HEDGING AGAINST Home Breakdowns : Warranty Contracts Protect the Owner From Unexpected Bills When Systems Fail
When the season’s first heat wave hit the Southland and Anita Goldstein turned on her central air conditioning, nothing happened. Instead of sitting comfortably in her Northridge home, Goldstein sat perspiring.
Most homeowners would grab the Yellow Pages and call repairmen until they found one who would come out quickly and at a price they could afford. Goldstein made one call--to her home warranty company--First American Home Buyers Protection Corp.
“They had someone down here the following day,” Goldstein said. “Because it was the compressor, and a large job, First American called me to say they would have to send someone down for a second opinion. The second contractor was out here the same day, and agreed with the first company.”
The estimate for a new compressor, parts and labor: $1,200 to $1,400. Goldstein’s cost: $35. First American paid the balance of her repair bill.
When Goldstein bought the 10-year-old home last year, she also bought a home warranty contract from First American.
“I had used First American in my other house,” Goldstein said. “When I came over here, I bought the same thing. I’m not presented with a bill; I just pay a $35 service call fee.”
A home warranty contract is a one-year services contract that protects the homeowner against unexpected repair bills due to mechanical failures or breakdowns in the major working systems of a home.
The major components generally include central heating, plumbing, water heater, electrical system, ducts, and built-in appliances such as dishwasher, oven and range, microwave, trash compactor and garbage disposal.
A home warranty contract should not be confused with a homeowner’s insurance policy. Nor should home warranty contracts be equated to a new-home warranty.
This type of contract does not cover structural flaws or damage. “People ask me what warranty contracts cover, and I say anything that moves,” said Garry Hagen of Re/Max Realtors of Valencia Inc. “It usually doesn’t cover the roof or cracks in the drywall or stucco. I make it perfectly clear that it covers strictly functional items--systems and appliances.”
More and more California home sales include home warranty contracts. Ten years ago only 10% of the homes sold in California were covered by such contracts; five years ago, 25% had contracts. Last year, about 243,240 home warranty contracts were sold--54% of the existing homes sold.
Thirteen companies are licensed to sell home warranty contracts in the state (see accompanying list). Eight of the companies are members of the Home Warranty Assn. of California (HWAC), an industry trade group established in 1985.
“I think that they (home warranty contracts) are a good thing to have . . . because they help the seller, especially in older homes,” said Lillian Snyder of Century 21 Newhall Valencia Realty Inc.
“They give the buyer more confidence, and the price isn’t bad. All of my home sales have had them. They seem to give buyers a feeling of security, and it’s good protection for realtors because we are liable too.”
Real estate agent Hagen agrees, saying, “I think this is one form of insurance that is very reasonable and well worth the cost--about $250 here.”
The cost of one year’s basic coverage for a home with 4,000 or less square feet is between $200 and $300; but the total cost for coverage can exceed $500 depending upon the optional coverage selected.
Optional coverage varies with each company, but usually includes electrical air conditioning systems, pools, spas, roofs, and other appliances such as washers, dryers and refrigerators.
There is also another type of protection available, for what the industry calls “unknown conditions.”
“Let’s say that your furnace has a cracked firebox, and nobody knows it; nobody has seen it,” said First American President Philip Branson. “That’s a very good unknown condition, and very expensive when it occurs. Maybe your dishwasher is rusting up from the bottom. You don’t know that--who looks underneath their dishwasher?”
“Unknown” coverage is included in some basic warranty contracts, but is considered optional at other companies.
When a covered system breaks down, the homeowner contacts the warranty company, usually on a toll-free number, to report the problem. The warranty company provides a contractor who schedules the service call with the homeowner.
The contract holder pays a predetermined flat rate for service calls, usually between $25 and $50, regardless of the actual repair or replacement cost of the covered item during the term of the contract.
Depending upon the contract, a homeowner may have to pay for the service call even if the item is not repaired due to its being a part of a system that is not covered, or because the malfunction is determined to be the result of a pre-existing condition.
In August, 1989, Carol Cox bought two adjoining townhouses in Carlsbad. She lives in one and rents the other. At her realtor’s recommendation, she purchased home warranty contracts on both units.
Although most homeowners purchase contracts for only the first year of ownership, contracts may be renewed indefinitely. When the original contracts expired on the townhouses, Cox renewed the coverage for an additional year.
“I live alone and don’t have the necessary skills to repair things that break down,” she said. “I felt it was a handy item to have.
“Recently, when I was checking the adjoining unit after my tenants left, I discovered the water heater was leaking. I went next-door and discovered mine was leaking too. I called the warranty company and was amazed at how quickly they responded. The same day I called, they came out, and by evening, two new water heaters were installed.”
With her home warranty contracts, Cox paid only $70--the charge for two service calls--to replace two water heaters-- in contrast to an average replacement cost of $375 per unit.
The home warranty industry is relatively new in California. Born during the real estate boom period of the 1970s, dozens of home warranty companies jumped into the market; some of those companies exited as quickly.
In its infancy, the industry was unregulated, but the Home Protection Act of 1979 put it under the jurisdiction of the state’s Department of Insurance. To sell home warranty contracts in California today, the company must be licensed by the state.
According to John Fogg of the Insurance Department, home warranty contract companies undergo legal and financial reviews and background checks on all officers, directors and key managerial personnel before a license is granted.
“To my knowledge, this is not one of our consumer-complaint problem areas,” Fogg said. “You’ll always receive some complaints in any line of insurance, but we don’t receive a disproportionate share in this line.
“The ones we usually have questions about are pre-existing conditions,” he said. “You move into a house in the middle of summer, you don’t know that the furnace isn’t working. When did it break? Did it break since you’ve had the policy? How do you determine that sort of thing?”
If consumers have complaints about the way they were treated by their home warranty company, they should contact the state on the consumer hot line (800) 233-9045. After hearing the consumer’s complaint, the representative will require the consumer to submit the complaint in writing.
“Typically, what they (the state’s representatives) will do is obtain the claim file from the home protection company, analyze it, and see if they can come to a resolution,” Fogg added.
To avoid any misunderstanding about the coverage provided, the home buyer should do some homework. The contracts are written in plain language, not “legalese,” and are very specific on covered and excluded items. Any of the warranty companies upon request will provide a contract for examination.
“Read the contract before you (purchase) it,” said Ray Adams, president of Buyers Home Warranty Co. “If you’re going to rent the house out, take a look at the rental section. If you’re going to buy an older house, read the warranty company’s position on upgrades or code violations.”
Another area of the contract that should be closely reviewed is the customer service section.
One warranty contract states that they will “dispatch” your call to a service contractor within four hours during normal business hours and 48 hours on weekends or holidays. The contract does not indicate any length of time before the contractor contacts the homeowner.
Another contract specifies that the contractor will contact the homeowner for an appointment within 36 hours during normal business hours and 48 hours on weekends and holidays.
Most home warranty contracts reserve the right to define emergency service calls and will make efforts to expedite emergency service. Most firms will not reimburse a homeowner for an unauthorized service call if the homeowner decides not to wait for the warranty company to respond.
Professional home inspections are often recommended before the purchase of a resale home, but such an inspection is required by only one firm issuing home warranty contracts in California--ERA.
“We don’t inspect these homes,” Adams, of Buyers, said. “We rely on the integrity of the real estate broker to disclose a known defect that would be covered under the program, and generally they do.”
Home warranty contracts are purchased by either buyers or sellers. Sometimes the cost of the contract is split between the two.
“I usually try to negotiate that the buyer pay half and the seller pay half,” Hagen said. “Both parties can just about alleviate going to Small Claims Court over a dishwasher that didn’t work properly or a garage-door opener that went on the fritz.”
When the Richardsons, Alan, Mary and their three children -- Nicola, Sarah, and Evan -- moved into their San Marino home last year, their realtor purchased a home warranty contract and gave it to them as a house warming present.
“It was a nice gift,” Mary Richardson said. “I think it’s great -- they send out the repairmen and get the job done; and I only pay $35 per service call.”
Besides several repair calls on the home’s air conditioning system, the Richardsons’ home warranty company has also dispatched a plumber to their home to repair a leak in one of their bathrooms.
“My husband doesn’t usually buy anything beyond an original warranty,” she said. “If something comes with a 30-day warranty and breaks down on day 31, that’s the way it goes. This time, however, he signed us up for a renewal.”
Fogg added: “The seller often buys it for the purchaser, and what the seller buys is a sort of peace of mind in that if anything does go wrong, the buyer looks to the home protection company.
“More important than peace of mind is the resolution of disputes that might otherwise lead to legal liability,” he said.
Industry statistics indicate that an average of 1.2 service calls are made per contract. Anita Goldstein’s experience with her home protection plan exceeded this statistic.
“Shortly after I moved in, I had a problem with the heater in the pool,” she said. (Goldstein had purchased optional pool coverage.) “At the same time, my husband passed away, and I left the house for about a month.
“All I know is that whoever was doing the service did an excellent job, even though I wasn’t even here. I have been more than satisfied with the response time and repairs,” she added. “I’m the first individual to let a company know when I’m displeased. On the other hand, I’m also the first to let you know that I’m pleased.”
Not all home buyers need a home warranty contract.
“You don’t need one on a new house because the builder provides it,” Branson said. “If the house is less than three years old, you probably don’t need one. I personally would still want one to be safe. Look at the overall cost of closing a house--the warranty contract is probably the smallest item listed on the closing statement.”
Sharon L. Warzocha is a free-lance writer living in Valencia.
Questions to Ask Before Buying a Home Warranty Contract
1--Is the firm writing the contract licensed by the State of California?
2--What is the annual cost of the basic home protection contract?
3--What systems and/or appliances are included in the basic coverage?
4--What systems and/or appliances are excluded in the basic coverage?
5--What optional coverages are available and how much do they cost?
6--What is the service call fee (or deductible)?
7--Do I have to pay the service call fee even if the item turns out to be a non-covered item?
8--How do I obtain customer service?
9--How long will it take for the warranty company to respond to my request for service?
10--Are repairs made under the warranty contract guaranteed, and if so, for how long?
11--Can I renew the policy after the first year?
Warranty Claims Rise
Homes sold with warranty policies have increased their share of the existing-home-sale market by about 50% over four years with a corresponding rise in the number of claims made, according to figures from the California home warranty industry.
1986 1987 1988 1989 1990 Warranty Sales 163,560 190,600 259,262 278,119 247,850 $ Value (millions) $47.2 $56.4 $77.7 $83.7 $78 Home Resales 488,337 512,447 562,570 538,770 446,370 Market Share* 30.1% 34.5% 41.5% 44.8% 45.5% Renewals 16,570 13,600 25,589 36,446 44,477 Number of Claims 166,000 210,000 249,730 277,837 310,000
SOURCE: Home Warranty Assn. of California, California Department of Insurance and California Assn. of Realtors
* Market Share is the number of existing home-sales transactions in California that include a home warranty plan. Total annual sales exclude renewals.
Licensed Home Protection Firms
*American Home Shield of California, Inc. (Santa Rosa) (800) 321-9222 (Northern Calif.); (800) 535-1389 (Southern Calif.)
*Buyers Home Warranty Co. (Burbank) (800) 521-2492
*Continental Home Services, Inc. (Walnut Creek) (800) 862-6837
*ERA Home Protection Co., Inc. (San Francisco) (800) 255-9405
*First American Home Buyers Protection Corp. (Van Nuys) (800) 992-3400
*HAA Home Protection of California (Solano Beach) (800) 327-9787
Linville Home Protection, Inc. (Westlake Village) (800) 331-5355
*Mauzey Enterprises, Inc. dba HISCO (Dublin) (800) 831-8200
Old Republic Home Protection Co., Inc. (San Ramon) (800) 972-5985
*Sierra National Home Warranty Corp. (San Ramon) (800) 464-4692
1) Ticor Home Warranty Co. (Los Angeles) (213) 852-6300
United Home Protection Corp. of Calif. (Santa Ana) (800) 543-6816
Western Warranty of California (Concord) (415) 682-4300
*Indicates firm is a member of the Home Warranty Assn. of California (HWAC).
1) Firm is licensed to sell contracts in California, but is not currently writing contracts.
Source: State of California, Dept. of Insurance; San Francisco