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Home Warranty

DEFINITION of 'Home Warranty' A residential service contract undertaken by a home owner that covers the cost of maintaining household systems or appliances. A home warranty provides coverage for a set period of time and varies from state to state and company to company. A home warranty is not the same thing as a home insurance. BREAKING DOWN 'Home Warranty' When an individual purchases a home, s/he may not be privy to how well the previous owners maintained and managed the components of the home. Information on how old the household appliances are or their useful life in years may not be provided at the time of purchase. Also, the search for an efficient handyman or service provider may prove to be time consuming for the home owner. Limited time, coupled with the high costs associated with paying for damages or replacements on multiple components of the home, are the two main reasons that home buyers are usually encouraged to purchase a home warranty. Appliances and systems like air conditioners, furnaces, washers and dryers, stoves, refrigerators, plumbing systems, electrical systems, door bells, water heaters, etc. are normally covered under a home warranty plan. It is imperative to read the fine print of a warranty document to understand what is and isn’t covered. While some warranties may cover garage door openers as part of the basic coverage plan, others may require additional premium to be paid to cover these appliances. Although it is possible to purchase additional coverage for a home feature not available under a basic coverage, it is also likely that some warranty companies don’t cover certain components of a home. For example, some home warranty companies may cover an outdoor pool for an additional cost to the policy, other companies may not have a pool warranty in their list of offerings. When an appliance or system is damaged, the homeowner calls the home warranty provider. The warranty company is usually in liaison with one or more home service providers such as plumbing companies or electrical contractors. After receiving the call from the homeowner, the warranty company would request the services of one of the service companies it partners with. The service company sends out one of its professionals to the home to access the damage. The assessment report made out by the contractor and sent to the warranty company reveals the extent of damage to the appliance and what could have caused the damage. The home warranty company confirms if the appliance or system is covered in the policyholder’s contract and also confirms whether the cause of damage is applicable for coverage. If approved, the contractor receives the go-ahead to fix or replace the system. Otherwise, the home owner’s claim is denied. A homeowner’s claim can be denied for several reasons. If the damage occurred and was known before the start date of the coverage, the warranty company may deny the homeowner’s claim. For this reason, if a home inspection done prior to purchase reveals some faults with some systems in the home, the prospective buyer should have the seller fix it before completing purchase. Also, household components that have been poorly maintained, improperly installed, or misused will not be covered by a warranty company. A home warranty can be purchased by the home builder, home seller or real estate agent, or home owner. Some home builders offer warranty policies for newly built homes that typically cover up to ten years of structural defects like flooring, walls, roofs, etc.; two years of electrical and plumbing systems; and six months of household appliances. The cost of this type of policy is usually included in the price of the new house. For houses that are not newly built, the seller or agent may pay for the warranty to incentivize a buyer to purchase the home. These warranties normally cover a year of household systems and appliances maintenance. After a year, the home owner has the option of renewing the contract with the home warranty company. The cost of coverage for a home warranty generally ranges from $300 to $600 annually depending on the home owner’s state of residence or the type of warranty contract purchased. In addition to this annual premium, home owners usually pay a service fee which is synonymous to an insurance deductible. This fee is called a service call fee or trade call fee and is paid to the contractors that are sent out to assess the damage to a household system. The fee is usually the lesser of approximately $100 or the cost of repair and applies to each feature or system that is assessed for damages. For example, if a homeowner’s oven and refrigerator are both faulty, s/he’ll have to pay the contractor two separate trade fees. Finally, if the repair or replacement costs more than the contract limit, the homeowner may be required to cover the excess. Home owners should endeavor to analyze the offerings of home warranty companies so as to understand what out-of-pocket costs they would be liable for in the event of a claim. While a home warranty may bear a semblance to home insurance in terms of premiums, deductibles, claims, and liabilities, both 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. Read more: Home Warranty Definition | Investopedia Follow us: Investopedia on Facebook

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