Accrued Expenses

6 Months Ended

Apr. 30, 2020

Accrued expenses at April 30, 2020 and October 31, 2019 consisted of the following (amounts in thousands):


	April 30, 2020		October 31, 2019
Land, land development, and construction	$	180,212	$	192,658
Compensation and employee benefits	168,959		183,592
Escrow liability	34,113		31,587
Self-insurance	194,969		193,405
Warranty	157,154		201,886
Lease liabilities (1)	127,754		—
Deferred income	34,904		51,678
Interest	41,351		31,307
Commitments to unconsolidated entities	8,141		9,283
Other	50,986		55,536
	$	998,543	$	950,932

(1) On November 1, 2019, we adopted ASU 2016-02 which resulted in the establishment of lease liabilities on our Condensed Consolidated Balance Sheet as of January 31, 2020. The Condensed Consolidated Balance Sheet as of October 31, 2019 does not reflect any changes resulting from the adoption of the new standard. See Note 1, “Significant Accounting Policies – Recent Accounting Pronouncements” for additional information regarding the adoption of ASU 2016-02.

The table below provides, for the periods indicated, a reconciliation of the changes in our warranty accrual (amounts in thousands):


	Six months ended April 30,						Three months ended April 30,
	2020		2019		2020		2019
Balance, beginning of period	$	201,886	$	258,831	$	188,916	$	237,326
Additions – homes closed during the period	14,278		14,954		7,254		8,329
Addition – liabilities assumed in a business acquisition	60				60
Increase in accruals for homes closed in prior years	3,579		272		2,361		963

Decrease to water intrusion accrual	(24,400)				(24,400)
Charges incurred	(38,249)		(50,402)		(17,037)		(22,963)
Balance, end of period	$	157,154	$	223,655	$	157,154	$	223,655

Since fiscal 2014, we have received water intrusion claims from owners of homes built since 2002 in communities located in Pennsylvania and Delaware (which are in our North region). During the second quarter of fiscal 2020, we continued to receive water intrusion claims from homeowners in this region, mostly related to older homes, and we continue to perform review procedures to assess, among other things, the number of affected homes, whether repairs are likely to be required, and the extent of such repairs.

Our review process, conducted quarterly, includes an analysis of many factors applicable to these communities to determine whether a claim is likely to be received and the estimated costs to resolve any such claim, including: the closing dates of the homes; the number of claims received; our inspection of homes; an estimate of the number of homes we expect to repair; the type and cost of repairs that have been performed in each community; the estimated costs to remediate pending and future claims; the expected recovery from our insurance carriers and suppliers; and the previously recorded amounts related to these claims. We also monitor legal developments relating to these types of claims and review the volume, relative merits and adjudication of claims in litigation or arbitration.

Since October 31, 2016, our recorded aggregate estimated repair costs to be incurred for known and unknown water intrusion claims has been $324.4 million and our recorded aggregate expected recoveries from insurance carriers and suppliers were approximately $152.6 million. Based on trends in claims experience over the past several years and lower than anticipated repair costs, in the second fiscal quarter of 2020, we reduced the estimate of the aggregate estimated repair costs to be incurred for known and unknown water intrusion claims by $24.4 million. Because this reduction was associated with periods in which we expect our insurance deductibles and self-insured retentions to be exhausted, we reduced our aggregate expected recoveries from insurance carriers and suppliers by a corresponding $24.4 million. Our recorded remaining estimated repair costs, which reflects a reduction for the aggregate amount expended to resolve claims, were approximately $85.1 million at April 30, 2020 and $124.6 million at October 31, 2019. Our recorded remaining expected recoveries from insurance carriers and suppliers were approximately $70.5 million at April 30, 2020 and $97.9 million at October 31, 2019.

As noted above, our review process includes a number of estimates that are based on assumptions with uncertain outcomes, including, but not limited to, the number of homes to be repaired, the extent of repairs needed, the repair procedures employed, the cost of those repairs, outcomes of litigation or arbitrations, and expected recoveries from insurance carriers and suppliers. Due to the degree of judgment required in making these estimates and the inherent uncertainty in potential outcomes, it is reasonably possible that our actual costs and recoveries could differ from those recorded and such differences could be material. In addition, due to such uncertainty, we are unable to estimate the range of any such differences. With respect to our insurance receivables, disputes between home builders and carriers over coverage positions relating to construction defect claims are common, and resolution of claims with carriers involves the exchange of significant amounts of information and frequently involves legal action. While our primary insurance carrier has funded substantially all of the water intrusion claims that we have submitted to it to date, other insurance carriers have recently disputed coverage for the same claims under policies that are substantially the same. As a result, we entered arbitration proceedings during the third quarter of fiscal 2019 with these carriers. Based on the legal merits that support our pending insurance claims, review by legal counsel, our history of collecting significant amounts funded by our primary carrier under policies that are substantially the same, and the high credit ratings of our insurance carriers, we believe collection of our remaining recorded insurance receivables is probable. However, due to the complexity of the underlying claims and the variability of the other factors described above, it is reasonably possible that our actual insurance recoveries could materially differ from those recorded. Resolution of these known and unknown claims is expected to take several years.