 Personal Finance PowerPoint Presentation Home Warranties Get ready to get financially fit by practicing personal finance. Most of this information can be found at Investopedia where you can go and take a look at more references, resources, continue your research from there. We're looking at the Professor of Insurance Law Ways In on Home Warranties by Jim Frabasco updated February 21st, 2022. A home warranty is a type of service contract that helps pay to repair or replace appliances or systems that break down in your home. These contracts are often more complicated than they sound and, according to our experts, sometimes duplicate coverage you already have, so some of the coverage could be redundant in some cases. Investopedia spoke exclusively with home warranty expert and American General Insurance Associate Professor of Insurance Law at Florida State University, Chad Martson, on the topic. So, Investopedia asking the question, what's a home warranty and what are the kinds of things it covers? Answer, a home warranty is viewed as a service contract. That's an obligation on outside entity undertakes to provide a service or a contractor for service if a covered appliance or system malfunctions fails or breaks down. A typical home warranty or a service contract is going to cover many of the systems and appliances in the home. Things like your water and electric lines, air conditioning system, refrigerator, washer and dryer, and dishwasher. So these are more of the appliances, obviously some of the more expensive types of things in the home, in the event that there's a problem with them. So things outside of main appliances may require an additional fee from the company. Some individuals try to cover things like pool awnings or pool enclosures or a lawn sprinkler system. There may be optional coverage available for those items. So Investopedia asking, what about utilities coming into the house or within the house that are not owned by the utility company? Does that fall under the home warranty? Answer, many home warranty companies in addition to providing coverage for covered appliances will also cover systems associated with the home as well. Some home warranty companies will provide system coverage for systems such as the air conditioning and heating systems, electrical systems and plumbing. However, a consumer should review the coverage for these systems carefully as they only cover certain aspects of the system and often include exceptions. Some home warranty plans combine coverage for systems and appliances and with others they are separate. So we asked the question or Investopedia asks, so how do you distinguish between home warranty coverage and homeowners insurance coverage? So here's where we could have some distinguishings between the two coverages and possibly some overlap that we would want to keep in mind. Answer, homeowners insurance coverage traditionally is going to cover things like liability. If someone comes on your premises, for instance, and is injured, homeowners insurance would cover that. A home warranty would not cover something like that. Homeowners insurance companies are regulated by various state departments of insurance. Next question, speaking of which, who regulates home warranty? So what's the regulation process? Answer, that tends to vary from state to state. In Florida, for instance, home warranties are regulated by the state insurance department. In some states, they are regulated by other state governmental entities or along the line of real estate transactions. In that case, they would be subject to a lot of the state's real estate laws. In Florida, home warranty companies must have a license to do business there. They must keep a certain amount of money and reserve for claims payouts. There are protections for consumers and companies that are treated similarly to homeowners insurance companies in the regulatory regard. But they are certainly different products because they're much more limited in scope. Investopedia asking, you provided a list of appliances and systems that are covered assuming the more things covered, the more expensive the policy. What are the most important things people should cover with a home warranty? So if you had a home warranty and you have a larger list of things on the home warranty, you would presume the cost would be higher for it. And so what would be the core things that you would want on it? Answer, the most important things for the average consumer would be the highest value items in the home. So clearly that would make sense, the highest value items in the homes, the things you'd want to cover. For instance, the air conditioning or heating system that would be the bigger item because obviously replacing or doing something to that would cost money most likely. Those typically are going to cost several thousand dollars to replace, if not more depending on the system and whether it's split or one unit. Many companies provide service plans and warranties. It becomes important especially for the homeowner who has an older unit that may not be covered by a service plan to purchase a warranty. Asking the question, do you need a home warranty when buying a new home? Answer, if it's a brand new home with new appliances, then certainly the need is not as pressing as with a pre-owned home. So he's saying basically if you got the brand new stuff in there then you might not need it as much in that case. So typically sellers will include home warranties coverage for an incoming buyer at least for one year because it provides that buyer peace of mind. In many cases the seller will include this or a realtor will include it as a sweetener. Investopedia asking, do you have a ballpark idea of what a home warranty costs? Answer, how much does it cost? Home warranties can cost several hundred dollars a year. Pricing could range anywhere from four hundred dollars to eight hundred dollars a year or more depending on what type of coverage is being bought. In addition to the annual cost of the home warranty there will usually be a service call fee. Every time the homeowner calls the company for service let's say they have a heating system that needs to be looked at the home warranty company will charge a service call fee. It might be that a homeowner pays five hundred dollars for their annual warranty but every time they call the company for someone to come out it's going to cost anywhere from fifty dollars to one hundred dollars. That cost will vary from company to company. Investopedia asking, are home warranties a good idea? Are they worth the cost that a homeowner would pay? Answer, you know this varies from situation to situation if an individual has the funds to self-insure their appliances then a home warranty may not necessarily be as pressing as the situation where maybe you are on a really tight budget and anticipate that an appliance may be in the last year or two or three running. So he's basically saying if you could do your own kind of insurance that could possibly be the way to go. But if you're not able to do that and you're thinking that these critical appliances that you're going to need are not running at capacity then it might be worth the warranty. That's what he's kind of gearing towards here it looks like to me. So that might be more worth it for the consumer to get a home warranty to provide peace of mind. So the issue of the home warranties is a question of your risk tolerance for large expenses. So obviously the warranties covering those larger appliance items and the heating and so on. And if you're saying hey look I think the heating is looking old at the heating or the air conditioning. I'm living in an area that I would not be able to tolerate it. Possibly if the heating or air conditioning went out and I don't have the funds to self-insure. I can't basically get the cash flow for that now. So maybe in those cases he's saying the warranty might be more likely. Some homeowners avoid home warranties altogether and save the money they would have paid out instead to anticipate a future repair. So it might be it sounds like he's kind of leaning towards in my opinion. It sounds like he's kind of leaning towards being able to self-insure if possible. Meaning putting it putting away the funds to be able to to take care of the kind of large ticket items that may come up from time to time if possible. So asking the question do warranties typically come with an annual or lifetime limit in terms of how much they'll pay. Answer yes some warranties will come with a limitation on liability provision. A limitation of liability is a provision in the contract which states that the company is obligated to pay only up to a certain dollar amount per year. So there could be limits on on you know obviously the pay. So I have reviewed some of these provisions very simple provisions in a law review article two or three years ago. In some cases this limitation may be one thousand five hundred dollars in various from company to company. But that is something a consumer should take a close look at or ask the company if they're thinking about buying a home warranty. Asking the question what are some other problems and answer. There are situations where the consumer claim where the consumers claim may be denied and denials are a concern for a lot of consumers. So clearly one of the most frustrating things with insurance is if you have insurance you think something's covered you make a claim. And then the claims and then the claims denied. So these denials could be based on any number of things. But the most common things include the policy holder not having adequate paperwork for the maintenance of the appliance. Keep records for all the services that have been conducted including annual maintenance. Otherwise improper maintenance might be asserted as a basis for the denial. And that's always kind of frustrating. They're going to say you know you didn't you didn't service it properly or whatnot. And so you know that could be a denial there and that would be a problem. So sometimes companies won't cover an appliance that has rust or corrosion. Another issue can occur when the homeowner doesn't get a choice on the contractor that comes out to review or inspect the appliance. Speed of service can be another problem. Companies do try to get a contractor out to the home right away. But service delays are not uncommon. Investopedia asking is there typically a waiting period for home warranty coverage. Answer it depends on the situation. If you get a warranty as part of a real estate contract the waiting period might be waived. Otherwise a 30 day waiting period would not be unusual. Some companies will provide coverage right away. When you purchase a home warranty you must warrant that the appliances being covered are all working correctly and have no issues. If you lie that can be considered insurance fraud. It's just like fraud with homeowners insurance. So clearly there's going to be a process in order to get the insurance because they have to check that the items are up to par and so on to be covered. If one's warranty that something is working and it doesn't work that would be fraud. So if you're saying hey I'm trying to cover this heating system or something and it doesn't work and your warranty is to ward against it breaking then of course that's a problem. You lied and lying is fraud intentional attempt to deceive typically. So Investopedia asking so to sum up what are some of the most important pros and cons of home warranties. Answer one important pro is peace of mind. A home warranty contract provides peace of mind. So clearly if you if you're feeling like OK if something breaks down here I'm covered for it. I'm not I'm not going to have to live in a sweltering hot home if the air goes out or something like that. Even though the warranties are not insurance like traditional homeowners insurance they do work a lock like insurance. Some of the cons we mentioned earlier the limitation on liability and the possibility of a claim denial. All those things would be the negatives. So asking the question are there any alternatives to buying a home warranty contract. One thing is to self ensure. So obviously the answer here would be if you don't want the warranty contract and maybe you need to save up and have the have the funds available in the event of an emergency or a break breakage of a critical larger dollar amount item as you might do for example for the purchase of a large thing like a car. You might have a fund saying hey I know the car is going to crack down at some point. I'm going to save up and when it does you know I'll be ready for that. So one thing is to self ensure another alternative may be to check in with your homeowners insurance company to see if they offer what's called a mechanical breakdown endorsement. You may be able to get an endorsement on your homeowners policy to cover an AC breakdown for example. But of course that would be an added cost. Typical things that are covered with equipment breakdown coverage would be major appliances like the AC and furnaces. Asking the question what should homeowners or consumers consider when buying their home warranty coverage and answer certainly the condition of one's appliances. So clearly you know you got like one of my clients is look my appliances look like they're looking like they're going to be they're going to go. They're going to crack down or they brand new appliances that likely are going to be lasting barring any kind of unusual circumstance. Again it's a question of your risk tolerance risk tolerance coming into play. How comfortable are you you know with risk going into the future and that could vary depending on your preparation or other forms of preparation. If you can get equipment breakdown coverage through homeowners insurance at a low cost that may be more cost effective for some homeowners rather than a home warranty. There are some situations where the appliances may be already covered by an existing parts warranty. So in those instances if it's a if it's a newer kind of thing it might already be covered by the parts warranty and then it would be somewhat redundant to have another warranty on it. Home warranties will only cover working appliances. If the appliances are not working they would be excluded. So clearly if you're saying hey I need to get a warranty to cover help me out to pay for this thing that's broken. Well that's not going to you know that's not going to work. It's got to work to get the warranty typically otherwise it's lying about. So invest asking the question who provides consumer protection especially when the state does not include home warranties under the insurance commission. Answer. There have been instances in the past where state attorneys general have investigated allegations of unfair and deceptive practices in association with the warranties. Some statutes do protect consumers in most states. They fall under unfair and deceptive practices. The UDAAP laws if a company engages in widespread claim denials without an adequate basis that would be subject to a UDAAP claim. Other avenues include reaching out to your state attorney general the consumer protection division or the consumer financial protection bureau the CFBP. Hiring an attorney can be a problem since the cost of an attorney may vastly exceed the cost of the claim. So that's kind of the deal with anything right. You could always you could always sue but but obviously the cost of hiring the attorney can be absorbent. And you know it means that some other kind of issues dealing with dealing with with that avenue. So how warranty claims tend to be smaller as opposed to traditional insurance. Hope warranty claims tend to be smaller as opposed to traditional insurance. That's why there are remedies through the attorney general's office and the state consumer protection authority. Another remedy of consumers may may have if they feel wronged is to pursue small claims court. So the small claims court being designed as a way to you know to remedy certain certain claims possibly in a less costly fashion than the the normal route. Depending on the state the consumer may be able to represent themselves and small claims court. So you can kind of forego the attorney possibly possibly a less formal kind of structure or setting in that case which would be less costly. And asking the question in these cases except potentially small claims court. Does a consumer need to have legal representation or can you file a complaint without legal representation. Answer with things like the attorney's general those complaints could be prepared by an attorney or come from the individual directly in a court case. Whether it's small claims course or otherwise it's wise to seek legal counsel in all situations. If you have a claim you should seek a counsel with an attorney before filing a claim. So the attorney can clearly be helpful in filing the proper claim and jumping through the proper hurdles and whatnot. So asking the question just to just to make sure we are we are separating the two one involving seeking counsel and going to an attorney for advice. So the second involves having the attorney in court with you and answer with small claims. It's wise to seek counsel even before going through the small claims route because an attorney may very well handle it in small claims which would be nice. Asking the question you're written a couple law review articles on home warranties issues in terms of helping the average consumer. What are some things they can do. Answer compare pricing on different plans so clearly we can do some comparison shopping. Check out the better business bureau rating for the company. How is the company seeking for consumers conduct research online to get a sense of how the company's customer feel about the product. So you can get the reviews which is a lot more readable these days with the online and the Internet and so on. Do your due diligence whether it's the best better business bureau or online research or asking questions of the company. What does this contract cover in quote. Is there a limitation of liability. These types of questions are important. Asking the question finally is there anything missing from our conversation about home warranties. Answer I think in general a good tip for homeowners is to keep records. Keep records on both appliances and systems track any warranties that may still be in force. So basically anything anything happens. Clearly you're going to have to provide the documentation so you would like to be able to do that in any event. So any of these big ticket items that we have it'd be good to have good representation and records of them. If purchased with a credit card check to see if you received an additional year warranty from the credit card company. Consider alternatives such as homeowners insurance endorsements or self insurance.