Home warranties: Are they worth it?
Plans can cut costs; loopholes may exist
Erica Sagon
The Arizona Republic
Jan. 29, 2005 12:00 AM
When Don Brooks and his wife bought a house in north Phoenix three years ago, the couple felt better knowing that its hidden problems would be taken care of by a home warranty.
As in most cases, the home seller paid about $400 for the warranty - the one-year, renewable service contract that protects homeowners from the cost of repairing or replacing major systems and appliances.
Sure enough, it wasn't long before problems mounted in the Brooks home.
In that first year, a water heater, dishwasher motor and clothes washer were replaced, and the air-conditioner was repaired.
Brooks paid about a $30 co-payment per fix and a little more for the air-conditioner, a fraction of the market rate for service and parts.
In fact, Brooks says the warranty company probably lost money on them.
When it came time to renew the warranty a year later, Brooks learned he would have to pay a $600 annual fee. He suspects the warranty company charged a premium because he had so many claims.
Brooks, like most consumers, asked: Is a home warranty really worth the cost?
Though the couple saved money on repairs and were happy with the service, they didn't renew the contract.
"We figured that most of that stuff was new or got replaced," Brooks said. "We decided to wing it."
Four months ago, the air-conditioner finally quit. Without the protection of a warranty, a new unit set the Brookses back $3,600.
Ouch.
Advocates say a story like Brooks' is a cautionary tale of the unforeseen costs of repairs in pre-owned homes. They also say that home warranties are more popular than ever.
The contracts provide peace of mind and budget protection for consumers, especially first-time buyers, according to industry experts.
"Compared to what it costs to repair any one item . . . it's very inexpensive," said Mark Lightfoot, president of the National Home Service Contract Association, a year-old organization that oversees vendors. "It's a very good value, dollar for dollar."
Lightfoot also points out the convenience of having a warranty: a toll-free number for claims and screened contractors on dispatch.
But consumers have long criticized warranties as false protectors with quirky policy loopholes that are hard to understand on the first read. Complaints include lousy service from contractors and that warranties are simply a Band-Aid for bigger problems.
Phoenix resident Monique Ashton recently filed a claim for a leaky bathtub faucet. She paid a $40 service fee, but the leak returned. When she called 35 days later to report the problem, she was shocked to find that it was considered a new claim, and would take another $40 to fix. Apparently, the warranty company allowed a 30-day window to follow up with any complaints. The stipulation was probably in the fine print of her contract from the vendor.
"I was really irritated with them," Ashton said.
It's common for consumers to misunderstand the warranty's terms, said Pattie Hackmann, vice president of sales for Fidelity National Home Warranty.
A standard warranty costs $350 to $500 and covers the repair and replacement of a home's major systems and kitchen appliances. Extended-coverage plans for pools, spas and clothes washers and dryers can be purchased at an extra cost.
There are plenty of limitations and exclusions. For one, warranties don't cover secondary damage. So, if your toilet malfunctions and leaks all over the floor, the warranty covers the broken toilet but not the damaged floor.
Secondly, warranties don't cover pre-existing problems.
Home builders typically provide a different type of warranty for new houses, where coverage lasts up to 10 years for certain issues.
The Arizona Department of Insurance, which licenses vendors and takes complaints from consumers, advises people to read their contracts thoroughly before signing.
Denial of a claim is consumers' top complaint, followed by delays and unsatisfactory results, said Erin Klug, spokeswoman for the department.
"We definitely will try to advocate on people's behalf," Klug said. "We're not always successful. It's very dependent on the contract language."
The state Insurance Department logged 12 complaints for American Home Shield Warranty Co. in 2004, more than any other vendor. However, it's difficult to say how widespread the problems are because the state isn't sure how many policyholders are out there. Arizona does not require companies to report the number of warranties sold.
Consumer complaints of home warranties haven't translated to slower sales, though.
In Arizona, home warranty companies aren't required to report their sales to the state. But anecdotal evidence and company records indicate that warranty sales are at their highest.
Fidelity National Home Warranty estimated a "phenomenal" 36 percent increase in sales in Arizona from 2003 to 2004, Hackmann said.
Although sales volume has increased, vendors paint a lean picture of their industry.
"About 40 to 60 percent of our income goes to service and claims for clients," Hackmann said.
Consumers are vastly more aware of home warranties today than they were a decade ago, she said.
Part of this can be attributed to real estate agents, who are the key marketers for home warranties. Some agents even get a kickback from the vendors.
Realtor Darrell Blomberg carries brochures for five or six warranties when meeting with his clients. Does he encourage them to purchase one?
"Absolutely," Blomberg said. "The first year they own a house, they don't know what all of the issues are."
Some industry experts claim that homes with a warranty sell faster than unwarranted homes, but Blomberg said that's not the case in metro Phoenix.
Given the tight inventory of homes on the market, sellers don't have to offer extras to snag buyers, Blomberg said.
Still, sellers will typically pick up the tab for a home warranty, mainly to protect themselves if the new homeowners find a problem.
It appears that more homeowners are renewing their contracts after that first year. At American Home Shield Warranty Co., the renewal rate is about 50 percent, said Lightfoot, general counsel for the firm.
"Ten years ago, renewals were very new to our industry. It was really a one-year contract," he said.
The industry is working to change its image from a provider of short-term protection to a long-term service contract provider.
Hackmann said coverage has never been better but still has limitations.
