do what’s called a floor topo survey. Now people are familiar with topo surveys out on land or on our property, but we actually do a topo survey on the floor of the home. And why do we do that? Well the reason is as I mentioned earlier, the key stat in our program is that 80% of all structural defects are due to the soils moving the foundation. So, we want to see how much that foundation is moving. And if the foundation is moving more than recognized professional industry standards, then it becomes a qualifying structural defect.

And just in a nutshell the standards that we’re using, the most common standards in the industry is that if the floor system is bending or deflecting more than one inch and 30 feet then that would exceed and that would be a qualifying structural defect. And that could be one inch in 30 feet, it could be two inches in 60 feet, or three inches in 90 feet, but that amount of bending or deflection qualifies. Or if the entire foundation is tilting from one side of the house to the other, the entire home is sort of tilting rather than bending, if that exceeds 1% then that also would be a qualifying structural defect.

Zach Wojtowicz:

Interesting. So, you get the report that’ll determine if it’s a qualifying structural defect or not, and what if the homeowner disputes the results of this evaluation? Or we were kind of talking about earlier part of 2-10’s system kind of opts them into rather than a litigation it creates an outlet for arbitration, so how does that work?

Walt Keaveny:

Yeah, thank you for circling back and talking about arbitration because it really is one of the key components of the warranty. And frankly it’s great for homeowners and builders, right? This is not a one-sided, it’s great for both entities because it’s very quick, and it’s low cost. And a lot of people think arbitration is sort of a new concept, and in fact, arbitration has been around for a long time. I mean Abe Lincoln was an arbitrator, he arbitrated landowner disputes. And so, arbitration is being used in just about any industry these days to resolve disputes, but it works particularly well in the construction industry. Because if you think about it, most construction defect disputes and litigation are technical in nature. The builder didn’t build something correctly and so, do you want to go to litigation and try to educate a judge and jury about all those technical issues? Or do you want to have arbitration that takes place in the home? The arbitrator actually comes to your home, and the arbitrator is a professional, typically a professional retired architect, a building official, an engineer, someone that has a lot of construction experience.

Zach Wojtowicz:

They have the experience.

Walt Keaveny:

There you go. So, now this arbitrator comes to your home, most of the time it’s just the homeowner, the builder, and the arbitrator. There’s no attorneys involved. And the arbitrator has the booklet, the 43 page booklet I mentioned to you with the construction performance standards. And the arbitrator says, okay mr. Homeowner, please show me the defects that you are disputing here. And they’ll go through the list, and sometimes the arbitrator will rule in favor of the homeowner, sometimes they rule in favor of the builder, typically it’s neither one or the other it’s some shared. And that arbitrator will make a final decision, a non-appealable decision. And what builders really like it’s a private decision, so the results of that arbitration are not shared with anyone. If it litigation that would be open to the public and not …

Zach Wojtowicz:

Right, in the court records.

Walt Keaveny:

So, we have a saying that arbitration in a dining room is much preferred over litigation in a courtroom to resolve disputes.

Zach Wojtowicz:

Yeah, absolutely. That’s really helpful. I think it paints the picture clearly of kind of the things you get by going through a third party service, even beyond what you might even be aware of. Is just being able to opt into a totally different release outlet to get a dispute resolved in a less costly way. I mean that right there is a huge value as well that a lot of people probably aren’t thinking of. And I just want to get back to sort of that cost concept, we talked about the large home builders will reserve 1%, so what are we looking at for you? How much does a warranty cost on average?

Walt Keaveny:

Zach, I had a feeling you’d go there.

Zach Wojtowicz:

Yeah, I mean people want to know. That’s the first question we get with any of our partnerships, what’s the cost, what’s the catch, all of that information.

Walt Keaveny:

Right, what’s it going to cost me, what’s it going to cost me? So, I would say on a national average our warranty runs probably about $500, and that varies by risk in different regions of the country, but a national average of about $500. And that is paid at closing, that’s typically where it’s paid. And if you think about that $500, now it’s paid all at once, but that averages out to about $50 a year for that 10 year warranty term.

And you think about what the builder’s getting for that, they’re getting the insurer to answer the phone for them for 10 years. They’re getting the insurer to address concerns from both the homeowners and sometimes the builders have concerns. They’re getting claims adjusting for that. They’re getting forensic investigations as needed. And ultimately the insurer is assuming all of that liability I mentioned to you for all of those homes with the 10 year term. So, that’s really a pretty good value. You mentioned the 1% that builders are setting aside, we feel that we do it way less expensively than that because we have the expertise, the efficiencies, the benefits of scale and all of that to just do it less expensively.

Zach Wojtowicz:

Absolutely. And I know 2-10 is a full service warranty company, what other products and services go along with the warranty with 2-10?

Walt Keaveny:

Well yeah, and thank you for bringing a product because I forgot to mention that earlier on. We’ve been talking here basically about single family homes, but it’s important to note that we have products for multi-family buildings, we have for mixed use. Let me see, commercial manufactured homes, modular homes, even a remodeling product. So we pretty much have products similar to what we’ve discussed here for the entire industry. But one particularly important and popular service I wanted to share today, Zach, the builders just love this, it’s called our Frontline Service. And what that is is that I mentioned earlier that the insurer answers the phone for 10 years for the structural liability component, right? But the builders still are taking the calls for the one year workmanship and the two year systems coverage, they’re taking those calls. But a lot of builders, they want to live up to their warranty obligations but they would rather build homes and sell homes.

And so, this particular product allows us to take those calls during the first-year workmanship and two-year systems, as well as the ten-year structural. And what our experts do then is we respond quickly and accurately to those calls, and we stay within the four corners of the warranty. If the builders taking those calls, some builders, every builder is going to go out to the house, they’re going to look at the defects, they’re going to sometimes feel obligated to repair things that the warranty didn’t really require them to do. And so by us taking those calls and figuring out if the homeowner calls with five efficiencies, we determined two of them exceed the standards that the builders obligated to repair, we let the builder know, please send your electrician to this home and please send your drywall sub to this home to take care of this because we’ve determined those are covered items. So, we’re basically the builders outsourced warranty department, especially smaller and medium-sized builders don’t really have warranty administrators or warranty department. So, they really liked that they can outsource that to us. So, that’s a pretty key service.

One other service if I could just mention, Zach, if I have one more minute to discuss.

Zach Wojtowicz:

Absolutely.

Walt Keaveny:

Another service that builders really like is we have what’s called an extended systems and appliance warranties. So, the systems and appliances in homes are warrantied by the manufacturer, right? The dishwasher and the refrigerator and the AC unit, they have manufacturers warranties. And sometimes builders want to provide some added value because they know when the dishwasher goes out two months after that manufacturer’s warranty expired that they’re going to get the call, right? They’re going to get the call and on anything that goes out. And many times years after the home was sold.

So, they like to do a value added sometimes and add another year, let’s say. So, when the manufacturer’s warranty expires they will add another year onto that, that this systems and appliance warranty covers. And you mentioned Costco earlier, I think of Costco, I buy my TVs at Costco because they provide, you get the manufacturer’s warranty but Costco gives you another year on top of that. And it’s kind of what this is. It’s just a value add from the builders and …

Zach Wojtowicz:

It’s a little extra perk.

Walt Keaveny:

Yeah, exactly. Exactly. So, those are the main ones that I would say that are our most popular services and products.

Zach Wojtowicz:

Yeah, yeah. That’s really helpful. I think for our Buildertrend listeners, we offer a warranty platform within our service that lets you track and coordinate these types of appointments, but that’s why we partnered with a third party warranty service. If you are a smaller to medium sized builder, and you just want to remove and have that peace of mind, we absolutely endorsed what 2-10 provides beyond just the structural warranty, but even that frontline warranty that Walt did a great job kind of explaining. Walt, is there anything else that you wanted to cover today? I know we hit everything, Abe Lincoln got shout out, we talked about Costco, got in some engineering speak. It’s been a whirlwind, frankly. Any final thoughts or closing statements,

Walt Keaveny:

Nothing else, just thank you for letting me be long-winded and talking extra fast, so I can squeeze as much information in as possible. So, thank you so much, Zach, for having me.

Zach Wojtowicz:

Yeah, Walt, that was fantastic. Really appreciate your time. And if anyone has any questions feel free to reach out to your Buildertrend representative to learn more about 2-10. Walt, is there any place that we could reach you directly?

Walt Keaveny:

I would just tell them to search for our website 2-10.com if they want and they can reach me through the 800 number on there as well.

Zach Wojtowicz:

Perfect. Alright, Walt, thank you so much for your time. Everybody have a great rest of your day.

Walt Keaveny:

Thank you, Zach.

Outro:

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