Home Warranty vs. Home Insurance

Buying a home can be both a rewarding and frightening prospect. Making your final choice, the commitment to that choice, the seemingly never-ending phone calls and emails with your mortgage company, and probably your first experience with shopping for lender-mandated homeowners insurance can make even the most even-keeled personality want to hide in the coat closet. The good news, at least as it relates to homeowners insurance, is that it is easier than ever to shop online, compare quotes, and find an agent you feel can help you develop a homeowners insurance policy that is right for you. Please note the intentional non-mention of the words home warranty.

What a Homeowners Policy Covers

Investopedia, the financial education website, defines homeowners insurance in part as: “a form of property insurance designed to protect an individual’s home against damages to the house itself, or to possessions in the home.” So while homeowners insurance does cover your belongings, including appliances, heat and air units, and the like, it only insures these items in the case of covered events as listed in your policy. Normal wear and tear, however, is never a covered event. That’s where the home warranty proffers come into play.

What a Home Warranty Plan Covers

The guy on TV talking you into calling the 1-800 number offers the peace of mind that comes with a home warranty, promising a variety of plans to fit your needs and budget. In reality, these plans act more like service contracts, and they operate much like regular insurance with regards to payment. Customers pay an agreed-upon amount at an agreed-upon time for the service plan, similar to an insurance premium. This fee can range anywhere from $300 to $600 a year. In return, the home warranty company promises to repair or replace appliances or other equipment listed in the plan that breaks down due to normal wear and tear. So far, so good.

How a Home Warranty Plan Works

On the surface, it seems pretty straightforward. Something breaks. The customer alerts the home warranty company. The home warranty company dispatches a technician to make repairs or replace the item in question. However, these companies rarely have their own technicians and instead hire independent contractors. Unfortunately, as several court cases have uncovered, these technicians are not always licensed, the warranty company might not have any technicians in your area, and customers might have to pay an additional “per-call trade service fee” of up to $100 dollars – even if the company decides not to repair or replace your item. And not repairing or replacing the broken item seems to be the rule, not the exception.

Bottom Line

Buyer beware. Many home warranty companies have been and continue to be fined for misleading and false advertising, denying homeowners legitimate claims, and continuing to bill customers after services have been canceled. So when the direct mail marketing finds you and tries to scare you into believing the insurance on your new home is running out, shred it. If concerns still linger, call your insurance agent. That’s where the real peace of mind is.

Investopedia Link: http://www.investopedia.com/terms/h/homeowners-insurance.asp

2009 Court Case: http://www.ag.ny.gov/press-release/attorney-general-cuomo-announces-court-victory-against-national-home-protection-inc

2015 Court Case: http://nj.gov/oag/newsreleases15/pr20150615b.html