Note 8 - Accrued Expenses and Other Liabilities

12 Months Ended

Dec. 31, 2020

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,
	2020		2019
	(Dollars in thousands)
Warranty accrual(1)	$	7,276	$	7,223
Litigation reserves(2)		5,641		10,900
Accrued interest		3,172		5,796
Accrued compensation and benefits		7,106		5,350
Completion reserve		5,683		3,167
Customer deposits		2,898		3,574
Lease liabilities		3,180		2,243
Other accrued expenses		1,254		2,301
	$	36,210	$	40,554

(1)

Included in the amount at December 31, 2020 and 2019 is approximately $2.5 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 year ended December 31, 2020, $4.7 million was paid by our insurance carrier directly to claimants related to two claims, and the Company decreased its litigation reserve estimate by $0.2 million for one claim and decreased the IBNR litigation reserve by a net $0.4 million ($1.0 million corresponding decrease in insurance receivables, and a $0.6 million increase in cost of sales) resulting in a litigation reserve balance of $5.6 million at December 31, 2020.

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 consolidated balance sheets 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 balance sheets. 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,
	2020			2019			2018
	(Dollars in thousands)
Beginning warranty accrual for homebuilding projects	$	7,195		$	6,681		$	6,634
Warranty provision for homebuilding projects		1,789			2,363			2,330
Warranty payments for homebuilding projects		(2,576	)		(2,341	)		(2,006	)
Adjustment to warranty accrual(1)		861			492			(277	)
Ending warranty accrual for homebuilding projects		7,269			7,195			6,681
Beginning warranty accrual for fee building projects		28			217			225
Warranty provision for fee building projects		—			9			—
Warranty efforts for fee building projects		—			(67	)		(70	)
Adjustment to warranty accrual for fee building projects(2)		(21	)		(131	)		62
Ending warranty accrual for fee building projects		7			28			217
Total ending warranty accrual	$	7,276		$	7,223		$	6,898

(1) During 2020 the Company recorded an adjustment of $0.9 million to increase its warranty accrual for homebuilding projects based on the expected warranty experience rates which resulted in a corresponding increase of $1.2 million to warranty insurance recoveries included in other assets in the accompany consolidated balance sheets and a $0.3 million credit to cost of 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.   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. 

(2) During 2020, the Company recorded an adjustment of $21,000 to decrease its warranty accrual for fee building projects based on the expected warranty experience rates which resulted in a corresponding decrease to fee building cost of sales 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.  During 2018, the warranty reserve and corresponding warranty insurance recoveries balances were increased by approximately $32,000, and the warranty reserve accrual was further adjusted by 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.