These 7 Misunderstandings About Home Warranties Could Cost You Big Time

I get more emails from disappointed home warranty customers than I care to count.

Home warranties only apply to normal wear on your appliances and systems. They often limit how much they’ll pay, always have exclusions and never guarantee that they’ll make a repair before diagnosing the issue. But they can save you money if you know how and when to use them.

Here are seven common misunderstandings that customers have about their home warranties.

A true warranty repairs manufacturing defects, and homeowners insurance pays for items that are damaged suddenly. Home warranties do neither.

Home warranties are service contracts that cover normal wear and tear. This includes issues that pop up from everyday use and are normal for appliances and systems as they age.

A lot of people confuse home warranties with insurance because some companies advertise that customers pay a “deductible.” That’s not accurate. Home warranties charge service fees, which you pay before you know whether or not your claim has been approved. The fee isn’t a guarantee of coverage; it pays for the technician to diagnose the problem, not make the actual repair.

With insurance, a deductible comes into play after a claim is approved. It’s your share of the repair cost, and the insurance company will cover the rest.

Home warranties cover systems and appliances in a way that manufacturers’ warranties and insurance don’t. This is a good thing if you’re wanting that type of everyday-wear-and-tear coverage. But that means home warranties also have different terms. And if your claim fits with their coverage, you could save money on big repairs.

One of the ways home warranty companies make money while still paying for repairs is by limiting coverage to a certain dollar amount, known as a coverage limit. These can range from $150 to $7,000, depending on the covered item, type of repair, plan and company.

Many home warranty companies also refuse to cover certain situations, such as pre-existing conditions or wear and tear caused by neglecting to maintain your systems.

Regardless of how a home warranty limits coverage, it’s probably a safe bet that it has policies that protect the company from paying for all of the repairs you request.

Some customers have legitimate claims that can cost home warranty companies thousands of dollars. In those cases, customers benefit more than the companies and probably get more out of the warranty than the company that sold it to them.

So even though your home warranty company is betting they’ll spend less on you than you’ll pay them, that’s not always how it works out. You might save money with a home warranty instead.

One of the most common customer complaints I see is that a home warranty didn’t pay for a replacement appliance or system. Instead, the company paid a customer a portion of the actual cost to replace an item. That left the homeowner paying the rest of the bill for a replacement.

If your home warranty can’t fix your water heater, it’s not going to send you a check for whatever it costs to buy a new version of your water heater. Instead, many of them calculate how much your old water heater (or stove or dishwasher) is worth.

Similar to how cars go down in value over time, appliances and systems depreciate as well. That means your 12-year-old water heater might only be worth $100, and that’s how much a home warranty is likely to give you to buy a replacement.

It doesn’t matter that a new one could cost more than $3,000 with installation and labor. You might be on the hook for the remaining $2,900.

Even if you have to pay for labor or costs over your coverage limit, your home warranty can keep you from paying the full cost of major repairs.

Let’s say your home warranty agrees to replace your dishwasher. If the company pays $400 of the $800 price tag, you still only had to pay half of the price tag even though your plan didn’t pay for the full replacement.

If you’d already paid $876 and your home warranty paid only $400 for a replacement dishwasher at the end of that year, you’d be out at least $476. Probably more by the time you paid your service fee for the dishwasher claim.

In cases like this, you can actually save money by not having a home warranty.

Each customer will have a different set of claims, a specific plan and a mix of appliance and system models. That means no two situations are the same.

Some customers might lose money with a home warranty, but others will save money with one. If you get one or two major repair claims approved, you could come out ahead with a home warranty.

A home warranty company can make you pay a service fee and then deny your claim.

The service fee is similar to the house-call fee that a repair company might charge you when you schedule an appointment with them directly. It’s how they ensure they make some money in case you decide not to have them repair whatever they came to look at.

The difference here is who can decide if a technician is going to make the repair. If you hire the company directly, you decide if you want them to repair your water heater. In that case, you’ll probably get to apply your house call fee toward the total cost of your repair.

With a home warranty, the company decides if it wants to pay someone to repair your water heater. If your claim is denied, you could lose your service fee.

A few home warranty companies are skipping service fees, so their customers don’t pay for a technician to visit their homes. That way they’re not paying out of pocket before they know if a claim will be approved. If you consider a company that doesn’t charge service fees, check how that might affect the monthly rate compared to prices other companies offer.

Your contract has to say what your home warranty will and won’t cover. But service agreements tend to be long and full of technical language, which can make them difficult to understand. So a lot of people don’t read them before agreeing to the terms.

Look, I’m not judging. I have no idea what I agreed to when Spotify last updated its terms, but I checked that “I agree” box immediately so I could keep streaming Sarah McLachlan’s newest album without interruption.

But your home warranty company is going to follow the terms that you agreed to when you signed up for a plan. So it’s a smart move to read those terms before paying for coverage that you might not understand.

I know reading pages of fine print to find out which parts of your heat pump are covered by your plan doesn’t sound like a relaxing Saturday afternoon. But your home warranty company will quote sections of the contract to you when you ask why your claim was denied.

Knowing the policies and exclusions in advance will help you avoid frustrating situations.

Many home warranty contracts have clauses that say you can’t sue the company. Instead, you have to go through arbitration, which is a way to resolve disputes without going to court. These clauses usually keep you from filing a class action lawsuit as well.

According to the Economic Policy Institute, arbitration is worse for consumers than for companies. This is because customers tend to lose more often than the companies, and end up paying arbitration fees.

Even when a home warranty company doesn’t follow its contract, it’s difficult for a customer to prove their case because of how arbitration works. Most successful cases against home warranty companies are filed by a state’s attorney general after they’ve investigated a lot of customers’ complaints.

When a state successfully sues a home warranty company, it usually makes the news. This gives other customers a way to learn about their rights and which home warranty companies haven’t been honest with their coverage.

If you’re thinking of buying a home warranty, search for any news about the company being involved in lawsuits. And if you are having trouble with your home warranty and need a resolution, contact your state attorney general’s office to file a complaint.

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