Why Home Warranties Are No Guarantee

Historically, home warranty service companies have been one of the "worst graded" categories on Angie's List. Members misunderstanding or disagreeing with what their warranties cover and the quality of repair work are cited in the majority of complaints.

After faithfully renewing his HMS National home warranty service contract for 11 years, 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 HMS home warranty when he purchased his Sterling, Virginia, home and used it twice before for small repairs. But when his A/C broke, he says HMS only would cover a portion of the total fee.

"The repair cost more than $1,000, but HMS only wanted to pay $250," he says. "On top of which, they sent a low-quality contractor."

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 $600 a year, with the cost of an enhanced plan adding $100 to $500+ depending on the desired amount of additional coverage. 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.'"

Many Angie's List members echoed Shelton's sentiments, arguing they're a waste of money. Patrick McGranahan of Winters, California, 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, Gayle Wilson of Los Angeles says she's successfully utilized her AHS home warranty 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.

Throughout the country, the real estate industry is closely tied with home warranty service contracts. For the most part, a home warranty comes with the purchase of a house.

"It's something I recommend on every transaction," says real estate agent Beth Smith Shuey of Keller Williams Realty in Charlotte, North Carolina. "But I warn my clients that not everything is going to be covered."

Mark Finchem, an associate broker for Long Realty Company in Tucson, Arizona, says it's about liability control and 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, a 2010 federal ruling prohibits individual agents or brokers from receiving 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 Realtor Jason Bowman of RE/MAX Elite, in Mason, Ohio, who, like many Realtors, relies on 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."

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 an Old Republic home warranty 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 industry veteran. "It's unfortunate when the services rendered do not meet expectations."

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 home warranty offers coverage in 23 states plus the District of Columbia and plans range in price from $285 in California to $460 in North Carolina.

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.

Eric Lipp, owner of Patriot Air in Tempe, Arizona, says he works with several home warranty companies 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."

However, 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 WF Hann & Sons in Bedford Heights, Ohio. "They're very cookie cutter as far as repairs are concerned."

Dave Mejean, HVAC manager for B&W Plumbing Heating & Air Conditioning in Speedway, Indiana, 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."

Editor's note: This is an updated version of an article originally posted on May 4, 2011.

Do you have a home warranty? Tell us about your experience in the comments section below.