A home warranty is often a feature in the sale of a home. In that scenario, the seller typically pays a few hundred dollars for a one-year warranty covering the home's major fixtures such as the furnace, water heater and kitchen appliances. This gives the buyer some protection during that first year of ownership knowing that if something major breaks down it will be covered. Many homeowners choose to continue paying an annual premium rather than risk bearing the full replacement cost of a major item.
Although technically not insurance, warranties are very similar in that the homeowner is paying an up-front fee to protect against a potentially huge replacement cost. If nothing breaks during the coverage period, the customer may in hindsight feel the fee was a waste of money, but that's what managing risk is all about. Are you financially prepared to replace major components as they are needed, or would you rather pay a set amount per year whether something breaks or not?
One important difference between insurance and a warranty is that the homeowner must go through the warranty company to arrange for service, and this can be another point where a customer might be dissatisfied. Home warranty companies establish relationships with service providers in the areas for which they provide coverage. So whether customers are satisfied with the warranty company depends in large part on whether they are satisfied with the repairmen whom the warranty company has hired.
Even though home warranties aren't considered insurance, the companies that sell them are typically regulated by each state's department of insurance. According to the Service Contract Industry Council, 32 states require home warranty companies to register or obtain a license with that state's department of insurance. This state agency is responsible for licensing the entity, examines the company for compliance of applicable laws regarding home warranty services and monitors the financial condition of the company for the protection of their clients.
Most home warranty companies offer a variety of plans, each providing different levels of coverage, so be sure to read the details of any contract before buying. Even if you choose to renew the contract from year-to-year, double-check the details of your plan because coverage can change annually. Here is a general idea of what a homeowner can expect to find in each tier of service: