What Is a Home Warranty? Coverage, Costs, and Exclusions

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A home warranty is a residential service contract that pays for the repair or replacement of covered home systems and appliances when they break down from normal use during the contract term. Plans for existing homes usually last one year and can be renewed. The homeowner pays a premium for the contract plus a separate fee each time a technician is sent out. A home warranty is not homeowners insurance. It does not cover the house itself against fire, storms or other disasters. It covers the working parts inside the home, such as the furnace, water heater or refrigerator.

How a home warranty works

A home warranty company generally does not do the repair work itself. It contracts with a network of home service providers, such as plumbers, electricians and appliance technicians, and assigns claims to them. A typical claim follows this sequence:

1. The homeowner reports the problem. When a covered item stops working, the homeowner contacts the warranty company rather than calling a contractor directly.
2. The company dispatches a provider. The warrantor sends a technician from its network to inspect the item.
3. The technician assesses the damage. The provider reports the extent of the damage and its likely cause back to the warranty company.
4. The company makes a coverage decision. The warrantor checks whether the contract covers that item for that type of failure. If the cause falls under an exclusion, such as damage that existed before the contract started, the claim can be denied.
5. The repair or replacement happens. If the claim is approved, the company authorizes the contractor to fix or replace the item, and the homeowner pays the service call fee.

The cause found in step 3 decides the claim. Two identical broken water heaters can produce different outcomes: one failed from ordinary wear and the other failed because it was installed incorrectly.

What a home warranty covers

Most basic plans cover major appliances such as water heaters, stoves and refrigerators. Many also include home systems: heating and air conditioning, plumbing and electrical. Coverage beyond that varies by company and by plan:

• Optional add-ons. One company may include a garage door opener in its basic plan, while another charges an extra premium for it.
• Specialty items. Outdoor pools and spas are covered by some companies for an added premium. Other companies do not offer pool coverage at all.
• Excluded components. Some companies will not cover certain parts of a home under any plan, so paying more does not always close a gap.

Because plans with the same name can cover different things, the contract itself is the only reliable list of what is covered.

Common exclusions

Warranty companies typically refuse claims involving:

• Pre-existing conditions: damage that existed before coverage began.
• Poor maintenance: systems or appliances that were not properly cared for.
• Improper installation: items installed incorrectly, whoever installed them.
• Misuse: damage from using a component in a way it was not meant to be used.

The pre-existing condition rule matters most for buyers. If a pre-purchase home inspection finds a failing system, a warranty bought at closing will likely not pay for it. The usual remedy is to ask the seller to repair or replace the item before the sale is final.

What a home warranty costs

Annual premium. This is the price of the contract. Plans commonly cost a few hundred dollars a year, depending on the level of coverage and which add-ons are included. Some companies bill monthly.

Service call fee. Also called a trade call fee, this is paid to the servicing contractor for each claim and works much like an insurance deductible. The fee applies per item or system, not per visit. If the oven and the refrigerator both fail, the homeowner pays two separate fees. Many contracts state that if the repair costs less than the service fee, the homeowner pays only the lower amount.

Coverage limits. Contracts cap how much the company will pay for a given item or repair. If a repair or replacement costs more than the limit, the homeowner pays the excess.

Worked example (hypothetical)

Assume a homeowner pays a $600 annual premium. The contract charges a $100 service call fee per item and has a $1,500 limit on air conditioning repairs. During the year, two things break:

• The refrigerator needs a $350 repair. The homeowner pays the $100 fee and the warranty covers the remaining $250.
• The central air conditioner needs a $2,200 replacement. The homeowner pays a second $100 fee. The warranty pays up to its $1,500 limit, which leaves $600 above the limit for the homeowner.

Without the warranty, the two repairs would have cost $2,550. In this case the contract saved $1,150. In a year with no claims, the same homeowner would have spent $600 and received nothing back. The value of a home warranty depends on how many covered items fail, what they cost to fix, and how the contract limits compare with real repair prices.

Home warranty vs. homeowners insurance

Both involve premiums, deductible-like fees, claims and coverage limits, but they protect against different risks.

A home warranty will not pay to rebuild a kitchen after a fire, and homeowners insurance will not replace a dishwasher that simply wore out. Many owners carry both because the coverage does not overlap.

Who buys home warranties and why

• Buyers of older homes. A buyer often cannot know how well the previous owners maintained the systems, or how old the appliances are. A warranty limits the cost of surprises in the first year. It also spares the new owner from finding reliable contractors, because the company assigns one.
• Sellers. A seller or agent may pay for a one-year warranty as an incentive for buyers, especially on an older property. This is a negotiating tool in a real estate transaction, not a requirement.
• Current owners. Existing homeowners can buy a contract at any time, subject to the same exclusions for pre-existing problems.

Builder warranties are a different product

New construction often comes with a homebuilder warranty, which works differently from a standard home warranty. Some builders cover structural defects for up to 10 years, including problems with framing, walls, roofs, flooring and drywall. Builder warranties may also cover electrical and plumbing systems for two years and installed appliances for six months. The cost is usually built into the price of the new home.

Unlike a builder warranty, a standard home warranty does not cover structural defects.

Limitations of a home warranty

• Limited choice of contractor. Repairs go through the company’s network, so the homeowner generally does not choose the technician.
• Costs can exceed expectations. Denials for maintenance or installation problems, several per-item fees in one year, and limits below real replacement costs all shift money back to the homeowner.
• Coverage varies widely. Pools, spas and garage door openers may need add-ons or may not be available.

Before signing, compare the coverage list, exclusions, per-claim fee and item limits across plans, not just the premium.

The Bottom Line

Home warranties matter most to buyers of older homes, sellers offering incentives, and owners worried about aging appliances. The contract pays off only when covered items fail and the repair costs fit within the item limits, so a year without claims returns nothing. Compare coverage lists, exclusions, per-item fees and limits along with the premium, and have the seller fix any problems an inspection finds before closing.