Despite sharing a similar name, home warranties differ greatly to home insurance. The reason why you’ve heard of the latter but perhaps not the former is because home insurance is mandatory by most mortgage companies. This is because of threats to the integrity of the house — fire, theft, weather and such, that the mortgage companies want to ensure that the property retains its value in case they need to repossess it upon failure to meet mortgage repayments. They couldn’t care less about what’s on the inside.
This is where home warranties come in. Whilst it’s rare for most citizens to be dealing with flood damage or the property burning down, we do have to put up with the boiler, HVAC, freezer and garage door breaking. Home warranties fill in this gap, as they propose an insurance-like solution (though it’s appropriate to avoid using the word “insurance”). For around ~$500 per year, you will receive coverage upon any breakdowns when it comes to the home systems and home appliances.
This highlights the other difference between home insurance and warranty. You wouldn’t consider a burglary or fire to be a malfunction. You would call it a travesty instead — often something or someone to blame. Home warranties are a little more benign. They don’t cover such systems or appliances breaking down because someone has attempted to steal it and has broken it, or if you’ve spilled your cup of coffee over it. Instead, they simply cover natural breakdowns. Things coming to an end of their life, or malfunctioning prematurely. This is why the word “warranty” offers more clarity.
How do Home Warranties work?
Home warranties offer such coverage and protection against breakdowns in exchange for monthly or annual premiums. This is usually between $400 and $700, but will usually depend on the extent of your coverage. For example, if you’re only covering appliances, it will be cheaper. On the other hand, you often get the option of extended plans for things like swimming pools which can be added on to your blanket plan.
The next thing to be aware of is the deductible. This is more intuitively known as the call-out fee; the price of getting a technician out on a Wednesday afternoon to fix the dishwasher. This variable cost is used in conjunction with the premium, fixed cost, because it scales with how many claims you put in (i.e. it stops people abusing the system). This is usually around $75 to $125, and some companies such as AHS will actually let you choose between than amount, which will then slightly change the amount of premium (in an inverse relationship, of course).
The other main component to home warranties are the coverage limits. These vary, and often more expensive, comprehensive plans will have higher limits. Generally, they may range from $500 to $4,000. This means that your $2,500 HVAC replacement may not be entirely covered if it exceeds this amount, and thus you pay the difference. Other noteworthy things to take into consideration are the cancellation fees, customer support hours, effective in, time in which a claim must be filed and finally, terms and conditions.
Criticisms of Home Warranties
Home warranties are the center of a lot of bad press. This comes as no real surprise, because it’s a relatively small industry and it hasn’t had a chance yet to be fully regulated to the extent it needs. To put it another bluntly, some states have some catching up to do.
This has led to some inherent flaws to the home warranties model, as well as some terrible customer experiences. There’s been scams of pop-up, fly-by companies making a quick buck, being asset stripped, then going into liquidation. And then there’s been large, well known companies to be unfairly denying claims of the elderly. Let’s start with the latter.
A huge problem with home warranty companies is their freedom to deny claims. Terms and conditions can (and should) be read as much as possible, but the fact is that many are verbose, unclear, or simply not read by the customer. The case that most companies put forward is a narrative of “you didn’t maintain the system correctly”. Meaning, one person (the technician) has had a look at your, say $3,000 air-con system, and has decided that you’ve not been sufficiently maintaining it, so you’re the cause of the breakdown.
This is as frustrating as it is difficult to argue with. Many vulnerable people may not be regularly maintaining their systems, many won’t know how. Either way, this often comes as a surprise for those that get their claim denied. Some where even having their claim denied because the air con system was too old. Right, so what is the point of the home warranty then? To only cover items that are new? That’s called a manufacturer’s warranty. This can and has led to pensioners being stuck in the Southern States of America during the summer, with not enough money to fix their broken A/C system.
Another issue with the model is the deductible. It’s understandable that they want a variable cost, but many are just too high. A $100 deductible can mean that it’s cheaper to get a repairman yourself instead of putting in a claim, if the repair is a minor one. This takes the sole point away from the “one entity, one point of contact” solution that they propose. What good is 24/7 customer support if it costs $100 for an hour repair. This feels like you’re paying the premium only to hire an overpriced technician.
Of course, the opposite is true when the breakdown is major, and you could save thousands. The issue is more that you may find yourself not using your home warranty company when small breakdowns occur. This can hurt though when your coverage limit of $1000 has meant that you had to pay the remaining $1000 for the swimming pool to be fixed, and when the fridge breaks, you pay more than you would have done privately. It seems like they win at both ends of the spectrum.
When it comes to finances, we understand that insurance/warranty companies win in the long run against most of us. That’s not that game we’re playing. The deductibles and the limits aren’t a red line across the logic of getting one, they’re just ways that you may end up extremely frustrated. The core essence of home warranties is to protect you from the worst case scenario. The scenario in which your expensive major systems and appliances breakdown in a cluster, and you have no savings to replace them. It’s knowing you have a single hotline number that will send someone out and fix your problem. That’s why the essence becomes redundant when claims are unfairly being denied. To make matters worse, most companies will not cover you within the first 30 days of signing the contract with them. For the first 30 days, you’re paying but you have no coverage.
Ways to mitigate and overcome the flaws of Home Warranties
As mentioned above, the reliability factor has gone once you’re being unfairly denied claims. The issue is one of foresight. If you didn’t know that the claim would be denied, it’s possible that you haven’t fully read and comprehend the terms and conditions. This is a true pain as they can be long. But length and detail can usually signal credibility. It tends to be the brief, vague terms and conditions that are used by companies looking to get one over on you.
The next issue is that, even if the company is in the wrong, isn’t a legal fight just hassle? This is only going to put off the amount of time until you get your plumbing fixed. Some things you can do to make companies give in before it enters a legal battle is to take notes of who you talk to on customer service and what they say. To quote the terms and conditions. Lastly, you can even write and blog or review about it online, which is truly going after the one they don’t want to happen.
Other than that, your best bet is simply to find an honest company. Whilst it’s easier said than done, you can start by ruling out the smaller companies. These have less of a track record and less credibility. When researching the larger companies, you should be reading online reviews of them to gauge their pros and cons, then read customer experience reviews to gauge how fairly they treat customers on aggregate. It’s also wise to Google the company and look at any bad press they’ve had, and to view their Better Business Bureau rating.
Lastly, look out for companies that have high cancellation fees and long contracts. The last thing you want to do is get tied down to a company that you haven’t had a chance to test out. Instead, stick to rolling contracts where possible, or at least ones with $0 transfer fee and $0 cancellation.
What kind of regulation is there in California
Fortunately for those that live in California, there are a lot of companies to choose from, and there is also adequate regulation in place. It must be stressed that before the purchase of any home warranty contract or home protection service, it must be licensed by the California Department of Insurance.
This is predominantly because of the high standards of becoming licensed. For a company to be licensed in California, they must comply with the right capital reserves, have enough financial assets and net worth, have enough paid-in capital and so on. On top of this, there are strict bookkeeping procedures in place, making quarterly reports on claims and sales mandatory. This is also audited by the Department of Insurance.
This is necessary because home warranties are not sufficiently regulated at a federal level. To operate without a license is illegal, but it doesn’t stop it from happening. They do it because they can’t get approved, and because it’s timely and expensive to apply. Many customers are caught out with this, which puts them in a difficult situation if the company goes under because it hasn’t got enough capital reserves, or perhaps they unfairly deny claims on mass and then fold.
Although licensing is a legal requirement, being a member of the Home Warranty Association of California is not. This members association helps ensure that companies are operating under a strict code of ethics, that clearly state prices, have professional standards of service and so on.
American Home Shield, Buyers Home Warranty, First American Home Buyers Protection, Hisco Home Protection Plan, Continental Home Services and only a few more are HWAC members.
However, despite there being a seemingly adequate amount of regulation in place, it doesn’t stop extremely expensive court cases from happening. In 2013, Emily Diaz went up against First American Home Buyers Protection Corporation in the United States District Court for the Southern District of California.
Emily Diaz put forward the case that First American Home Buyers Protection were refusing to make timely repairs, used poor contractors and were wrongfully denying claims. The court dismissed Diaz’s concealment and unfair competition claims. After denying an offer of judgement from First American Home Buyers Protection, the company then dismissed these claims and indicated the rest are moot. The court agreed, and Emily Diaz was left with a large bill.
This case highlights the difficulty of taking on large corporations in court, which thus renders the regulation less important. Not only do you have to ensure that the amount of money in question is enough to make a costly court case worthwhile (both in terms of time and money), it’s also incredibly difficult to win cases.
The bottom line
Whether home warranties are worth it for the average customer comes down to a few things. Like with all insurances or warranties, you’re likely going to lose in the long run. So, if a customer has plenty of savings to cover themselves in the event of huge breakdowns, then a home warranty 8 times out of 10 is going to be pointless. It would more often than not be cheaper to pay for them yourself. However, this doesn’t mean that individual months or years could generate a lot of savings in isolation by having home warranty coverage. Thus, it is for those that cannot afford those worst-case scenarios. Or simply, they have a strong risk-averse attitude to finances, and so paying a little more in the long run is worth it for mitigating the chances of a ten-digit repair bill by the end of the year.
The difficult decision of whether to have home warranty coverage or not is somewhat less difficult than choosing the company itself. For this, research is key. You can view a list of home warranty companies available in California, and rule out those with substandard reviews. Companies should have a strong track record with customers, limited court cases and bad press, reasonable prices, limits, cancellation fees, and finally, very clear terms and conditions.