What is Home Warranty
A home warranty is a residential service contract that covers the cost of maintaining household systems or appliances for a set period. A home warranty is different from a home insurance contract.
BREAKING DOWN Home Warranty
When purchasing a home, the buyer may not know how well the previous owners maintained and managed the components of the home. Information on the age of household appliances or their useful life in years may not be available at the time of purchase. Also, the search for an expert handyman or service provider may be time-consuming for the homeowner. Limited time and the high costs of paying for damages or replacements on multiple components of the home are the two main reasons that home buyers purchase home warranties.
While a home warranty bears a resemblance to home insurance policies regarding premiums, deductibles, claims, and liabilities, they each offer different services. Home warranties maintain the functionalities of household systems, while home insurance covers loss of the home itself that may be due to fire or natural disasters.
Home Warranty Coverage
Usually, a home warranty plan covers major appliances like water heaters, stoves, and refrigerators. It may also include systems such as HVAC, plumbing and electrical. It is imperative to read the fine print of a warranty document to understand coverages and exclusions. While some warranties cover garage door openers as part of the basic coverage plan, others may require additional premiums. Although it is possible to purchase additional coverage for a home feature not available with basic coverage, it is also likely that some warranty companies do not cover specific components of a home.
For example, some home warranty companies cover outdoor pools or spas for an additional premium to the policy, whereas other companies may not warranty a pool on their offerings.
When an appliance or system is damaged, the homeowner contacts the home warranty provider. The warranty company usually works in unison with one or more home service providers such as plumbing or electrical contractors. After notified of a claim, the warranty company requests the services from one of its partnered providers, who will assess damage and subsequently provide a report to the warrantor. The assessment report reveals the extent and potential causes of damage to the appliance. The home warranty company confirms if the policyholder's contract covers the appliance or system for the assessed damage. If approved, the warrantor employs the contractor to repair or replace the system. (For related reading, see "Do You Need A Home Warranty?")
Home Warranty Denial of Coverage
Home warranty providers may deny coverage for several reasons. Known damage existing before the start of warranty coverage may meet with denial of a claim. For this reason, if a home inspection conducted before purchase reveals damage to some systems or appliances, the prospective buyer should request the seller repair or replace the item before finalizing the purchase of the home. Also, a warranty company will not cover poorly maintained, improperly installed, or misused household components.
Availability and Costs
Homebuilders, sellers, and homeowners may purchase a home warranty. Some homebuilders offer policies that cover the structure up to ten years for structural defects. Structural defects include issues with flooring, walls, roofs, framing, sheetrock and other items. Homebuilder warranty may also cover two years of electrical and plumbing systems, as well as six months for installed household appliances. Most often, the cost of a homebuilder warranty policy is part of the price of the new house.
For older homes, the seller or agent may pay for the warranty to incentivize a buyer to purchase the home. Warranties for existing homes typically cover a year of household systems and appliance maintenance. After a year, the homeowner has the option to renew the contract.
The cost for a home warranty ranges between $300 to $600 annually. The policy's price depends on the homeowner’s state of residence and the type of warranty product bought. In addition to the annual premium, homeowners will usually pay the servicing contractor a fee, often called a service call fee or a trade call fee. The contractor fee is synonymous with an insurance deductible.
Depending on the provider, the fee can range between approximately $40 and $100. Most policies include the clause that if the cost of a repair or replacement is less than the fee, the homeowner pays the lesser amount. A new service fee will apply to each feature or system scheduled for maintenance. For example, if a homeowner’s oven and refrigerator are both faulty, they pay the contractor two separate trade fees. Finally, if repair or replacement costs more than the home warranty contract limit, the homeowner must cover the excess.
Homeowners should analyze the offerings of home warranty companies to understand what out-of-pocket expenses they would be liable for in the event of a claim.