Accrued Expenses

Accrued expenses at October 31, 2016 and 2015, consisted of the following (amounts in thousands):



	2016		2015
Land, land development and construction	$	153,264	$	118,634
Compensation and employee benefits	138,282		125,045
Escrow liability (1)	137,396		24,023
Self-insurance	126,431		113,727
Warranty (2)	370,992		93,083
Deferred income (1)	43,488		43,059
Interest	34,903		26,926
Commitments to unconsolidated entities	5,637		5,534
Other (1)	61,907		58,035
	$	1,072,300	$	608,066


(1)	In prior periods, Escrow liability and Deferred income were included in Other in the above schedule. The October 31, 2015 column presented above has been reclassified to conform to the fiscal 2016 presentation.


(2)	The fiscal 2016 amount includes $159.0 million of warranty charges expected to be recovered from our insurance carriers and suppliers, which we recorded as a receivable at October 31, 2016 and is included in “Receivables, prepaid expenses, and other assets” in our Consolidated Balance Sheet.

In response to an increasing number of water intrusion claims received in the second half of fiscal 2014 from owners of stucco homes in certain completed communities located in Pennsylvania and Delaware (which are in our Mid-Atlantic region), we undertook a review of homes built in these communities during fiscal 2003 through fiscal 2009 to determine whether additional repairs related to stucco homes would likely be needed in these communities.

Our quarterly review process includes an analysis of many factors to determine whether a claim is likely to be received and the estimated costs to resolve any such claim, including: the closing dates of the stucco homes in each community; the number of claims received; our inspection of homes; an estimate of the number of homes we expect to repair; the type and cost of repairs that have been performed in each community; the estimated costs to remediate pending and future claims in each community; the expected recovery from our insurance carriers; and the amount of warranty and self-insurance reserves already recorded.

At the end of fiscal 2014, we estimated our liability for known and unknown warranty claims for stucco homes in the affected communities to be approximately $54.0 million, of which we expected to recover approximately $21.5 million from our outside insurance carriers. We recognized a $25.0 million net charge, after reduction for expected insurance recoveries, in the fourth quarter of fiscal 2014 for estimated repair costs for these homes.

During our fiscal fourth-quarter 2015 review of the estimated liability for warranty claims for stucco homes, we determined that the average cost of repairs had increased based on the actual costs we incurred to complete repairs of homes in the second half of fiscal 2015. We also determined that additional repairs would likely be needed in certain communities built during fiscal 2010 through fiscal 2013 in Pennsylvania. Based on the revision of our estimated costs of repairs and the inclusion of certain additional communities in our estimates, the estimated liability for known and unknown warranty claims for stucco homes increased to approximately $80.3 million as of October 31, 2015, of which we expected to recover approximately $32.6 million from outside insurance carriers. We recognized a $14.7 million additional net charge, after reduction for expected insurance recoveries, in the fourth quarter of fiscal 2015 for estimated repair costs for these homes.

Based upon the reviews conducted in the second and third quarters of fiscal 2016, we determined that the actual costs incurred per claim had increased. We recognized additional net charges of $2.5 million and $1.9 million in the second and third quarters of fiscal 2016, respectively, for repairs to stucco homes. In the third quarter of fiscal 2016, our estimated liability also included estimated costs for a small number of water intrusion claims for non-stucco homes in these same completed communities.

In the fourth quarter of fiscal 2016, we increased our estimate of the aggregate number of homes we expect to repair for stucco-related issues as well as the expected repair costs per home. These increases were largely attributable to the repairs taking place in the affected communities and our experience in responding to and adjusting claims received as we completed an increasing number of fully resolved repairs. The fourth-quarter 2016 increase in the estimated number of homes we expect to repair was further affected by an increase in the rate of claims received. In response to our remediation experience, we modified our repair protocol in the fourth quarter of fiscal 2016. The increase in the projected cost per claim in the fourth quarter is attributable to the modified repair protocol, as well as construction cost increases affecting the industry generally.

In addition, based upon an increase in the number of water intrusion claims received on non-stucco homes and further investigation of these claims, we determined that an accrual was needed for projected warranty claims from these non-stucco homes in these same completed communities. We did not see a change in the geographic concentration of claims, and we believe these claims are attributable to local construction practices employed by independent contractors in this region.

Our estimated liability for known and unknown water intrusion claims increased in the fourth quarter of fiscal 2016 to approximately $324.4 million as of October 31, 2016, of which we expect to recover approximately $152.6 million from outside insurance carriers and suppliers. Of the $324.4 million total estimated liability, approximately $115.5 million relates to water intrusion at non-stucco homes. We recognized a $121.2 million and $125.6 million additional net charge, after reduction for expected insurance and supplier recoveries, for estimated repair costs in the fourth quarter and full fiscal year of 2016, respectively. The charges discussed above are included in “Cost of revenues” in our Consolidated Statements of Operations and Comprehensive Income. Resolution of these known and unknown claims is expected to take several years.

Our estimates are predicated on several assumptions for which there is significant uncertainty including, but not limited to, the number of homes to be repaired, the extent of repairs needed, the cost of those repairs, and expected recoveries from insurance carriers and suppliers. At October 31, 2016, the number of known claims represented approximately a third of the total number of claims included in our estimates. Due to the degree of judgment required and the potential for variability in the underlying assumptions, it is reasonably possible that our actual costs could differ from those estimated, such differences could be material, and therefore, we are unable to estimate the range of any such differences.

As of October 31, 2014, we had received construction claims from three related multifamily community associations in California alleging issues with design and construction and damage to exterior common area elements. We believe we have coverage under multiple owner controlled insurance policies with deductibles or self-insured retention requirements that vary from policy year to policy year. We completed a settlement of one of the claims during fiscal 2015 and one of these claims in fiscal 2016. Our review of the remaining claim is ongoing. Due to issues related to insurance coverage on all three claims, the degree of judgment required, and the potential for variability in our underlying assumptions, our actual future costs could differ from our estimates. Based on the above settlements and our evaluation of the remaining claim, we recorded a charge of $6.9 million in fiscal 2015. We do not believe that the resolution of any of these matters, in excess of the amounts currently accrued would be material to our results of operations, liquidity, or on our financial condition.

We accrue for expected warranty costs at the time each home is closed and title and possession are transferred to the home buyer. Warranty costs are accrued based upon historical experience. The table below provides a reconciliation of the changes in our warranty accrual during fiscal 2016, 2015, and 2014 as follows (amounts in thousands):



	2016			2015			2014
Balance, beginning of year	$	93,083		$	86,282		$	43,819
Additions - homes closed during the year	28,927			20,934			18,588
Addition - liabilities acquired							11,044
Increase in accruals for homes closed in prior years *	26,689			2,661			2,913
Reclassification from self-insurance accruals							7,554
Increase to water intrusion reserves (see above) **	267,258			14,685			24,950
Charges incurred	(44,965		)	(31,479		)	(22,586		)
Balance, end of year	$	370,992		$	93,083		$	86,282