A home warranty is a type of service contract that helps pay to repair or replace appliances or systems that break down in your home. These contracts are often more complicated than they sound and, according to our expert, sometimes duplicate coverage you already have.
Investopedia spoke exclusively with home warranty expert and American General Insurance Associate Professor of Insurance Law at Florida State University, Chad Marzen, on the topic of home warranties, including what they cover, how much they cost, and whether they are worth considering. Our edited conversation follows.
Defining Home Warranties
Investopedia: What’s a home warranty and what are the kinds of things it covers?
Marzen: A home warranty is viewed as a service contract. That’s an obligation an outside entity undertakes to provide a service or a contractor for service if a covered appliance or system malfunctions fails or breaks down. A typical home warranty or service contract is going to cover many of the systems and appliances in the home, things like your water and electric lines, air conditioning system, refrigerator, washer and dryer, and dishwasher.
Things outside of main appliances may require an additional fee from the company. Some individuals try to cover things like pool awnings or pool enclosures or a lawn sprinkler system. There may be optional coverage available for those items.
Investopedia: What about utilities coming into the house or within the house that are not owned by the utility company? Does that fall under a home warranty?
Marzen: Many home warranty companies, in addition to providing coverage for covered appliances, will also cover systems associated with the home as well. Some home warranty companies will provide systems coverage for systems such as the air conditioning and heating systems, electrical systems, and plumbing. However, a consumer should review the coverages for these systems carefully as they only cover certain aspects of the system and often include exclusions. Some home warranty plans combine coverage for systems and appliances, and with others, they are separate.
Don’t confuse a home warranty with homeowners insurance. A home warranty covers systems and equipment from breakdown. Insurance covers your home and contents from liability and disaster.
Investopedia: So, how do you distinguish between home warranty coverage and homeowners insurance coverage?
Marzen: Homeowners insurance coverage traditionally is going to cover things like liability. If someone comes on your premises, for instance, and is injured, homeowners insurance would cover that. A home warranty would not cover something like that. Homeowners insurance companies are regulated by the various state departments of insurance.
Regulation of Home Warranty Companies
Investopedia: Speaking of which, who regulates home warranties?
Marzen: That tends to vary from state to state. Here, in Florida, for instance, home warranties are regulated by the state insurance department. In some states, they are regulated by other state governmental entities or along the line of real estate transactions. In that case, they would be subject to a lot of the state’s real estate laws.
In Florida, home warranty companies must have a license to do business here. They must keep a certain amount of money in reserves for claims payouts. There are protections for consumers and companies that are treated similarly to homeowners insurance companies in the regulatory regard. But they are certainly different products because they’re much more limited in scope.
What to Cover With a Home Warranty
Investopedia: You’ve provided a list of appliances and systems that are covered; assuming the more things covered, the more expensive the policy, what are the most important things people should cover with a home warranty?
Marzen: The most important thing for the average consumer would be the highest value items in the home. For instance, the air conditioning or heating system. Those typically are going to cost several thousand dollars to replace, if not more, depending on the system and whether it’s split or one unit.
Many companies provide service plans and warranties. It becomes important, especially for the homeowner who has an older unit that may not be covered by a service plan, to purchase a warranty.
Investopedia: Do you need a home warranty when buying a new home?
Marzen: If it’s a brand-new home with new appliances, then certainly the need is not as pressing as with a pre-owned home. Typically, sellers will include home warranty coverage for an incoming buyer, at least for one year, because it provides that buyer peace of mind. In many cases, the seller will include this, or a Realtor will include it as a sweetener.
The amount you will likely pay for a home warranty.
The Cost of a Home Warranty
Investopedia: Do you have a ballpark idea of what a home warranty costs?
Marzen: Home warranties can cost several hundred dollars a year. Pricing could range anywhere from $400 to $800 a year or more, depending on what type of coverage is being bought.
In addition to the annual cost of a home warranty, there will usually be a service call fee. Every time the homeowner calls the company for service, let’s say they have a heating system that needs to be looked at, the home warranty company will charge a service call fee.
It might be that a homeowner pays $500 for their annual warranty, but every time they call the company for someone to come out, it’s going to cost anywhere from $50 to $100. That cost will vary from company to company.
Are Home Warranties Worth the Cost?
Investopedia: Are home warranties a good idea? Are they worth the cost that a homeowner would pay?
Marzen: You know, this varies from situation to situation. If an individual has the funds to self-insure their appliances, then a home warranty may not necessarily be as pressing as the situation where maybe you are on a really tight budget and anticipate that an appliance may be in the last year or two or three of running. That might be more worth it for the consumer to get a home warranty to provide peace of mind. So, the issue of home warranties is a question of your risk tolerance for large expenses. Some homeowners avoid home warranties altogether and save the money they would have paid out instead in anticipation of a future repair.
Investopedia: Do warranties typically come with an annual or lifetime limit in terms of how much they’ll pay?
Marzen: Yes. Some warranties will come with a limitation of liability provision. A limitation of liability is a provision in the contract which states that the company is obligated to pay only up to a certain dollar amount per year. I have reviewed some of these provisions, various sample provisions in a law review article two or three years ago.
In some cases, this limitation may be $1,500. It varies from company to company, but that is something a consumer should take a close look at or ask the company if they’re thinking about buying a home warranty.
Things to Watch Out For
Investopedia: What are some other problems?
Marzen: There are situations where a consumer’s claim may be denied, and denials are a concern for a lot of consumers. These denials could be based on any number of things, but the most common things include the policyholder not having adequate paperwork for the maintenance of the appliance. Keep records of all the service that have been conducted, including annual maintenance. Otherwise, improper maintenance might be asserted as a basis for the denial.
Sometimes companies won’t cover an appliance that has rust or corrosion. Another issue can occur when the homeowner doesn’t get a choice on the contractor that comes out to review or inspect the appliance. Speed of service can be another problem. Companies do try to get a contractor out to the home right away, but service delays are not uncommon.
Most home warranties come with a 30-day waiting period before coverage begins.
Investopedia: Is there typically a waiting period for home warranty coverage?
Marzen: It depends on the situation. If you get a warranty as part of a real estate contract, the waiting period might be waived. Otherwise, a 30-day waiting period would not be unusual. Some companies will provide coverage right away.
When you purchase a home warranty, you must warrant that the appliances being covered are all working correctly and have no issues. If you lie that can be considered insurance fraud. It’s just like fraud with homeowners insurance. If one’s warranting that something is working, and it doesn’t work, that would be fraud.
“If you lie [about the condition of appliances or systems] that can be considered insurance fraud.”
Investopedia: So, to sum up, what are some of the most important pros and cons of home warranties?
Marzen: One important pro is peace of mind. A home warranty contract provides peace of mind. Even though warranties are not insurance like traditional homeowners insurance, they do work a lot like insurance.
Some of the cons we mentioned earlier, the limitations on liability and the possibility of a claim denial, all those things would be the negatives.
Alternatives to a Home Warranty
Investopedia: Are there any alternatives to buying a home warranty contract?
Marzen: One thing is to self-insure. Another alternative may be to check in with your homeowners insurance company to see if they offer what’s called a mechanical breakdown endorsement. You may be able to get an endorsement on your homeowners policy to cover an AC breakdown, for example. But of course, that would be an added cost. Typical things that are covered with equipment breakdown coverage would be major appliances like AC and furnaces.
Investopedia: What should homeowners or consumers consider when buying their home warranty coverage?
Marzen: Certainly the condition of one’s appliances. Again, it’s a question of your risk tolerance. If you can get equipment breakdown coverage through homeowners insurance at a low cost, that may be more cost-effective for some homeowners rather than a home warranty.
There are some situations where the appliances may be already covered by an existing parts warranty. Home warranties will only cover working appliances. If the appliances are not working they would be excluded.
How to Complain if You Feel You’ve Been Wronged
Investopedia: Who provides consumer protection, especially when the state does not include home warranties under the insurance commission.
Marzen: There have been instances in the past where state attorney generals have investigated allegations of unfair and deceptive practices in association with the warranties. Some statutes do protect consumers in most states. They fall under unfair and deceptive practices (UDAAP) laws. If a company engages in widespread claim denials without an adequate basis, that would be subject to a UDAAP claim. Other avenues include reaching out to your state attorney general, the consumer protection division, or the Consumer Financial Protection Bureau (CFPB).
Hiring an attorney can be a problem since the cost of an attorney may vastly exceed the cost of the claim. Home warranty claims tend to be smaller as opposed to traditional insurance. That’s why there are remedies through the attorney general’s office and the state consumer protection authority.
Another remedy a consumer may have if they feel wronged is to pursue small claims court. Depending on the state, the consumer may be able to represent themselves in small claims court.
Investopedia: In all these cases, except potentially small claims court, does a consumer need to have legal representation or can you file a complaint without legal representation?
Marzen: With things like the attorney general, those complaints could be prepared by an attorney or come from the individual directly. In a court case, whether it’s small claims or otherwise, it’s wise to seek legal counsel in all situations. If you have a claim, you should seek counsel with an attorney before filing a claim.
Investopedia: Just to make sure we are separating the two, one involves seeking counsel or going to an attorney for advice. The second involves having your attorney in court with you.
Marzen: Right. With small claims, it’s wise to seek counsel even before going through the small claims route because an attorney may very well handle it in small claims.
In some states, it’s very typical for attorneys to appear in small claims court. In other states, it’s not as common.
How to Choose a Home Warranty
Investopedia: You’ve written a couple of law review articles on home warranty issues in terms of helping the average consumer. What are some things they can do?
Marzen: Compare pricing on different plans. Check out the Better Business Bureau rating for the company. How is the company seen by consumers? Conduct research online to get a sense of how that companies’ customers feel about the product.
Do your due diligence, whether it’s the Better Business Bureau or online research, or asking questions of the company. “What does this contract cover?” “Is there a limitation of liability?” These types of questions are important.
Investopedia: Finally, is there anything missing from our conversation about home warranties?
Marzen: I think in general, a good tip for homeowners is to keep records. Keep records on both appliances and systems. Track any warranties that may still be in force. If purchased with a credit card, check to see if you received an additional year warranty from the credit card company. Consider alternatives such as homeowners insurance endorsements or self-insuring.