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The Home Owner must file a claim against HOWIC for Builder Default Coverage (i.e., for warranty claims arising within the first two years of the home's construction) or Major Structural Defect coverage (i.e., for defect claims arising during years three through ten after the home's construction). The insurance provided by HOWIC covers the home itself; therefore, the coverage is available even if the original home buyer has sold the home to another person. The coverage applies to damage resulting from construction defects. Causes such as storms, fires, and breach of contract are not included in the coverage.

The Companies also offered the HOW Remodeler Program to those Member Builders in the home remodeling business. Under this program, Member Builders provided to the Home Owner essentially the same limited warranties as under the HOWIC Warranty during the first and second years following completion of a remodeling project to a home. The Member Builder's limited warranty was covered by HOWIC under the remodeler program. In addition, HOWIC provided the Home Owner with insurance protection during years three through five (extendable for five additional years on an optional basis) following completion of the home remodeling project.

In addition to these coverages, the Companies offered a variety of other insurance products to the home construction industry. These products constituted a small portion of the Companies' overall insurance business.

Interruption in the Sale of New Policies

Upon the commencement of receivership, the Companies generally ceased issuing new HOWIC Warranties. When necessary to avoid substantial hardship to a home buyer, however, the Deputy Receiver did permit new warranties to be issued. For this exception to apply, a contract for home construction between the Member Builder and home buyer had to be in effect on or before October 7, 1994, and construction of the home had to have commenced by that date. Moreover, before a new warranty would be issued, the Member Builder, the home buyer and buyer's lender had to acknowledge in writing that the Companies were in receivership and may be unable to fulfill their contractual obligations. The Deputy Receiver is no longer accepting requests for new warranties under this initiative.

The Deputy Receiver suspended new insurance business because there was substantial uncertainty that HOWIC would be able to fulfill its current insurance obligations and, therefore, the issuance of new warranties would only have further depleted the assets of the Companies. In general, applications for new home enrollments received after October 7, 1994, have been returned to the Member Builder with an explanation that no new insurance business would be accepted by the Companies.

In instances where the Companies received payment of an enrollment fee from the Member Builder for a home that was enrolled on or before October 7, 1994, and the builder has thereafter obtained other warranty coverage on the home, the builder has been permitted to cancel the HOWIC Warranty retroactively and receive a refund of the enrollment fee under certain circumstances. The builder was required to make written request for cancellation of the warranty and refund of the enrollment fee, enclosing a copy of the declarations page of the other warranty policy, and an executed and notarized release from the Home Owner and Member Builder. A builder's request for the refund of an enrollment fee was denied if the above conditions were not met or if claims had been paid or were pending under the HOWIC Warranty.

Enrollment fees received after October 7, 1994, from a Member Builder who, for any reason, did not want a HOWIC Warranty were also refunded if the enrollment application had not been processed by the Companies, the HOWIC Warranty had not been bound or issued by HOWIC, and the Member Builder did not owe HOWIC an offsetting balance on another matter. If an offsetting balance did exist, the enrollment fees would have been held pending payment of the Member Builder's balance. The enrollment fees would be offset against the Member Builder's balance if it was not paid promptly to the Deputy Receiver.

Although most eligible claims for returns of enrollment fees have already been presented to the Deputy Receiver, Member Builders who believe they have eligible claims may still present them at this time.

Directors and Officers Litigation

In October 1995, the Deputy Receiver instituted a lawsuit in Virginia Federal Court against certain former directors and officers of the Companies, alleging violation of federal securities laws as well as various state law claims. On January 15, 1996, the Deputy Receiver, together with a group of 12 Texas Home Owners on behalf of themselves and other Home Owners similarly situated, instituted a second lawsuit in Texas State District Court in Dallas County against various persons and entities who were not Defendants in the Federal Court lawsuit. These lawsuits were instituted in an effort to seek redress from those parties whom the Deputy Receiver and the other plaintiffs believe to have caused damage to the Companies and Home Owners for which they may recover assets for the benefit of creditors including Home Owners. Eventually, the two cases were effectively consolidated in the Dallas court. Some of the preliminary phases of this litigation have been completed as the parties prepare themselves for various matters before the court.(3) The Deputy Receiver intends to use any recoveries obtained from this case to add to assets available to fund benefits owed to the Home Owners, Member Builders, and creditors of the Companies.

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(3) Recently, the court denied a motion to certify a plaintiff class of home owners. As this Report is distributed, it is probable that this decision may be appealed.

REPORT TO HOME OWNERS - Page 3

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