Why home warranties are no guarantee

After faithfully renewing his HMS National home warranty service contract for 11 years, Angie's List member Robert Shelton reached his breaking point. "It's been hell dealing with HMS," he says. "I'm done with the whole idea of a home warranty."

Shelton received the warranty when he purchased his Sterling, Va., home and used it twice before for small repairs. But when his A/C broke last summer, he says HMS, which has an overall nationwide grade of D on Angie's List, only would cover a portion of the total fee: "The repair cost more than $1,000, but HMS only wanted to pay $250. On top of which, they sent a low-quality contractor."

For the past six years, home warranty service companies have been the No. 1 "worst graded" category by Angie's List members. In 2010, 54 percent of the reviews on these types of businesses received a D or F grade. Members misunderstanding or disagreeing with what their warranties cover and the quality of repair work are cited in the majority of complaints. 

Understand the fine print

In order to minimize misunderstandings, experts stress the importance of reviewing and understanding a service contract before purchasing a home warranty.

"Like anything else, make sure you shop around," says Tim Meenan, executive director of the Service Contract Industry Council, a national trade association that supports home warranties and advocates the regulation of the industry. "Read what's covered and the exclusions. If you read those two sections, you'll have a good idea if it's a policy you want to buy."

A home warranty service contract isn't an insurance policy that protects you from loss, but is meant instead to provide service, repair or replacement on a home's appliances and major systems, such as heating and electric. Typically, contracts are good for one year. "It gives people peace of mind," he says. "Lots of folks can finance a service contract but cannot finance a new $4,000 HVAC unit."

The average cost of a basic coverage plan ranges from $350 to $500 a year, with the cost of an enhanced plan adding $100 to $300. Prices reflect not only coverage, but also a company's loss history, which is determined by how often an item breaks down and the cost to repair it. Some home warranty companies offer additional coverage for certain items, such as a well pump or pool, for an extra fee. Regardless of the type of plan, homeowners typically pay an additional service fee ranging from $50 to $75 for each repair job.

Shelton says he feels like he understood the terms of his warranty contract and was frustrated at HMS for only paying for a specific component of the A/C, which wouldn't work unless he replaced the entire unit. "I've paid [HMS] $4,000 over the years, including $50 for every service call," Shelton says. "I would have been better off putting that money in a savings account."

HMS National president Doug Stein declined to speak to Angie's List Magazine. Nine other home warranty companies didn't respond to our interview requests and neither did the National Home Service Contract Association, a nonprofit trade organization comprised of some of the largest home warranty companies. A spokesperson for one of the home warranty companies told us NHSCA asked its members to refrain from participating in the story, but Arthur Chartrand, counsel for the NHSCA, repudiated that assertion, writing in an e-mail, "Our communique to all NHSCA members ... actually suggests that members reply, but stated, 'All members are free to make their own judgment call in regard to your inquiries.'"

Differing opinions

Twenty-four percent of Angie's List members responding to a recent online poll say they have a home warranty - and many echoed Shelton's sentiments, arguing they're a waste of money. Member Patrick McGranahan of Winters, Calif., says even though his new home purchase came with a warranty from American Home Shield, he found the policy to be underrated.

"I did the math, and I figure you're paying all this money for the warranty and then you pay $50 to $75 for every service call - it really doesn't add up," he says. "Plus, the people they sent to do the work were late and unprofessional. I got real put off."

On the other hand, member Michelle Morgan of San Clemente, Calif., had nothing but good things to say about the contractors American Home Shield sent out to repair her pool and spa, and plans to use them, if necessary, in the future. Gayle Wilson of Los Angeles says she's successfully utilized her AHS plan 10 times in the past five years for repairs to her washer, dryer, refrigerator, freezer, microwave and clogged drains. "I'm delighted to have someone to call when I have a problem," she says.

Nearly two-thirds of members who took our poll say their home warranty came with the purchase of a house. "It's something I recommend on every transaction," says highly rated real estate agent Beth Smith Shuey of Keller Williams Realty in Charlotte, N.C. "But I warn my clients that not everything is going to be covered." Nonetheless, Smith Shuey says 95 percent of her clients who buy a home close on the deal with a warranty included.

The real estate connection

Throughout the country, the real estate industry is closely tied with home warranty service contracts. "It's about liability control," says Mark Finchem, a highly rated associate broker for Long Realty Company in Tucson, Ariz. He requests sellers pay for a home warranty on every contract to reduce their chances of being sued if an appliance or system breaks down. "You're telling the buyer everything you know about the house in a disclosure statement, but what happens to those things that you've forgotten about?" he says.

While home warranty companies often market their services to realty companies, neither individual agents nor brokers are permitted to receive referral fees for promoting one warranty company over the other. "In the past, warranty companies would offer real estate agents a fee from $40 to $75 that was typically paid after closing for each contract written," says highly rated Realtor Jason Bowman of RE/MAX International Inc., in Mason, Ohio.

In June 2010, the U.S. Department of Housing and Urban Development issued a ruling that home warranty companies could not pay real estate professionals for referrals. "I actually feel this is a great thing for our industry and consumers alike because Realtors can offer their customers better advice on warranty program decisions when the financial motive is out of the picture," Bowman says.

Like many Realtors, he relies on his past experiences when suggesting a home warranty company. "If there's a customer service issue relating to a particular warranty company, I won't offer their service," Bowman says. "On the other hand, I'll report positive feedback from past clients to new buyers."

Even with the new rule in place, some agents don't endorse them. "I think home warranty contracts are a good concept, but mislead buyers into thinking that they offer a guarantee on the house," says highly rated Realtor Jen Geisinger of Maple Grove, Minn. "I also think the fine print can be prohibitive to the needs of many situations that buyers are likely to encounter."

Warranty companies speak out

Not every warranty company offers coverage to homeowners nationwide, but the industry is regulated in all 50 states under consumer protection laws. Also, they're required to be licensed or registered by the department of insurance in 32 states, according to the SCIC. North Carolina regulates service contracts under the Attorney General, while Texas regulates them through the state's Real Estate Commission.

Gwen Gallagher, president of Old Republic Home Protection, says her company strives to provide comprehensive coverage, but inevitably some claims will be turned down and could result in unhappy customers. The most common reasons they deny service is because the item, such as a broken window, wasn't covered under contract, or the service, such as replacing missing parts or components, was excluded.

Homeowners also are denied coverage if the item wasn't in good working order prior to purchasing the home. "We don't inspect properties; however, we ask that in good faith, plan holders do not place claims on pre-existing defects," says the 33-year industry veteran. "It's unfortunate when the services rendered do not meet expectations," she adds. "I can speak firsthand of the desire we have, from the top down, to make a positive difference."

To obtain the most value from a home warranty, Gallagher says it's important plan holders read and understand the coverage that's offered, and the limitations. "We've tried to make it as simple and easy-to-read as possible," she says. Old Republic offers coverage in 25 states plus the District of Columbia and plans range in price from $270 in California to $375 in Texas.

Contractor selection

In addition to thorough coverage, providing competent contractors for plan holders is a priority for most home warranty companies, according to industry leaders.

American Home Shield, has a network of 11,000 professionals to service their 1.4 million customers nationwide. Company spokeswoman Nicole Ritchie says contractors are screened during the application process, including a background check. "We believe our customers expect - and deserve - professional service at all times," she says. "However, in the unfortunate event that expectations aren't met, we encourage customers to make us aware of any issues, and we'll take corrective action as appropriate."

Contractors working for a home warranty company often have to meet set mandates before they can work on a customer's home, such as acting and dressing professionally and following specific guidelines for pricing jobs.

"They need to have the proper amount of insurance and any required certifications or licensing," says Eric Brody, customer service supervisor for highly rated Colonial Home Warranty, based in Wilmington, Del. and serving many parts of the country. "And we keep a rating system on our contractors based on feedback from customers. Their rating directly relates to how many jobs they get from Colonial." The company offers three levels of coverage for homeowners, ranging in price from $345 to $432.

Eric Lipp, owner of unrated Patriot Air in Tempe, Ariz., says he works with several home warranty companies, including Colonial, and appreciates the business, but also understands he needs to keep costs down. "When you're a startup company, it's a great way to get free leads," he says. "[Home warranty companies] know what things cost, and they reward contractors who have the cheapest ticket by giving them more work."

Colonial says pricing is one of many factors they use to rate their contractors. "Most contractors are willing to accept the negotiated rates in exchange for the higher volume of work," Brody says.

For the past 15 years, unrated Kings Appliance in Las Vegas has partnered with a number of home warranty companies. "We like that they send us business, and whatever the homeowner needs, we're here to help," says office manager Maria Reyes. Although Reyes advocates professionalism and experience among her technicians, she also says sometimes they have to compromise their service to keep costs down.

Avoiding cost restraints is just one reason some contractors choose not to partner with a home warranty company. "We've been approached by several of them, but it's really not advantageous for us," says Mike Fedor, residential service manager of highly rated WF Hann & Sons in Bedford Heights, Ohio. "They're very cookie cutter as far as repairs are concerned."

Dave Mejean, HVAC manager for highly rated B&W Plumbing & Heating in Speedway, Ind., doesn't plan on working with home warranty companies either. "Their pay scale is nothing we want to mess with," he says. "They're looking for people to work for little money and customers might not get good, quality work."