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Warranties Are Backed by Insurance Policies

February 04, 1996

M. Laurie Murphy ("Letters," Nov. 19) gave a lawyer's approach to dealing with an extended home warranty from a builder who has declared bankruptcy. Murphy's approach is extreme and should be considered only as a last resort.

When extended warranties are written on a new house, older house, automobile or home appliance, they must be backed by an established insurance company. Although the warranty on a new house is a contract between the builder and the buyer, the builder must also buy indemnity coverage to protect the home buyer just in case the builder goes out of business.

The warranty contract, which is not an insurance policy, is supposed to name the insurance company that backs it. That insurance company must be licensed to operate in California (or in the state in which the warranted house was built).

If the builder has gone bankrupt, is out of business or otherwise refuses to honor the warranty, the home buyer should submit a claim to that insurance company and not to the builder's general liability insurer.

If there is no indemnity insurance backing the warranty, the builder may have committed fraud by selling an illegal warranty. In this case, the consumer affairs office of the district attorney's office and the state Department of Real Estate should both be notified immediately that a crime may have been committed.

DAVID E. ROSS

Agoura

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