COMMITMENTS AND CONTINGENCIES

Warranty Claims

The Company provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

Changes in the Company’s warranty liability during the three months ended December 31, 2018 and 2017 were as follows:



	Three Months Ended December 31,
	2018			2017
	(In millions)
Warranty liability, beginning of period	$	202.0		$	143.7
Warranties issued	18.0			16.4
Changes in liability for pre-existing warranties	5.5			6.8
Settlements made	(19.9		)	(17.5		)
Warranty liability, end of period	$	205.6		$	149.4

Legal Claims and Insurance

The Company is named as a defendant in various claims, complaints and other legal actions in the ordinary course of business. At any point in time, the Company is managing several hundred individual claims related to construction defect matters, personal injury claims, employment matters, land development issues, contract disputes and other matters. The Company has established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes. The estimated liabilities for these contingencies were $412.2 million and $408.1 million at December 31, 2018 and September 30, 2018, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets. Approximately 99% of these reserves related to construction defect matters at both December 31, 2018 and September 30, 2018. Expenses related to the Company’s legal contingencies were $5.8 million and $8.8 million in the three months ended December 31, 2018 and 2017, respectively.

The Company’s reserves for legal claims increased from $408.1 million at September 30, 2018 to $412.2 million at December 31, 2018. Changes in the Company’s legal claims reserves during the three months ended December 31, 2018 and 2017 were as follows:



	Three Months Ended December 31,
	2018			2017
	(In millions)
Reserves for legal claims, beginning of period	$	408.1		$	420.6
Increase in reserves	11.6			10.6
Payments	(7.5		)	(11.5		)
Reserves for legal claims, end of period	$	412.2		$	419.7

The Company estimates and records receivables under its applicable insurance policies related to its estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable. Additionally, the Company may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as an additional insured on their insurance policies. The Company’s receivables related to its estimates of insurance recoveries from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $57.8 million, $54.6 million and $73.1 million at December 31, 2018, September 30, 2018 and December 31, 2017, respectively, and are included in other assets in the consolidated balance sheets.

The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated amounts, and it is not possible for the Company to make a reasonable estimate of the possible loss or range of loss in excess of its reserves.

Land and Lot Option Purchase Contracts

The Company enters into land and lot option purchase contracts to acquire land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of many of the option purchase contracts, the option deposits are not refundable in the event the Company elects to terminate the contract. Option deposits are included in other assets in the consolidated balance sheets.

At December 31, 2018, the Company’s homebuilding segment had total option deposits of $449.1 million, consisting of cash deposits of $446.1 million and promissory notes and letters of credit of $3.0 million, to purchase land and lots with a total remaining purchase price of approximately $6.9 billion. The majority of land and lots under contract are currently expected to be purchased within three years. Of these amounts, $65.0 million of the option deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $706.4 million. A limited number of the homebuilding land and lot option purchase contracts at December 31, 2018, representing $96.5 million of remaining purchase price, were subject to specific performance provisions which may require the Company to purchase the land or lots upon the land sellers meeting their contractual obligations. Of the $96.5 million remaining purchase price subject to specific performance provisions, $44.4 million related to contracts between the homebuilding segment and Forestar.

During the three months ended December 31, 2018, Forestar reimbursed the Company’s homebuilding segment $12.1 million for previously paid earnest money and $3.0 million for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar.

At December 31, 2018, Forestar had total option deposits of $5.4 million to purchase land and lots from third parties with a total remaining purchase price of approximately $68.0 million.

Other Commitments

At December 31, 2018, the Company had outstanding surety bonds of $1.5 billion and letters of credit of $144.5 million to secure performance under various contracts. Of the total letters of credit, $124.4 million were issued under the homebuilding revolving credit facility and $3.4 million were issued under Forestar’s revolving credit facility. The remaining $16.7 million of letters of credit were issued under secured letter of credit agreements, of which $1.4 million related to homebuilding operations and $15.3 million related to Forestar. These agreements require the deposit of cash as collateral with the issuing banks, which is included in restricted cash in the consolidated balance sheets.