Commitments and Contingencies

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of these limited warranties vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes, or customer service practices could have a significant impact on our actual warranty costs in the future and such amounts could differ from our current estimates.

The changes in our warranty liability are as follows (in thousands):



	Years Ended November 30,
	2012			2011			2010
Balance at beginning of year	$	67,693		$	93,988		$	135,749
Warranties issued	8,416			4,852			5,173
Payments	(19,866		)	(25,024		)	(44,973		)
Adjustments	(8,421		)	(6,123		)	(1,961		)
Balance at end of year	$	47,822		$	67,693		$	93,988

Our overall warranty liability at November 30, 2012 included $1.5 million for estimated remaining repair costs associated with 17 homes that have been identified as containing or potentially containing allegedly defective drywall manufactured in China. These homes are located in Florida and were primarily delivered in 2006 and 2007. Our overall warranty liability at November 30, 2011 and 2010 included $4.8 million for estimated remaining repair costs associated with 87 such homes and $11.3 million associated with 296 such homes, respectively. The decreases in the liability for estimated repair costs associated with such homes at November 30, 2012 and 2011 reflected the lower number of homes with unresolved repairs at each date as compared to the respective previous year. Since 2009, we have identified a total of 469 such homes and resolved repairs on 452 of them through November 30, 2012. We consider warranty-related repairs for homes to be resolved when all repairs are complete and all repair costs are fully paid, and/or when we determine that we are not obligated to or will not need to repair a home under our limited warranty. During the years ended November 30, 2012, 2011 and 2010, we paid $2.9 million, $13.7 million and $25.5 million, respectively, to repair homes identified as affected or potentially affected by the allegedly defective drywall. As of November 30, 2012, we have paid $43.4 million of the total estimated repair costs of $44.9 million associated with all such homes.

The drywall used in the construction of our homes is purchased and installed by subcontractors. Our subcontractors obtained drywall material from multiple domestic and foreign sources through late 2008. In late 2008, we directed our subcontractors to obtain only domestically sourced drywall. Based on the significantly reduced warranty claim rate on the issue (only two additional homes were identified in 2012 as containing or potentially containing allegedly defective drywall manufactured in China), community-wide reviews we have conducted, and the domestic sourcing of drywall material since late 2008, we believe that we have identified substantially all such homes and will receive at most only nominal additional claims in future periods.

We have tendered claims with our liability insurance carriers, seeking reimbursement of costs we have incurred to make repairs on and to handle claims with respect to previously delivered homes, including homes identified as affected or potentially affected by the allegedly defective drywall. During 2012, we recognized insurance recoveries of $26.5 million as a reduction to construction and land costs in our consolidated statements of operations, representing amounts we received from one of our insurance carriers for a portion of the claims we have tendered. We intend to continue to seek and are undertaking efforts, including legal proceedings, to obtain reimbursement from various sources, including suppliers and their insurers, for the costs we have incurred or expect to incur to investigate and complete repairs and to defend ourselves in litigation associated with homes previously delivered, including homes identified as affected or potentially affected by the allegedly defective drywall. Given uncertainties in the potential outcomes of these efforts, we have not recorded any amounts for potential future recoveries as of November 30, 2012.

As of November 30, 2012, we were a defendant in 10 lawsuits relating to the allegedly defective drywall. Seven of these lawsuits are “omnibus” class actions purportedly filed on behalf of numerous homeowners asserting claims for damages against drywall manufacturers, homebuilders and other parties in the supply chain of the allegedly defective drywall material. We are also a defendant in two lawsuits brought in Florida state court and one lawsuit brought in Louisiana federal court, in each case by individual homeowners. On May 31, 2012, a global settlement of claims relating to the allegedly defective drywall material, including those brought against us, was preliminarily approved by the federal court judge overseeing a multidistrict litigation case — In re: Chinese Manufactured Drywall Products Liability Litigation (MDL-2047). A fairness hearing on the preliminary global settlement was held on November 13, 2012. The hearing is not yet concluded. If the global settlement is finally approved and is accepted by all parties in its current form, it will resolve all current claims against us and bar any future claims against all participating defendants, including us. Some of the plaintiffs have opted out of the global settlement, and we will defend cases by those plaintiffs against us. While the ultimate outcomes of the drywall-related lawsuits are uncertain, based on the current status of the proceedings, we do not believe the outcomes will be material to our consolidated financial statements.

During 2012, we received warranty claims from homeowners in certain of our communities in Florida for water intrusion-related issues on homes we delivered between 2003 and 2009. While we initially believed these issues were isolated, after additional investigation, we determined in the fourth quarter of 2012 that more homes and communities may have been affected. Given the early stage of our investigation into the scope of the water intrusion-related issues in Florida, we are currently unable to determine whether we will need to record additional charges for repair costs. Our investigation into these issues, including estimating the number of homes affected and the overall repair costs, is ongoing.

In assessing our overall warranty liability at a reporting date, we evaluate the costs for warranty-related items on a combined basis for all of our previously delivered homes that are under our limited warranty. Accordingly, since 2009, we have evaluated the costs related to homes identified as affected or potentially affected by allegedly defective drywall manufactured in China, and in 2012, we also evaluated the costs related to homes potentially affected by water intrusion-related issues, in each case together with all of our other warranty-related items. Notwithstanding our actual or estimated remaining repair costs related to the allegedly defective drywall and water intrusion-related issues, since 2009 we have experienced favorable trends in our actual warranty costs incurred with respect to claims relating to other warranty-related items, reflecting, among other things, our ongoing focus on construction quality and customer service. Based on our assessments of these and other relevant factors on a combined basis, we determined that our overall warranty liability at each reporting date was sufficient to cover our overall warranty obligations on previously delivered homes that are under our limited warranty. Additionally, based on our assessment of the trends in our warranty claims experience, and taking into account the decrease in the overall number of homes we have delivered over the past several years before 2012 and the steady reduction in our estimated remaining repair costs and actual repair costs incurred for homes identified as affected or potentially affected by the allegedly defective drywall, we recorded favorable warranty adjustments of $11.2 million in the second quarter of 2012 and $7.4 million in the third quarter of 2011 as reductions to construction and land costs in our consolidated statements of operations in those periods. As of November 30, 2012, based on our assessment of our overall warranty liability on a combined basis for all of our previously delivered homes that are under our limited warranty, including the homes identified as affected or potentially affected by the allegedly defective drywall and the increased number of homes potentially affected by water intrusion-related issues, we recorded an adjustment to increase our overall warranty liability by $2.6 million in the fourth quarter of 2012 with a corresponding charge to construction and land costs in our consolidated statement of operations.

Depending on the number of additional homes identified as affected or potentially affected by allegedly defective drywall manufactured in China or by water intrusion-related issues, if any, and the actual costs we incur in future periods to repair such homes and/or homes affected by other warranty-related issues, including costs to provide affected homeowners with temporary housing, we may revise the estimated amount of our liability, which could result in an increase or decrease in our overall warranty liability.

Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales that may be affected by Accounting Standards Codification Topic No. 460, “Guarantees.” Based on historical evidence, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.

Insurance. We maintain, and require the majority of our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. In Arizona, California, Colorado and Nevada, our subcontractors' general liability insurance primarily takes the form of a wrap-up policy, where eligible subcontractors are enrolled as insureds on each project. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. We record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under our insurance policies, and the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and include an estimate of construction defect claims incurred but not yet reported. Our estimated liabilities for such items were $93.3 million at November 30, 2012 and $94.9 million at November 30, 2011. These amounts are included in accrued expenses and other liabilities in our consolidated balance sheets. Our expenses associated with self-insurance totaled $8.7 million in 2012, $7.2 million in 2011 and $7.4 million in 2010. These expenses were largely offset by contributions from subcontractors participating in the wrap-up policy.

Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At November 30, 2012, we had $286.1 million of performance bonds and $41.9 million of letters of credit outstanding. At November 30, 2011, we had $361.6 million of performance bonds and $63.8 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.

Land Option Contracts. In the ordinary course of business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At November 30, 2012, we had total deposits of $26.2 million, comprised of $25.7 million of cash deposits and $.5 million of letters of credit, to purchase land having an aggregate purchase price of $625.3 million. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.

Leases. We lease certain property and equipment under noncancelable operating leases. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years. In most cases, we expect that leases that expire will be renewed or replaced by other leases with similar terms. The future minimum rental payments under operating leases, which primarily consist of office leases having initial or remaining noncancelable lease terms in excess of one year, are as follows (in thousands):



Years Ending November 30,
2013	$	5,873
2014	5,338
2015	2,728
2016	289
2017	—
Thereafter	—
Total minimum lease payments	$	14,228

Rental expense on our operating leases was $5.5 million in 2012, $6.7 million in 2011 and $8.5 million in 2010.