The plaintiffs in Frumer v. National Home Insurance Co., ___ N.J. Super. ___ (App. Div. 2011), purchased a new home in Englewood, New Jersey in April 2008 for $997,000. They also completed a “Certificate of Participation in New Home Warranty Plan Of 2-10 Home Buyers Warranty” (“Certificate”). The Certificate listed defendant National Home Insurance Company (“NHIC”) as the warranty guarantor. It also stated that the warranty was offered by defendant Home Buyers Warranty Corporation (“HBW”) as the administrator for NHIC.

By executing the Certificate, the plaintiffs acknowledged that they received both the Certificate and the Home Buyers Warranty Booklet Workmanship/Systems and Structural Limited Warranty Coverage (“Booklet”). The Booklet contained limited warranty coverage for major structural defects and workmanship/systems defects, as well as a methods for resolving disputes over both types of defects. For workmanship/systems defects, the homeowner had the option of filing a warranty claim or pursuing other remedies. If the homeowner filed a warranty claim with HBW, however, binding arbitration became the exclusive remedy for disputes over the claim. As to major structural defect claims, the Booklet provided that binding arbitration was the exclusive remedy for such issues.

The plaintiffs claimed that shortly after they moved into their home they discovered several defects, including a water leak in the basement and problems with the roof gutters, window hardware, and the HVAC unit. When their efforts to resolve those problems with the builder failed, the plaintiffs chose to proceed under the warranty as they filed a notice of complaint with HBW that identified what they alleged were workmanship/systems defects. HBW referred their complaint to NHIC under a file number, and then NHIC assigned more claims numbers for certain defects that plaintiffs alleged NHIC considered to be major structural defects.

Under the terms of the warranty, NHIC could repair, replace, or pay the plaintiffs the reasonable cost of repairing or replacing the defects. After the home was inspected in July and September 2008, NHIC originally chose the repair and/or replace option, though it denied certain coverage. Demolition work began in January 2009, but repair work ceased in September 2009. Having already paid $350,000 in claims benefits, in February 2010 NHIC offered plaintiffs an additional $208,059 to settle the claims. Plaintiffs rejected that offer and the parties then engaged in an unsuccessful non-binding mediation.

Thereafter, instead of proceeding with binding arbitration in accord with the warranty, plaintiffs filed suit against NHIC and HBW. The plaintiffs claimed that the defendants breached the warranty and that NHIC acted in bad faith. The defendants filed a motion to compel arbitration and stay the action, which the trial court denied. The Appellate Division granted leave to appeal and reversed.

After pointing out that it was reviewing the trial court’s ruling under the de novo standard of review, the Appellate Division concluded that “there is no ambiguity in the warranty’s arbitration provisions and those provisions establish binding arbitration as the exclusive remedy for the dispute over plaintiffs’ workmanship/systems defects and major structural defects claims.” The court bolstered its conclusion by emphasizing that the Federal Arbitration Act and the New Jersey Uniform Arbitration Act strongly favored arbitration, whereby arbitration agreements are interpreted liberally.

Next, the Appellate Division reviewed the New Home Warranty and Builders’ Registration Act (“Act”) and its provisions. Consistent with the Act, the builder had participated in a private warranty plan that allowed for an election of remedies for the workmanship/systems defect claims. The court pointed out that because the plaintiffs had elected to file a warranty claim for those defects, the warranty unequivocally provided that binding arbitration became the exclusive remedy. After noting that there was no such election for major structural defect claims, such that arbitration was the sole remedy, the court declared that it was “satisfied that the arbitration provisions applicable here reflect an enforceable agreement that establishes arbitration as the exclusive remedy for the dispute involving plaintiffs’ claims against the warranty. Plaintiffs’ breach of warranty and bad faith claims are preserved and resolution of those claims, if necessary, shall abide the outcome of the arbitration.”