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Home Warranty May Survive Bankruptcy

November 19, 1995

I am writing to comment on Robert Bruss' advice in his Nov. 5 column ("Home Builder Warranty Can Prove Worthless") to a reader whose patio slab was cracked and who questioned whether he had a remedy against a builder who had provided him with a 10-year home warranty, only to file bankruptcy and start up a new building business. Bruss informed the reader that he was out of luck and that the builder's warranties are only as good as the builder who warrants them.

Bruss' advice was, in my opinion, incomplete. Many reputable builders and developers carry comprehensive general liability insurance policies that protect them, in certain cases, from negligence claims. Although the builder might be in a bankruptcy proceeding, if he has or had insurance, it is possible to proceed against the builder in a separate civil action.

What that requires is for the owner to ask the bankruptcy court for relief from the automatic stay imposed upon any civil action brought against the debtor in order to proceed against the builder, but only to the extent that the builder has liability insurance.

If there is such an insurance policy, the insurer will then be duty-bound to defend and, depending upon the claims, indemnify the builder for the owner's claims.

Even if the bankruptcy proceeding was completed, the owner could still obtain this relief by asking the bankruptcy court to open the file for the purpose of pursuing the builder in a civil action, again only to the extent he has liability insurance for the claim.

In addition, the owner may have a valid claim against the subcontractor who built the slab, if the builder used one; if the problem is soil-related, he might have a claim against the soils engineer. Many reputable subcontractors and soils engineers carry liability insurance.

The reader's question also serves as a warning to all buyers of new homes. My advice would be to request a copy of the builder's certificate of insurance for his comprehensive general liability policy, as well as a list of all subcontractors and design professionals before closing escrow and to make that a condition in the sales agreement. If the builder refuses, the buyer should be very concerned.

M. LAURIE MURPHY, Valensi, Rose & Magaram. The writer is an attorney.

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