Commitments and Contingencies

3 Months Ended

Dec. 31, 2023

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.

Changes in the Company’s warranty liability during the three months ended December 31, 2023 and 2022 were as follows:


	Three Months Ended December 31,
	2023		2022
	(In millions)
Warranty liability, beginning of period	$	512.4	$	454.3
Warranties issued	45.1		39.9
Changes in liability for pre-existing warranties	4.5		1.1
Settlements made	(30.2)		(31.3)
Warranty liability, end of period	$	531.8	$	464.0

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 $814.5 million and $858.9 million at December 31, 2023 and September 30, 2023, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets. Approximately 97% of these reserves related to construction defect matters at both December 31, 2023 and September 30, 2023. Expenses related to the Company’s legal contingencies were $26.4 million and $18.8 million in the three months ended December 31, 2023 and 2022, respectively.

Changes in the Company’s legal claims reserves during the three months ended December 31, 2023 and 2022 were as follows:


	Three Months Ended December 31,
	2023		2022
	(In millions)
Reserves for legal claims, beginning of period	$	858.9	$	729.1
(Decrease) increase in reserves	(4.7)		26.9
Payments	(39.7)		(7.5)
Reserves for legal claims, end of period	$	814.5	$	748.5

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, and the limits of the policies are finite, the Company anticipates it may be in large part self-insured. Since June 1, 2021, except for contractual risk transfer, the Company is almost exclusively self-insured for construction defect exposures. The Company’s estimated insurance receivables from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $131.5 million, $165.8 million and $143.6 million at December 31, 2023, September 30, 2023 and December 31, 2022, respectively, and are included in other assets in the consolidated balance sheets. The Company also contractually requires major subcontractors in most markets to have general liability insurance, which includes construction defect coverage.

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 December 31, 2023, the Company had total deposits of $1.9 billion, consisting of cash deposits of $1.7 billion and promissory notes and surety bonds of $131.9 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $22.5 billion. Of these amounts, $161.7 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 December 31, 2023, representing $301.3 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 $301.3 million remaining purchase price subject to specific performance provisions, $259.5 million related to contracts between the homebuilding segment and Forestar.

During the three months ended December 31, 2023 and 2022, Forestar reimbursed the homebuilding segment $13.3 million and $0.1 million, respectively, for previously paid earnest money and $4.6 million and $4.7 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.

Other Commitments

At December 31, 2023, the Company had outstanding surety bonds of $3.2 billion and letters of credit of $253.9 million to secure performance under various contracts. Of the total letters of credit, $229.6 million were issued under the homebuilding revolving credit facility and $24.3 million were issued under Forestar’s revolving credit facility.