Buying a home is generally the biggest investment that most people are likely to make. But with the excitement of buying a home, does anyone ever consider the costs of repairs? Probably not. Both a Home Warranty Policy and a Homeowner’s Insurance Policy can operate to protect the cost of some home repairs, but it is important to know the difference in these two policies.
Home Warranties: What is a Home Warranty Policy?1 First, a Home Warranty Policy is neither a legal warranty—such as a manufacturer’s warranty—nor insurance that protects from a covered loss. Rather, it is a residential service contract paid upfront annually that saves money for future repairs or replacement costs of appliances if they break or become unusable due to mechanical failure or fail from normal wear and tear.2 A Home Warranty Policy typically includes coverage for clothes washers and dryers, ovens, refrigerators, microwave ovens, dishwashers, garbage disposals, trash compactors, and heating and/or cooling systems, to name a few.3 Unlike a Homeowner’s Insurance Policy, they are purely elective and not required by the bank if you have a mortgage. A Home Warranty Policy is also different from a manufacturer’s warranty which covers a specific appliance from the time of purchase/installation to a set expiration date.4 For example, if a pipe burst, causing water damage to a refrigerator motor, a Homeowner’s Insurance Policy would cover it—a Home Warranty Policy would not. But if a refrigerator just stopped working independent of any other larger occurrence due to a parts malfunction, a Home Warranty Policy would cover it or a manufacturer’s warranty might cover it depending on when it happens.5
A Home Warranty Policy can be purchased at any time; however, in recent years, they have been frequently offered as an incentive to potential home purchasers and, more often than not, to potential purchasers of older homes with older appliances.6 They are not offered by a real estate agent but rather, are suggested by real estate agents to the selling homeowners to purchase and include as an incentive for a sale. Another pitch by real estate agents to sellers for their purchase of a Home Warranty, is to protect sellers if an appliance or system breaks down after the sale to help reduce the seller’s chances of being sued by the new owners.
A Home Warranty Policy, at times, has an overall limit set, where anything in the contract is covered up to a certain set amount. When payment reaches that set amount, the company will stop paying for any repairs or replacements.7 Renewals are yearly and typically cost about $300-$600 a year for a basic plan.8 Add-on coverage such as for pools and spa equipment, water heaters, and fans, raises the cost. Additionally, the majority of Home Warranty Policies still include a service fee charge of $50.00 to $75.00 for each service job.
Home Warranty Policies do not cover regular seasonal maintenance of appliances, and claims, in fact, are denied if the system or appliance is “not maintained properly” (whatever that phrase may mean, which generally, is not defined in the policy). Some Home Warranties will not cover an item that is over ten years old9 and some only cover certain component parts in a broken system or appliance but not the whole system or appliance or damage caused by the broken system or appliance. Nevertheless, one appeal for buying a Home Warranty Policy is its simplicity of calling one number and then letting the Home Warranty Company take care of everything else such as deciding on the repair company and arranging a service date. It also is an appealable option for those homeowners that do not have a handy man around the house.
Regulation of Home Warranty Policies differ from state to state but are usually regulated by consumer regulation commissions, the attorney general’s office or, as in Texas, by the Texas Real Estate Commission.10 A Home Warranty Company is required to be licensed by the Texas Real Estate Commission and their current web site shows about 50-plus licensed Residential Service or Home Warranty Companies in Texas.11
Homeowner’s Insurance Policies: If you have a mortgage, a Homeowner’s Insurance Policy is required to protect the bank’s investment and are often paid through an escrow account. A Homeowner’s Insurance Policy covers a loss to a home and property thereon as a result of an unexpected event such as a fire, a natural disaster, a wind/hailstorm, a hurricane or tornado, or theft. A Homeowner’s Insurance Policy protects a home’s exterior, interior, contents/personal property, and damage to other structures located on the property. They can cost anywhere from $1,200.00 upward annually and always contain a deductible amount that has to be paid when a claim is filed, and coverage is found. They do not cover the repair of appliances or household systems due to mechanical failure or normal wear and tear. Rather, there must be a natural disaster that causes the damage.
Typically, however, a Homeowner’s Insurance Policy which covers contents of a home would include replacement or repair of damaged electrical plug-in appliances caused by a covered event like a flood, fire, or storm. This type of coverage is found in the personal property section of a policy. Coverage for devices that are built-in such as furnaces or central air conditioning systems that are damaged by a covered event, are found in the dwelling coverage section of a policy. Absent a covered event, a Homeowner’s Insurance Policy, unlike a Home Warranty Policy, does not cover appliances with maintenance issues or regular wear and tear problems. In fact, a Homeowner’s Policy generally has an exclusion regarding wear and tear. Homeowner’s Insurance Policies are regulated in Texas by the Texas Department of Insurance.
Take-Aways: An Annual Home Warranty Policy is not insurance, not a manufacturer’s warranty, and they are not a substitute for a Homeowner’s Insurance Policy. A Home Warranty Policy covers appliances and heating and cooling systems that have a mechanical failure or fail from normal wear and tear. They may cover only certain failing component parts rather than the whole system. They are an elective choice and can be purchased at any time but also can be part of a seller’s closing at the time a home is purchased and then renewed annually by a new homeowner. They are regulated in Texas by the Texas Real Estate Commission.
A Homeowner’s Insurance Policy is required if there is a mortgage for the purchase of a home. They cover exterior and interior damage and contents to a home including appliances and heating/cooling systems caused by a covered event such as a windstorm, fire, theft, or other natural disaster. They are more expensive than a Home Warranty Policy and are regulated by the Texas Department of Insurance.
As with all contracts, the most important thing to remember when purchasing either a Home Warranty Policy or a Homeowner’s Insurance Policy is to read the policy before signing it.
1 Other terms for this type of contract include: “Residential Service Contract,” “Appliance Warranty Plan,” and “Home-Owners Warranty”
2 See “Home Warranty,” https://en.wikipedia.org at *1.
4 See “Home Warranty Guide for Home Buyers,” Lena Katz, December 18, 2019, https://www.fool.com/millionacres/real-estate-basics
5 Id. at *2.
6 See “Home Service Warranties—Choosing a Home Warranty Provider,” July 5, 2012, http://www.bbb.org/houston
7 See “Home Warranty at 2.
8 See “Why Home Warranties Are No Guarantee”, Angie’s List, November 9, 2016, https://www.angieslist.com
9 Home Warranty Guide for Home Buyers,” at *4.
10 See http://www.trec.texas.gov