Commitments and Contingencies

6 Months Ended

Mar. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

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 and six months ended March 31, 2022 and 2021 were as follows:


	Three Months Ended March 31,				Six Months Ended March 31,
	2022		2021		2022		2021
	(In millions)
Warranty liability, beginning of period	$	390.0	$	324.0	$	376.3	$	310.2
Warranties issued	43.6		36.3		82.5		69.7
Changes in liability for pre-existing warranties	3.0		1.1		7.3		3.7
Settlements made	(28.8)		(20.7)		(58.3)		(42.9)
Warranty liability, end of period	$	407.8	$	340.7	$	407.8	$	340.7

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 $617.1 million and $577.5 million at March 31, 2022 and September 30, 2021, 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 March 31, 2022 and September 30, 2021. Expenses related to the Company’s legal contingencies were $44.1 million and $37.3 million in the six months ended March 31, 2022 and 2021, respectively.

Changes in the Company’s legal claims reserves during the six months ended March 31, 2022 and 2021 were as follows:


	Six Months Ended March 31,
	2022		2021
	(In millions)
Reserves for legal claims, beginning of period	$	577.5	$	473.8
Increase in reserves	55.7		56.2
Payments	(16.1)		(5.6)
Reserves for legal claims, end of period	$	617.1	$	524.4

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. However, because the self-insured retentions under these policies are significant, the Company anticipates it will largely be self-insured. The Company’s estimated insurance receivables from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $112.0 million, $109.5 million and $90.5 million at March 31, 2022, September 30, 2021 and March 31, 2021, respectively, and are included in other assets in the consolidated balance sheets. 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 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 Purchase Contracts

The Company enters into land and lot 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 purchase contracts, the deposits are not refundable in the event the Company elects to terminate the contract. Land purchase contract deposits and capitalized pre-acquisition costs are expensed to inventory and land option charges when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means.

At March 31, 2022, the Company had total deposits of $1.4 billion, consisting of cash deposits of $1.3 billion and promissory notes and surety bonds of $86.1 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $18.7 billion. The majority of land and lots under contract are currently expected to be purchased within three years. Of these amounts, $137.7 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $1.5 billion. A limited number of the homebuilding land and lot purchase contracts at March 31, 2022, representing $91.1 million of remaining purchase price, were subject to specific performance provisions that may require the Company to purchase the land or lots upon the land sellers meeting their respective contractual obligations. Of the $91.1 million remaining purchase price subject to specific performance provisions, $64.8 million related to contracts between the homebuilding segment and Forestar.

During the three and six months ended March 31, 2022, Forestar reimbursed the homebuilding segment $2.7 million and $5.4 million, respectively, for previously paid earnest money and $16.2 million and $37.8 million, respectively, for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar. During the three and six months ended March 31, 2021, Forestar reimbursed the homebuilding segment $8.0 million and $24.2 million, respectively, for previously paid earnest money and $7.3 million and $28.2 million, respectively, for pre-acquisition and other due diligence costs.

Other Commitments

At March 31, 2022, the Company had outstanding surety bonds of $2.5 billion and letters of credit of $236.1 million to secure performance under various contracts. Of the total letters of credit, $175.6 million were issued under the homebuilding revolving credit facility and $60.5 million were issued under Forestar’s revolving credit facility.