Home Warranties Can Help Head Off Costly Repair Bills

The prospect of a $1,000 repair bill was pretty unpleasant for Susan Silverman when the air conditioning broke in her recently purchased Woodland Hills townhouse.

It was in the midst of a heat wave, and Silverman could think of other ways she would rather spend her money.

Suddenly, it dawned on her that she didn’t have to pay for the repair after all. The seller of her townhouse had paid for a one-year warranty--and Silverman was covered.

In California, approximately 240,000 home warranty service contracts were sold last year, representing 50% of all pre-owned home sales transactions in the state. In 1978, only 10% of existing houses were sold with a warranty--but the percentages have been climbing consistently. And, the 12 companies licensed to sell warranties in California are aiming to make warranties a standard part of sales contracts.

“If something breaks, the buyer has somewhere to go other than pursuing the seller or the broker,” said Ray Adams, president of 5-year-old Buyers Home Warranty Co. in Burbank. Most policies are priced under $300 a year, not including optional coverage for extras such as a pool or spa. Normal wear and tear is under warranty, not calamitous events covered by homeowners insurance. Home warranties also won’t pay for consequential damages. So, for example, the warranty will cover replacing a broken pipe in a wall. The warranty will not, however, pay for the major expense of re-plastering the wall or replacing carpet that was ruined as a result of the broken pipe.

It’s worth noting that these warranty companies are not insurance companies even though they are licensed by the California Department of Insurance and must keep 40% of the money from active contracts in a reserve to protect consumers. Insurance is designed to cover unusual events while warranties cover the annoying breakdowns of daily life.

Are these warranties worth paying for? Members of the Home Warranty Assn. of California, of course, think the answer is a resounding yes. So do most homeowners like Silverman who have had occasion to collect on claims--especially when the seller paid for the policy. As with any insurance or warranty claim, though, disputes between a policyholder and an issuing company can arise. Most warranty companies say they are apt to do what they have to in order to please their customers.

“Usually it’s to our advantage to settle claims,” said Adams, especially since most invoices are for less than $100. “If customers go to small claims court, we always lose.”

But complaints by homeowners against California’s home warranty companies seem to be surprisingly rare. “We get very few legitimate complaints. They are few and far between,” said John M. Fogg, senior staff counsel at the state Department of Insurance. “We’ve had pretty good experience with the home warranty companies.”

Indeed, a review of small claims court filings in the city of Los Angeles backs Fogg up. A check of suits filed against three of the state’s biggest warranty companies showed there were fewer than 10 cases filed since the start of 1991.

The most common disagreements with customers concern whether the warranty company should repair or replace something that is broken. If the repair estimate is for more than 50% of its value, most companies will give the homeowner an option to get the cash that would cover the value of the repair, and then go out and purchase a replacement themselves. If the cost of repair approaches two-thirds of the cost of replacement, the warranty company usually will cover the full cost of that replacement. Repairs and replacements usually involve a deductible of up to about $35.

Unlike insurance companies which send out an adjuster and then pay homeowners for the contractor of their choice, warranty companies send out repairmen of their own choosing. This, say the warranty companies, helps keep repair costs down and eliminates the need for adjusters.

Sylvia Kosven and her family continue to renew their home warranty four years after moving into their home in West Hills. “I don’t like expensive surprises,” Kosven said. “I know I can afford $435 a year for the warranty.” Kosven pays more for her warranty than the most basic policies thanks to a pool and spa that are also covered. From her perspective, though, it’s worth it. Two years ago, Kosven recalled, her air conditioning broke and would have cost more than $1,200 to repair. All she paid was the $35 deductible.

About one-third of 80,000 policies offered by First American Home Buyers Protection Corp. in Van Nuys are renewals, reported Marty Wool, senior vice president. And, rather than cancel owners who have made lots of claims, Wool said, “if we’ve replaced a lot of major systems, we probably want you back so we can begin to recoup our losses.”

First American’s policies start out at about $245 a year. Wool advises homeowners to shop around. Some policies cover certain items that others don’t and some offer certain optional coverage that others won’t. Not every policy, for example, covers garage door openers.

Most warranty policies are purchased by sellers and become effective either at the opening or closing of escrow. Some sellers are buying policies that become effective with their for-sale listing.

“You hate to put money into fixing a house you’re leaving,” noted James R. Gary, president of James R. Gary & Co. Ltd. in Woodland Hills. The policy, he said, helps ensure that the seller keeps things up until the property changes hands.

Warranties alleviate a lot of uncertainties for buyers so we encourage sellers to offer a home warranty when the property is offered for sale. We feel that 95% of buyers should have a warranty--unless a major renovation or tear-down is planned,” Gary said. “Murphy’s law is always in effect when property changes hands.”