HR Block 2012 Annual Report Download - page 85

assumed validity rates and loss severities would result in losses beyond SCC’s accrual of approximately $31
million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key
assumptions on the representation and warranty claims liability. In reality, changes in one assumption may
result in changes in other assumptions, which could affect the sensitivity and the amount of losses.
A rollforward of our accrued liability for representation and warranty claims is as follows:
(in 000s)
Year ended April 30, 2012 2011 2010
Balance, beginning of the year:
Amount related to representation and warranty claims $ 126,260 $ 138,415 $ 156,659
Amount related to indemnity agreement dated April 2008 –49,785 49,936
126,260 188,200 206,595
Changes:
Provisions 20,000 ––
Payments on representation and warranty claims (16,242) (12,155) (18,244)
Payments under indemnity agreement dated April 2008 –(49,785) (151)
Balance, end of the year:
Amount related to representation and warranty claims 130,018 126,260 138,415
Amount related to indemnity agreement dated April 2008 –– 49,785
$ 130,018 $ 126,260 $ 188,200
During the second and fourth quarters of fiscal year 2012, SCC observed an increase in third-party activity. As
a result of this third-party activity, SCC’s estimate of probable claims increased from its prior expectations,
resulting in additional loss provision of approximately $56 million. These loss provisions were partially offset by
changes in assumptions, including a decrease in the rate at which claims have been found to be valid,
corresponding to recent trends in reviewed claims as described above, and a decrease in expected future claims
related to NIM bonds that had matured, resulting in a net recorded loss provision in discontinued operations of
$20.0 million.
During fiscal year 2011, SCC made payments totaling $49.8 million under an indemnity agreement dated April
2008 with a specific counterparty in exchange for a full and complete release of such party’s ability to assert
representation and warranty claims. The indemnity agreement was given as part of obtaining the counterparty’s
consent to SCC’s sale of its mortgage servicing business in 2008. SCC has no remaining payment obligations
under this indemnity agreement.
DISCONTINUED OPERATIONS – INDEMNIFICATION OBLIGATIONS – Losses may also be incurred with
respect to indemnification claims by underwriters and depositors, and litigation claims by others, with respect
to loans and securities SCC originated and sold, as discussed in note 19.
See discussion in note 20 below for indemnification obligations related to the sales of RSM and MCM.
NOTE 19: LITIGATION AND RELATED CONTINGENCIES
We are a defendant in a large number of litigation matters, arising both in the ordinary course of business and
otherwise, including as described below. The matters described below are not all of the lawsuits to which we
are subject. In some of the matters, very large and/or indeterminate amounts, including punitive damages, are
sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief.
Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to
state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible
verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a
lawsuit or claim bears little relevance to its merits or disposition value due to this variability in pleadings and
our experience in litigating or resolving through settlement numerous claims over an extended period of time.
The outcome of a litigation matter and the amount or range of potential loss at particular points in time may
be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate
documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate
courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and
their counsel will themselves view the relevant evidence and applicable law.
In addition to litigation matters, we are also subject to other claims and regulatory investigations arising out
of our business activities, including as described below.
H&R BLOCK 2012 Form 10K 71