In the course of buying a home, sellers may offer buyers home warranties as a means of inducing or sweetening a sale. Depending upon what is specifically covered in the warranty contract, buyers of older homes may find reassurance in the promise that, should the home’s named appliances and systems fail to function, the homeowner will be saved from costly repair or replacement bills. Generally speaking, the homeowner pays a yearly fee, perhaps $350-$600, and pays perhaps $60-$75 for each service call. The warranty company sends a repair person to the home to evaluate and fix the problem and/or to determine whether or not the non-functioning appliance or system can be repaired or will have to be replaced. Many policies also have deductibles, for example, $100, or the cost of the repair, whichever is less; the deductible applies to each repair or replacement.
Purchasers of new homes may receive more comprehensive warranties as part of the purchase price of the home. These warranties may cover items such as up to 10 years of structural defects; a year of coverage on stucco, drywall and paint; two years on HVAC, plumbing and electrical systems; and six months for appliances. There is also Home Warranty Insurance, which protects homeowners if a builder does not fix or compensate for the builder’s defective or incomplete residential building work. The builder pays for this policy as well.
Buyers sometimes confuse home warranties with homeowners insurance policies. A home insurance policy covers major perils—losses if your home and its contents are damaged or destroyed due to fire, theft etc. A home warranty does not cover these perils, nor does it cover structural defects: It is a service contract, an agreement between the homeowner and the warranty company that issues the contract that the company will repair, or replace when necessary, those components and appliances of your home that are specified in the agreement.
Examples of typically covered appliances are refrigerators, dishwashers, ovens, stoves, cooktops, water heaters, clothes dryers and built-in microwaves. Examples of typically covered components are air conditioning systems, duct work, plumbing and electrical systems. Buyers also have the option to pay extra for coverage of other components not covered in the basic agreement.
Those who tout the advantages of home warranties say that they help to pay for expensive and unforeseen repairs and replacements, especially if the homeowner does not have his/her own emergency fund. If a homeowner does not have his or her own service provider or is not handy, then the solution to the problem is a phone call to the warranty company. People who buy existing homes and don’t know how well the home’s appliances and systems have been previously maintained appreciate the warranty protection.
In practice, however, things may not be so rosy or so simple. Consumer Reports cautions against buying such contracts. Angie’s List reports that home warranties lead the list of complaints that it receives. At the very least, before you purchase a warranty, try to do the following: Make sure that you don’t already have coverage on appliances and systems, especially if you are buying a new home. If you buy an older home, ask the seller to provide you with information because some of the appliances and systems may still be under their original warranties or may still have significant useful life. Using the ages of the appliances, check their life expectancies by using the charts from the National Association of Certified Home Inspectors—see lnterNACHI’s Standard Estimated Life Expectancy Chart for Homes—very comprehensive and useful! Check out home warranty companies by consulting the Better Business Bureau and your state’s Attorney General’s office and insurance commissioner. Home warranties are regulated in all 50 states under consumer protection laws and, in 32 states, must be licensed or registered by the department of insurance (even though they are not insurance companies).
Let’s examine some factors of which purchasers of these contracts should be aware. First, read your contract and note inclusions and exclusions. Don’t assume that the home warranty will guarantee replacement of a faulty component—the decision may be to repair it instead. Don’t assume that you can use your own service provider—you must use the service person sent by the company. Don’t assume that the warranty will cover the entire cost of the repair or replacement. Don’t assume that service calls are free of charge. Don’t assume that there are no deductibles. Don’t assume that the warranty company will repair or replace an appliance or system that never worked.
Home warranty contracts include exclusions and they can be extensive. For example, if the contract covers a named individual appliance then it may not cover it in the appliance’s entirety. That is, the refrigerator may be covered except for leaks, icemakers, beverage dispensers, doors, door seals, gaskets and hinges. I have read contracts that contain an astonishing number of exclusions. Read the contract carefully before you commit!
Because the warranty company does not inspect every home and appliance before issuing a policy, the company relies upon you to disclose if the appliance or system has a known or unknown pre-existing condition because pre-existing conditions are not covered. You are also required to maintain your appliances and systems in accordance with the manufacturer’s instructions. Thus, when you report a problem with an appliance or system, a dispute may arise:
Who is to say that you did or did not maintain it, that there was no pre-existing condition and that it is not functioning due to normal wear and tear? Guess what? You have to abide by the decision of the service rep sent by the company—and you cannot choose this service provider, who may or may not be competent. If he/she decides that you did not do your part or that the problem is due to a pre-existing condition, then the company will not repair or replace what is broken. If you disagree with the verdict, a second opinion might be provided—so that’s another service call, again at your expense (you pay, perhaps $60-$75 per call). And again you are not permitted to choose the service rep.
The company has the sole right to decide whether or not a covered system or appliance will be repaired or replaced. If a repair is called for, you may not choose the repair product; if a replacement is needed, you may not be able to choose the make and model. If you disagree, you may be offered a cash settlement which may be less than what you think is the value of the repair or replacement to which you believe you are entitled; this cash will be in the amount of the company’s actual cost, which may be less than retail!
Moreover, there may be limits on compensation provided by the warranty company. For example, one contract that I read limits to $1000.00 in aggregate for professional series or similar appliances such as Sub Zero and Viking. Also excluded are appliances still covered by the manufacturer’s warranty and appliances that malfunction due to manufacturing defects and recalls. Read your contract! Note the exclusions! Of course, there is always arbitration…
And just who are the service reps sent by the company to diagnose and fix your problem? One contract I read states that the warranty company is not liable for the negligence or other conduct of the service providers it sends to you and whom you have no right to choose; nor does the company insure the service provider’s performance! Please keep in mind that the warranty company exists to make a profit. So it is alleged that service reps who make decisions and do repairs in a manner that keeps costs down are rewarded with more work by the warranty company. Some good contractors complain that the companies will not pay them well and demand the cheapest—not necessarily the best—solution to the customer’s problem. They claim that the warranty companies hire service providers who need work and are willing to do the cheapest job in order to be rewarded with more work by the companies. Thus, they say that the best contractors decline to work for the warranty companies. This may or may not be true.
As Consumer Reports and other commentators point out, you do have other options. When buying new appliances, charge them to a credit card that extends the product’s warranty. Buy good, reliable products that have less chance of malfunctioning and take the money that you would have spent on a warranty and put it in a savings account each year so that you can pay for repairs and replacements yourself—it might be cheaper and you can choose your own repairmen and replacements. Finally, manufacturers will repair or replace or refund, at their expense, products that have been recalled.
By Vivian Oleen
Vivian Oleen is an associate broker at Sopher Realty.
