Insurance companies provide protection against all kinds of risks, including fire, theft and some weather-related catastrophes, as part of property insurance coverage. Additionally, some policies include specialized forms of insurance, such as flood insurance, earthquake insurance, or home insurance.
Homeowner’s insurance - also referred to as home insurance - is a form of property insurance that covers losses and damages to an individual's house and the valuables in their home. Home insurance also provides liability coverage against accidents in the home or on their property.
A home warranty is a contract that allows for repairs or replacement of home systems and appliances, such as HVAC systems, water heaters, ovens, washers/dryers and swimming pools. These contracts usually expire after a designated period of time.
Home warranties and home insurance both cover unexpected circumstances but one primary difference is that in your homeowner policy, there are exclusions about mechanical breakdown and regular wear and tear.
For example, if your dishwasher breaks down, or the air conditioning system fails, the actual replacement of those items or repair would not be covered under your home insurance policy.
A home warranty is designed to cover numerous things that are not normally covered by home insurance, which is what makes the product so attractive to many homebuyers.
Though these two forms of insurance are similar in their means of protection, there are substantial differences between a home insurance policy and home warranties, and those differences will be addressed in this article.
HOME INSURANCE
When a prospective or existing homeowner requests a mortgage from a lender to purchase or refinance a home, the borrower is required to provide proof of insurance on the property, before the lending bank can approve their financing. The insurance can be acquired independently or it can be provided by the lending institution.
Homeowners who prefer to acquire their own insurance policy can solicit multiple offers from reputable home insurance providers and select the plan that best suits their needs. However, if the homeowner’s property is not covered from loss or damages, the lending bank may obtain a policy on their behalf, at an additional cost to the borrower.
Typically, a homeowner’s mortgage and insurance policy are combined into a single monthly payment. The lending bank receives the combined payment, and deposits the portion for insurance coverage into an escrow account. Then, when the home insurance bill comes due, whatever is owed is paid from that designated escrow account.
4 Types of Incidents
A homeowner’s insurance policy usually covers four types of incidents on the insured property:
- Interior damage
- Exterior damage
- Loss or damage of personal assets/belongings
- Any Injury that arises while on the property
When a claim is made due to any of one of these incidents, the homeowner will be required to pay a deductible, which is the out-of-pocket costs that are borne by the insured.
Let’s look at a possible claims scenario. Let’s say a homeowner experienced some interior water damage in their home and they initiated a claim with their insurance company. A claims adjuster determined that the cost to bring the property back to livable conditions is estimated to be $10,000.
According to the terms of the home insurance policy that the homeowner purchased, let’s say their deductible is $4,000. If the claim is approved, the insurance company will issue a payment of $6,000 – the difference between the amount of the deductible and the total repair costs.
As with all types of insurance policies, the higher the deductible on a homeowner’s insurance policy, the lower the monthly or annual premium.
Personal Liability Coverage
In addition, every home insurance policy has personal liability coverage which provides coverage for bodily injury and property damage sustained by others for which you are legally responsible.
For example, if someone falls down your stairs, you may be held legally responsible for the injuries they incurred. Most home insurance policies provide a minimum of $100,000 in personal liability coverage, meaning the insurance company will pay up to that amount in total to injured persons per occurrence. However, if you feel you need more protection, higher limits are available.
Generally speaking, acts of war or acts of God – such as earthquakes or floods – are excluded from standard home insurance policies. If a homeowner lives in an area that is susceptible to these kinds of natural disasters, they may need to acquire special coverage to ensure their property is protected from the damage these kinds of disasters can inflict. However, most basic home insurance policies do cover weather-driven events like hurricanes and tornadoes.
Also, it is important to make the distinction between home insurance and mortgage insurance, which people sometimes confuse. Mortgage insurance is something that lenders generally require from home buyers who are making a down payment of less than 20% of the purchase price of the property. Mortgage insurance provides protection coverage to the lender for issuing a loan to a home buyer who might not otherwise qualify for a loan.
Basically, a home insurance policy protects the home owner and mortgage insurance protects the lender.
Home WARRANTY
A home warranty is not a home insurance policy. Although both home warranties and home insurance can provide you with coverage when an emergency comes up, the two are very different.
First, home insurance is absolutely essential – no reasonable homeowner would be without a home insurance policy. On the other hand, home warranties are not explicitly essential, though they do offer advantages to a home owner under a variety of different circumstances.
So regardless of your homeownership status – whether you’re a first time home buyer, experienced home or condo owner, or even a home seller, you may want to know about home warranties in order to decide if you should purchase one, in addition to your home insurance.
What Is a Home Warranty?
A home warranty is an insurance product – in the form of a service contract – that is meant to cover various key elements of your home, and to help defray costs when repairs to your home are needed. These services are provided in exchange for an annual premium, and service fees whenever a repair or replacement is required.
The top-rated home warranty policies vary greatly in what they will and will not cover, and most companies set a limit on how much they will pay to replace certain items, or how many times you can request repair for them.
Home warranty coverage varies from the very basic to the very extensive, depending on your needs, budget and how much risk you believe you have in your home.
What Do Home Warranties Cover?
Although specific coverage will vary based on location, standard home warranty policies will generally cover home appliances & other in-home systems. Typically, these items will include:
- Air conditioning units
- Refrigerators
- Ovens
- Dishwashers
- Clothes washers and dryers
- Garbage disposals
- Trash Compactors
- Toilets
- Water heaters
- Ceiling Fans
- Smoke Detectors
- Built-in Microwaves
- Doorbells
- Humidifiers
- Heat Pump
While home warranty plans are an excellent method to help defray costly appliance repairs and replacements, it is important to note that coverage is limited to damage caused by “normal wear and tear”.
Most home warranty coverage will allow for the repair and replacement of vital parts needed for the normal operation of appliances and systems. However, non-essential parts do not typically fall within the warranty’s scope.
What Do Home Warranties Not Cover?
If a specific item is not included in the basic warranty plan, and it needs to be, then a customized warranty might be a sensible investment. The cost of an enhanced plan, with its broader range of coverage options, can cost an additional $100 - $600, on top of the standard plan.
Some of the systems and appliances that are not typically covered as part of a standard or common plan are:
- Plumbing fixtures
- Faucet repairs
- Pools/Hot tubs
- Sprinkler systems
- Outdoor water systems
- Combo ceiling fans
- Ice makers
- Well Pumps
- Central Vacuums
- Septic systems
- Stand Alone Freezers
- Home entertainment system
- Wine cooler
Also, it’s important to know that most home warranty companies will not cover any pre-existing defects or damages, meaning that if your item was broken or not working before you purchased the warranty, the company will not pay to have it fixed. As this can sometimes be difficult to figure out, we recommend having a company that makes their contracts easy to understand.
In addition, there are a number of other potential loopholes you should be aware of. For example, some companies will not cover damages made by animals, or problems stemming from improper system installation, or any malfunction they conclude was caused by poor maintenance.
So make sure to read the fine print and know exactly what the warranty will cover – and for how much – before signing your contract.
Questions to Ask Before You Purchase a Home Warranty
It is important to ask as many questions as possible regarding the details of your home warranty plan before you make a purchase decision. Each company’s policies and coverage vary so you must fully understand what the company you’re considering is offering in their plan:
- Are there limits for each coverage. Are there certain parts of covered appliances that are excluded? Are there maximum amounts payable?
- What are the deductibles?
- What kind of service calls are covered? Is there a limit on how many service calls?
- Is there a charge to have a professional come and assess whether something is covered or not? There may be service fees charged in addition to your deductible.
- Do you have to use their network of contractors and service people, or can you choose your own?
- Repairing roofs can be really expensive. Does my plan have any protections against sudden leaks to a well-maintained roof?
- What is the process to make a claim? How will you be paid? Is there a waiting period?
- What kinds of damage are excluded? Ask for examples to make sure you understand the range of coverage. Many situations can be tricky and have restrictions or limitations, in particular with electrical and plumbing, how they interpret pre-existing conditions will be important.
- Are there limits for each coverage. Are there certain parts of covered appliances that are excluded? Are there maximum amounts payable?
The home warranty business is notoriously dodgy – there are some very reputable and honorable companies in this field, and some that are not. So it is incumbent upon you – the consumer – to do your homework before signing a contract.
Check with the Better Business Bureau. Contact professionals in the home repair and construction fields to get as sense of a company’s reputation on the street. Carefully review all contracts and avoid the ones that are needlessly complicated. And above all, read the fine print.
Home warranties can offer valuable home protection and potentially save a homeowner lots of money, but only if the company actually delivers on the services they have promised to provide.