Home service contracts protect homeowners from the cost and efforts of getting their major home appliances repaired by a qualified technician.

Home Warranty vs. Home Service Contract: Introduction

In marketing, the term "home warranty" is used for a variety of contracts. A home warranty is a kind of service contract that covers the repair or replacement costs if any of the covered items in your home breaks down.

Buying a home warranty is often a risky investment. Although home warranties are meant to cover unexpected home repairs, there are thousands of unsatisfied owners. The home warranty industry does not have a very good reputation. There are a huge number of consumer complaints, ranging from poor repairs to service delays to denied claims. 

However, most of the home warranty complaints are due to misunderstandings by owners. Owners often assume that their home warranty covers all of their appliances. They expect complete repair or replacement when one of the appliances breaks down.

Most of the owners do not understand the limitations of their warranty. Neither do marketers always focus on educating their customers on what the warranty entails and what it doesn't.

We often come across advertisements and promotional material about a “warranty” that leaves us wondering whether the product in question is a home warranty or a home service agreement. Irrespective of what it's called, if you bought a “home warranty,” it's most likely to be a home service contract.

Since most of the home warranty complaints are due to misunderstandings about what the warranty covers, always consider buying from providers who are upfront and transparent about the product they are selling. Keep the following tips in mind when shopping for a policy:

  • One of the ways to check how you'd be treated as a policyholder is to call the company several times and ask about the coverage or the claims process.
  • Read the service agreement carefully, especially the section that lists out the details about what all issues the company would be liable to fix and the maximum amount it would pay you.
  • It's important to compare the providers since some companies may limit their payment liability to $1,500 per item whereas others may not cap their coverage at all.

A Typical Home Warranty Is for Builders

It's usually builders who need a true home warranty. What homeowners actually need is a home service contract.

A home warranty, in its true sense, offers a warranty for labor and material when repairing a home. When a new house is sold to the first occupant, the warranty passes over from builder to buyer without any additional cost.

Even when a builder transfers his warranty to a second buyer of the house, the buyer doesn't incur any additional cost.

A warranty, in its strictest legal sense, cannot be sold. A warranty is a right given to a customer to expect that the product being purchased will work properly within a specified period of time. A true warranty offers compensation to the buyer if the purchased product fails or contains any defect, whether due to material or workmanship.

A home warranty usually covers everything from house's foundation to its roof, but it does not cover items like dishwashers, ovens, and refrigerators that are not installed permanently. A home warranty is a legally binding contract and does not cost anything to the home buyer, so there is not much reason for the buyer to research the company that provides the warranty.

However, since the builder often buys the warranty from a third party, in order to absolve himself from any liability that may arise due to poor construction or defective parts, there is always a chance that the company backing the warranty is financially unstable. If the builder is backing the warranty himself, there could be an even higher risk involved than in cases where a large insurance company or financial institution is backing the warranty.

Home Warranty vs. Homeowner's Insurance

Unlike a homeowner's insurance policy, a home warranty doesn't cover repairs and replacement arising out of accidents and natural disasters. However, the pricing model is similar in both the cases.

  • Just like a homeowner's insurance premium, owners pay a monthly fee or a lump sum amount for the warranty.
  • When owners schedule a repair, they pay a service fee to cover labor and replacement parts, which is similar to a deductible in the case of insurance.

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