Commitments and Contingencies

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home.

We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices and our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates.

The changes in our warranty liability are as follows (in thousands):



	Years Ended November 30,
	2015			2014			2013
Balance at beginning of year	$	45,196		$	48,704		$	47,822
Warranties issued	23,018			18,479			14,261
Payments	(26,367		)	(39,458		)	(45,338		)
Adjustments (a)	7,238			17,471			31,959
Balance at end of year	$	49,085		$	45,196		$	48,704

(a)

As discussed below, adjustments in 2015 and 2014 were primarily comprised of the reclassification of estimated minimum probable recoveries to receivables. Adjustments in 2014 also included a reclassification of estimated minimum probable recoveries to establish a separate accrual for a water intrusion-related inquiry. Adjustments in 2013 were comprised of charges associated with water intrusion-related issues in central and southwest Florida.

Central and Southwest Florida Claims. Since 2012, we have received warranty claims from homeowners in certain of our communities in central and southwest Florida primarily involving framing, stucco, roofing and/or sealant matters on homes we delivered between 2003 and 2009, with many concerning water intrusion-related issues. Based on the status of our ongoing investigation and repair efforts with respect to homes affected by these water intrusion-related issues, our overall warranty liability at November 30, 2015, 2014 and 2013 included $2.2 million, $9.4 million and $28.9 million, respectively, for estimated remaining repair costs associated with (a) 69, 324 and 710 identified affected homes, respectively, and (b) similarly affected homes that we believed at each respective date may be identified in the future. The $2.2 million at November 30, 2015 encompasses what we believe to be the probable overall cost of the repair effort remaining with respect to affected homes before insurance and other recoveries. However, our actual costs to fully resolve repairs on affected homes could differ from the overall costs we have estimated depending on the identification of additional affected homes in future periods, if any, and the nature of the work that is undertaken to complete repairs on identified affected homes. In 2015, we resolved repairs on 356 identified affected homes and identified 101 additional affected homes. During 2014, we resolved repairs on 536 identified affected homes and identified 150 additional affected homes, most of which were in one attached home community. During 2013, repairs were resolved on 754 identified affected homes. We consider repairs for identified affected homes to be resolved when all repairs are completed and all repair costs are fully paid. In 2015, 2014 and 2013, we paid $8.4 million, $26.6 million and $32.7 million, respectively, to repair identified affected homes. Since first identifying affected homes in 2012, we have identified a total of 1,715 affected homes requiring more than minor repairs and resolved repairs on 1,646 of those homes through November 30, 2015. As of November 30, 2015, we had paid $71.7 million of the probable total repair costs of $73.9 million that we have estimated for the overall repair effort.

We believe it is probable that we will recover a portion of our repair costs associated with affected homes from various sources, including our insurers and independent subcontractors involved with the original construction of the homes and their insurers. In 2015 and 2014, we collected $7.0 million and $.9 million, respectively, of such recoveries. Based on a review of our estimated potential recoveries in 2015, we increased our estimate of minimum probable recoveries. As of November 30, 2015, our estimated minimum probable recoveries, net of amounts collected, totaled $20.6 million, of which $2.2 million was included as an offset to our overall warranty liability and the remainder was included in receivables. During 2014, we recorded adjustments to increase our warranty liability mainly to reflect additional affected homes identified at one attached home community and our updated estimate of repair costs on identified affected homes. We also recorded adjustments to increase our estimated minimum probable recoveries during the period based on our updated estimate of repair costs. Together, these items did not have an impact on our consolidated statement of operations for 2014. As of November 30, 2014, our estimated minimum probable recoveries, net of amounts collected, totaled $26.6 million, of which $9.4 million was included as an offset to our overall warranty liability and the remainder was included in receivables. As of November 30, 2013, our estimated minimum probable recoveries, all of which were included as an offset to our overall warranty liability, totaled $19.4 million. The estimated minimum probable recoveries pertaining to affected homes are included in receivables to the extent they exceed the estimated remaining repair costs in our overall warranty liability associated with such homes. During 2015 and 2014, we reclassified $7.2 million and $18.1 million, respectively, of estimated minimum probable recoveries that were in excess of the estimated remaining repair costs to a receivable. Our assessment of the water intrusion-related issues in central and southwest Florida, including the process of determining potentially responsible parties and our efforts to obtain recoveries, is ongoing, and as a result, our estimate of minimum probable recoveries may change as additional information is obtained.

In 2013, based on our assessment of our overall warranty liability, we recorded adjustments to increase our warranty liability by $32.0 million with a corresponding charge to construction and land costs in our consolidated statement of operations. The adjustments reflected our then-current estimate of remaining repair costs associated with homes in central and southwest Florida that had been identified as having water intrusion-related issues and our estimate of repair costs associated with similarly affected homes in central and southwest Florida then-believed likely to be identified in the future, net of an increase in estimated minimum probable recoveries of such repair costs and other adjustments.

Overall Warranty Liability Assessment. In assessing our overall warranty liability at a reporting date, we evaluate the costs for warranty-related items on a combined basis for all of our previously delivered homes that are under our limited warranty program, which would include homes in central and southwest Florida that have been or may in the future be identified as affected by water intrusion-related issues. Based on this evaluation, we believe our overall warranty liability as of November 30, 2015 is adequate. Depending on the number of additional homes in central and southwest Florida that are identified as affected by water intrusion-related issues, if any, and the actual costs we incur in future periods to repair such affected homes and/or homes affected by other issues, we may revise the amount of our estimated liability, which could result in an increase or decrease in our overall warranty liability. Based on our assessment of the water intrusion-related issues in central and southwest Florida, and the substantial wind down of these issues in 2015, we believe that our overall warranty liability as of November 30, 2015 is adequate to cover the estimated probable total repair costs with respect to affected homes.

Florida Attorney General’s Office Inquiry. In 2013, we were notified by the Florida Attorney General’s Office that it was making a preliminary inquiry into the status of our communities in Florida affected by water intrusion-related issues. We established an accrual for the estimated minimum probable loss with respect to this inquiry during 2014 and increased the accrual during 2015. We anticipate that this inquiry will be resolved through an agreement with the Florida Attorney General’s Office, requiring approval by a Florida circuit court in order to become effective. We believe that the amount accrued for this matter is adequate as of November 30, 2015.

Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home and land sales. Based on historical evidence, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.

Self-Insurance. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a wrap-up policy, where eligible independent subcontractors are enrolled as insureds on each project. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled subcontractors’ general liability associated with the work performed on our homes within the applicable projects as part of our overall general liability insurance and our self-insurance through our captive insurance subsidiary. We record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under our insurance policies, and the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and industry data, and include an estimate of construction defect claims incurred but not yet reported.

We engage a third-party actuary that uses our historical claim and expense data, as well as industry data, to estimate our liabilities related to unpaid claims, claim adjustment expenses, third-party recoveries and incurred but not yet reported claims associated with the risks that we are assuming with respect to our self-insurance and insurance policy deductibles. Key assumptions used in these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a structural warranty or construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; insurance industry practices; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Though state regulations vary, structural warranty or construction defect claims can be reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated liability relates to incurred but not yet reported claims and thus, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.

The changes in our self-insurance liability were as follows (in thousands):



	Years Ended November 30,
	2015			2014			2013
Balance at beginning of year	$	86,574		$	92,214		$	93,349
Self-insurance expense (a)	18,590			13,491			8,239
Payments, net of recoveries (b)	(22,989		)	(19,131		)	(9,374		)
Balance at end of year	$	82,175		$	86,574		$	92,214


(a)	These expenses are included in selling, general and administrative expenses and are largely offset by contributions from independent subcontractors participating in the wrap-up policy.


(b)	Recoveries are reflected in the period we receive funds from independent subcontractors and/or their insurers.

Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At November 30, 2015, we had $565.4 million of performance bonds and $33.4 million of letters of credit outstanding. At November 30, 2014, we had $541.6 million of performance bonds and $26.7 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.

Land Option Contracts and Other Similar Contracts. In the ordinary course of business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At November 30, 2015, we had total cash deposits of $54.5 million to purchase land having an aggregate purchase price of $1.19 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.

Leases. We lease certain property and equipment under noncancelable operating leases. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years. In most cases, we expect that leases that expire will be renewed or replaced by other leases with similar terms. The future minimum rental payments under operating leases, which primarily consist of office leases having initial or remaining noncancelable lease terms in excess of one year, are as follows (in thousands):



Years Ending November 30,
2016	$	7,552
2017	5,805
2018	4,924
2019	4,316
2020	3,417
Thereafter	9,442
Total minimum lease payments	$	35,456

Rental expense on our operating leases was $8.5 million in 2015, $7.7 million in 2014 and $6.5 million in 2013.