The Truth About Home Warranties And Are They Worth It?

When you buy a new home you always have the option of purchasing a home warranty that, theoretically, covers the cost of repairs to various appliances and other home systems. But are these home warranties worth it and what should you be aware of before you actually buy one of these?

Before I get into some of the nuts and bolts behind these home warranty products let me explain that I actually managed the extended warranty program for Circuit City Stores for a period of time and these home warranties are a very similar product. In addition, I've studied the economics of insurance before and home warranties are basically insurance policies. So I know a fair amount about the economics of home warranties.

A Home Warranty Is An Insurance Policy

When you buy a home warranty - and they start around $420 - you are basically buying an insurance policy. The reason this is important to recognize is that insurance companies are in business to make money and that means that they expect to make money on the average policy they sell, which means that on average the people who buy these policies will lose money. Buyers will most likely pay more for the policy than they receive in return over the life of the policy.

Then why would you ever buy an insurance policy? Because you are willing to trade off the certain cost for a very uncertain cost. The insurance company can play the averages game but many consumers cannot or don't want to play that game and they are willing to pay a premium for the certainty. This is especially true as it relates to health care where a catastrophic illness can cost over $1 MM.

But when it comes to home appliances and other systems what is the worst thing that can happen? Maybe you need a new air conditioner or a refrigerator that might cost you a couple of thousand dollars. So for people who can handle that type of expense out of the blue, there is no need for them to buy an insurance policy - they basically "self-insure" from their own savings. But if a new air conditioner would break the bank then you might want to consider getting a home warranty.

How To Beat The Home Warranty Companies At The Averages

There is one advantage that the homebuyer has over the home warranty companies. They know more about what is being insured than the warranty company does and this asymmetrical information allows them to make a better decision about when to buy the warranty than the companies can make about when to sell the warranty. In fact, the companies will pretty much sell a policy on any property to any buyer because they just can't afford to inspect every home before issuing a policy. But a buyer is going to be more likely to buy a policy when they can see that a home has been poorly maintained - e.g. a trashed short sale - and is, therefore, more likely to develop problems. That's what I did when I bought my short sale. I bought a policy from Home Warranty.

This asymmetrical information leads to a problem for the warranty companies called adverse selection - the tendency of these companies to get stuck with bad deals. Consequently, they have to raise their prices to offset this bias, which means that anyone who buys such a warranty on a well-maintained property is overpaying.

Beware The Exclusions

It's important to understand what you are really buying when you get one of these home warranties. The contract is full of fine print which excludes a huge list of situations that you would reasonably expect to be covered such as:

  • Improper installation
  • Plumbing fixtures
  • Whirlpool jets
  • Ejector and sump pumps
  • Doorbells associated with intercom systems
  • Alarm system repairs above $400
  • Security video equipment
  • Central vacuum cleaner repairs above $400
  • The remote components of an automatic garage door opener
  • Ice and water dispenser in a refrigerator. In fact, it's not even clear if they cover the ice maker in the standard policy. I don't think they do.

That's just a small sample of my CoverageInsure Home Warranty contract. The entire list is enormous. But you can buy a higher cost policy that will cover some of these excluded items. Like I said...these guys are in business to make money.

Beware The Pre-Existing Condition

Just like in healthcare these home warranties have pre-existing condition clauses. When you call in a claim they will ask you a series of questions and if your answers indicate that you don't know for sure that this item ever worked properly since you owned the home then they will simply deny the claim. Now you can buy a premium plan that will cover unknown pre-existing conditions but, even then, if they somehow determine that you knew the item wasn't working when you bought the plan they will deny coverage.

Beware The Deductible

Just like in healthcare you have to pay a deductible for every claim made. On my Home Warranty contract, it's a trade call fee of $100.

The Warranty Company Does Not Guarantee All The Work Performed

This one really burned me up. The home warranty companies contract with various repair companies to actually perform the work and they will make sure that your reported problem is ultimately solved. However, apparently, and once again I can only speak from my experience with Home Warranty if the contractor's work directly or indirectly damages your home or appliance you are on your own to work out the issue with the contractor. CoverageInsure will do nothing to help you resolve the issue other than note a complaint in their system for future reference in dealing with the contractor even if CoverageInsure sent out an unqualified contractor in the first place.

For instance, we had a gas leak in our dryer and CoverageInsure sent out Bender's Plumbing of Addison to fix it. They fixed the leak but after they left we discovered that the dryer was no longer venting outside. Bender's Plumbing was dispatched again to fix this problem but incredibly they decided it wasn't their problem. Reluctantly we paid an appliance repair guy $80 to fix it and he explained that when Bender's moved the dryer the vent hose disconnected and was then crushed as the dryer was moved back in place. If Bender's had known what they were doing they would have opened a panel on the front of the dryer to reconnect the hose and pull it out of the way as they slid the dryer back in place.

Bender's initially promised to send me a check for $80 but it never arrived and then they wouldn't return my phone calls. And even though CoverageInsure should never have sent out a plumber to do an appliance repairman's work they refused to help resolve this dispute.

Your Realtor Gets A Commission For The Sale Of A Home Warranty

And this is a lesser concern because it does not involve a lot of money but your realtor does get paid a small commission to sell a home warranty. It's around $70 I think, which is such a small amount that my company rebates it back to our clients to avoid any conflict of interest however small. But you should still be aware of this because some realtors will do anything for a buck.

What to Ask When Choosing a Home Warranty

There are a number of things to know about before getting your first Home Warranty Plan. Here are 10 questions to ask yourself and the provider when comparing your options.

Purchasing a home warranty to cover your major appliances and system components (refrigerator, dishwasher, garage door entry system, HVAC unit, etc.) can be tricky. You have to balance consideration of each warranty's options, premiums, deductibles, terms, and conditions. At the end of the day, what you really want is some assurance that, in times of need, you and your family will remain safe, comfortable and suffer the least amount of inconvenience.

What should you look for in a home warranty? There is no simple answer, and there is no one-size-fits-all home warranty solution. As with all your other investments, one of the best things you can do for yourself is to enter negotiations as well-prepared as possible. So we’ve assembled this checklist of questions to ask before you commit to a home warranty agreement to help you better understand your needs, your expectations, your reservations, and your own attitudes towards what makes a house a home.

1. How much wear and tear do your appliances already have?

Appliances exist for one reason: to make our lives easier and that means taking on the dirty work (literally, in the case of a dishwasher or washing machine). Some of us use them harder than others and age can add up over the years, but as long as you use your appliances according to manufacturer's instructions, a home warranty can help you keep your machines running without worrying about unexpected repair or replacement costs. Should your appliance's or system's major components break down due to your normal use, a home warranty can be there to help cover the costs to get back in working condition.

2. Do you plan on upgrading or replacing your appliances any time soon, even though they are still functioning?

New appliances and systems come with manufacturer's warranties which are great protection, however, they run out and are unit specific. A home warranty can provide more of an umbrella of protection for your home to cover multiple appliances and systems. Plus, some companies, CoverageInsure, for example, provide programs such as the Appliance Discount Program that can save you money on the purchase of brand new, brand-name appliances.

3. Are you aware of any pre-existing conditions or problems with your appliances that have gone unaddressed?

Home warranty companies want to help you keep your home in working order but there may be some limitations when it comes to addressing certain pre-existing conditions. Check with your potential provider.

4. Are there any essential components on your appliances (e.g., your refrigerator’s ice-maker; your HVAC system’s ductwork) that may not be covered by a particular warranty?

Today's appliances are amazingly complex machines with evolving pieces and parts. However, they still basically rely upon essential core parts to perform their necessary duties. Those components are what require protection and often can be most expensive to repair. Your home warranty should cover these core components.

5. How does a particular warranty complement or supplement your existing homeowner's insurance policy?

Home insurance is great protection for your home for what MIGHT happen (fire, flood, natural disaster, etc.). However, what about protection for things that WILL happen? For example, your air conditioner condenser finally giving out or your clothes dryer refusing to dry your clothes. Having a home warranty plan to work side-by-side with your home insurance can greatly help your home remain a comfortable and happy place.

6. Will a specific home warranty policy help you pay for routine preventative maintenance of your major appliances?

A home warranty may not cover your routine preventative maintenance, however, they may penalize you for NOT taking that action. American Home Shield will not do that. We understand you're busy and that time gets away from you. That's why we can help cover you when your major system and appliance components break down from normal use.

7. Will a specific home warranty policy help you to pay for significant cosmetic damage to your major appliances?

Home warranties are designed to cover parts and components that are designed to wear down from normal wear and tear. If that normal use causes cosmetic damage, you should be covered. However, if an overly excited family member causes damage to your dishwasher door, for example, you will not be covered.

8. Are any repairs, services or appliances too minor (e.g. your microwave oven) to be covered by a specific warranty?

It all depends on your provider and your contract. An CoverageInsure Home Warranty Plan, for example, covers every part of your refrigerator. Other companies may exclude coverage for a dozen or more parts. 

9. What is the upper limit for repairs and replacement that the warranty will cover?

This depends on your prospective provider, but AHS offers some of the most competitive levels of coverage. In some cases, CoverageInsure provides twice or even five times as much in terms of replacement coverage.

10. When can you make a claim with your prospective warranty provider?

You may currently have appliances in need of repair. Most companies may make you wait 30-60 days before you are able to submit a service request. 

So, which home warranty combines the best reputation, the greatest expertise, and the most satisfactory customer service?

That warranty is the one that can be of the most benefit to you when the time comes for you to maximize your home’s equity. And American Home Shield is confident that the home warranties we offer are world-class in that regard. As the home warranty industry creator and leader, we are proud to offer the best, most comprehensive and award-winning home warranty plans. Learn more about CoverageInsure Home Warranty Plans and get a quote today.

6 Holiday Headaches You Can Control with Home Warranty

The holidays can be both joyous and stressful. With a home warranty, unexpected repairs can be fixed by reliable technicians. Save yourself a headache!

While many of us look forward to the holiday season all year, it can also be a time of great stress. In between all that cookie-baking and gift-buying, it can be challenging to get someone to fix your broken dishwasher or HVAC system. Fortunately, there’s a solution for any unexpected breakdowns that might put a damper on your holiday spirit: a home warranty plan.

home warranty is an excellent way to protect your home from unforeseen and unexpected expenses. The Home Warranty Plan is a one-year service contract for the repair or replacement of covered home system components and appliances that typically break down over time.

Take a look at these five common holiday season headaches that can be easily managed with an Home Warranty Plan.

1. Finding reliable help around the holidays

It can be just as challenging to find reliable home-repair help during the busy holiday season as it is to get that Thanksgiving turkey just right. With a home warranty plan, you’ll have access to industry-leading expertise 24 hours a day, 7 days a week, 365 days a year. CoverageInsure will find the right licensed personnel and eliminate the need for you to locate qualified help during the busy days leading up to and during the holidays.

2.Unforeseen expenses 

Repairing something as major as your home heating system could cost you thousands of dollars. Such a huge expense can be stressful at a time when you’re already spending money on gifts, food, decorations and other miscellaneous holiday expenses. But with a home warranty, you’ll only need to pay the monthly fee along with a trade service call fee, which is a fixed amount that's easy to plan for.

3. Dealing with insurance companies

With a warranty plan, you can skip the whole process of filing claims and deal with insurance, and spend that precious time shopping, wrapping gifts, cooking delicious meals, or decorating your home with family and friends.

4. Playing host with a broken appliance

A broken dishwasher or refrigerator can really put a damper on your holiday festivities. A home warranty plan offers an expedited repair process on covered items. You no longer have to worry about a crisis caused by appliance or system breakdowns at a time when your house is swarming with guests.

5. Paying the full cost of repair or replacement

In the event of a breakdown, insurance usually reimburses the value of the item minus depreciation. This means you will not be reimbursed the full amount paid at the time of purchase. With a warranty plan, you won’t have to pay for the actual repair or replacement of covered items, and your contract will cover repair or replacement of covered items regardless of age, make or model.

6. Not enough time to coordinate home repairs

Finding reliable help that suits your budget, following up and replacing parts all involve a considerable time investment. Since the costs associated with repair and replacement are so high, it is not possible to skimp on the research and effort needed to get a satisfactory solution. A warranty plan will save you time when you need it the most this busy holiday season.