Note 8 - Accrued Expenses and Other Liabilities

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Accrued Expenses and Other Liabilities [Text Block]

8.    Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

	December 31,
	2019		2018
	(Dollars in thousands)
Warranty accrual(1)	$	7,223	$	6,898
Litigation reserves(2)		10,900		—
Accrued interest		5,796		6,497
Accrued compensation and benefits		5,350		5,749
Completion reserve		3,167		4,192
Customer deposits		3,574		2,192
Lease liabilities(3)		2,243		—
Other accrued expenses		2,301		3,500
	$	40,554	$	29,028

(1)	Included in the amount for 2019 and 2018 is approximately $1.9 million and $0.9 million, respectively, of warranty liabilities estimated to be recovered by our insurance policies.
(2)	During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimable within the 2019 fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and their impact to the Company’s litigation reserve estimates for incurred but not reported ("IBNR") future construction defect claims, we recorded an additional $5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 million offsetting the litigation reserves as of December 31, 2019.
(3)	In conjunction with the adoption of ASC 842, the Company established a $3.5 million lease liability on January 1, 2019. For more information, please refer to Note 1 and Note 11.

We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related warranty and construction defect claims. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish and track separately our warranty accrual and litigation reserves for both known and incurred but not reported (“IBNR”) construction defect claims. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in the accompanying consolidated financial statements without consideration of insurance recoveries. Expected recoveries from insurance carriers are tracked separately between warranty insurance receivables and insurance receivables related to litigated claims and are presented within other assets in the accompanying consolidated financial statements. Our warranty accrual and related estimated insurance recoveries are based on historical warranty claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Our litigation reserves for both known and IBNR future construction defect claims based on historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our construction defect claim accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated.

Changes in our warranty accrual are detailed in the table set forth below:

	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Beginning warranty accrual for homebuilding projects	$	6,681		$	6,634		$	4,608
Warranty provision for homebuilding projects		2,363			2,330			1,825
Warranty assumed from joint ventures at consolidation		—			—			781
Warranty payments for homebuilding projects		(2,341	)		(2,006	)		(989	)
Adjustment to warranty accrual(1)		492			(277	)		409
Ending warranty accrual for homebuilding projects		7,195			6,681			6,634
Beginning warranty accrual for fee building projects		217			225			323
Warranty provision for fee building projects		9			—			—
Warranty efforts for fee building projects		(67	)		(70	)		(3	)
Adjustment to warranty accrual for fee building projects(2)		(131	)		62			(95	)
Ending warranty accrual for fee building projects		28			217			225
Total ending warranty accrual	$	7,223		$	6,898		$	6,859

(1) Included in the amount for 2017 is approximately $1.2 million of additional warranty liabilities estimated to be covered by our insurance policies that were adjusted to present the warranty reserves and related estimated warranty insurance receivable on a gross basis at December 31, 2017.  Of the $1.2 million adjusted in 2017, approximately $0.6 million related to prior year estimated warranty insurance recoveries.  Netted against the amount recorded in 2017 is a warranty accrual adjustment of $0.8 million related to a lower experience rate of expected warranty expenditures which resulted in a credit to cost of home sales of the same amount in the accompanying consolidated statement of operations.  During 2018, the estimated amount to be covered by our insurance policies was reduced by $0.3 million.  Netted against the amount recorded in 2018 is a warranty accrual adjustment of $43,000 related to higher expected warranty expenditures which resulted in an increase of $43,000 to cost of home sales in the accompanying consolidated statement of operations. During 2019, the Company recorded a warranty accrual adjustment of $0.5 million due to higher expected warranty expenditures which resulted in an increase of the same amount to cost of home sales in the accompanying consolidated statement of operations.   

(2) Included in the amount for 2017 is a reduction of approximately $31,000 to warranty liabilities made in conjunction with adjustments made to present the warranty reserve and related estimated warranty insurance receivable on a gross basis at December 31, 2017.  Netted with the 2017 amount is a $63,000 adjustment related to lower experience rate of expected warranty expenditures which resulted in a credit to fee cost of sales in the accompanying consolidated statement of operations.  During 2018, the estimated amount to be covered by our insurance policies was increased by approximately $32,000.  Netted with this amount was a warranty accrual adjustment of approximately $30,000 related to higher expected warranty expenditures which resulted in an increase to fee cost of sales of the same amount in the accompanying consolidated statement of operations.  In 2019, the Company recorded an adjustment of $0.1 million due to a lower experience rate of expected warranty expenditures for fee building projects which resulted in a reduction of the same amount to fee cost of sales in the accompanying consolidated statement of operations.