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Note 8 - Accrued Expenses and Other Liabilities

6 Months Ended

Jun. 30, 2020

Accrued Expenses and Other Liabilities [Text Block]

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

	*June 30,*		*December 31,*
	*2020*		*2019*
	(Dollars in thousands)
Warranty accrual ⁽¹⁾	$	6,740	$	7,223
Litigation reserves ⁽²⁾		6,000		10,900
Accrued interest		5,605		5,796
Accrued compensation and benefits		4,216		5,350
Completion reserve		964		3,167
Customer deposits		3,608		3,574
Lease liabilities		2,434		2,243
Other accrued expenses		3,713		2,301
	$	33,280	$	40,554

(1)	Included in the amount at June 30, 2020 and December 31, 2019 is approximately $1.8 million and $1.9 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 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. During the six months ended June 30, 2020, $4.7 million was paid by insurance related to two claims and the Company also reduced its litigation reserve estimate by $0.2 million for one of these claims, resulting in a litigation reserve balance of $6.0 million at June 30, 2020, with a corresponding decrease recorded within insurance receivables. Please refer to Note 7.

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 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 condensed 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 condensed 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:

	*Three Months Ended June 30,*						*Six Months Ended June 30,*
	*2020*			*2019*			*2020*			*2019*
	(Dollars in thousands)
Beginning warranty accrual for homebuilding projects	$	6,836		$	6,767		$	7,195		$	6,681
Warranty provision for homebuilding projects		357			627			778			1,054
Warranty payments for homebuilding projects		(481	)		(581	)		(1,261	)		(922	)
Adjustment to warranty accrual(1)		—			94			—			94
Ending warranty accrual for homebuilding projects		6,712			6,907			6,712			6,907

Beginning warranty accrual for fee building projects		28			178			28			217
Warranty provision for fee building projects		—			—			—			9
Warranty efforts for fee building projects		—			(18	)		—			(66	)
Adjustment to warranty accrual for fee building projects(1)		—			(18	)		—			(18	)
Ending warranty accrual for fee building projects		28			142			28			142
Total ending warranty accrual	$	6,740		$	7,049		$	6,740		$	7,049

(1)

During the 2019 second quarter, we recorded an adjustment of $0.1 million to our warranty accrual for homebuilding projects due to higher expected warranty expenditures which is included in "Adjustment to warranty accrual" above and resulted in an increase of the same amount to cost of home sales in the accompanying condensed consolidated statement of operations. Also during the 2019 second quarter, the Company recorded an adjustment of $18,000 due to lower experience rate of expected warranty expenditures for fee building projects which is included in "Adjustment to warranty accrual for fee building projects" above and resulted in a reduction of the same amount to cost of fee building sales in the accompanying condensed consolidated statement of operations.