The Washington Times: Sign on Dotted Line for Peace of Mind

Ten years ago, when Ryall Smith purchased his century-old town house on Capitol Hill, he decided he needed a little help when it came to the aging appliances within. He purchased a home-service contract, more commonly known as a home warranty.

“I’m a person who doesn’t know how to fix anything,” says Mr. Smith, a Realtor with Coldwell Banker’s Capitol Hill office. “And the appliances in the house weren’t bad, but they weren’t brand-new, either.”

According to the Service Contract Industry Council (SCIC), a national trade association based in Tallahassee, Fla., the number of home-service contract sales was up in 2009. One of the largest home-warranty providers nationwide, American Home Shield, saw renewals jump last year by almost 2.5 percent, with new sales increasing by more than 18,000.

Industry experts say a number of reasons explain the increase, from changing lifestyles and convenience factors to increased budget consciousness and awareness that new technology makes it nearly impossible to fix things the way one might have done 20 years ago. Meanwhile, home sellers frequently use home warranties to help make properties more attractive, and homebuyers often demand one to seal the deal.

“The economy has driven the value [of home warranties] up to potential sellers and buyers of new homes,” says Stephen McDaniel, assistant general counsel for SCIC.

So what is a home-service contract or home warranty? Although the details can differ from state to state and company to company, most home-service contracts specify that the company will service, repair or replace certain listed appliances that fail because of normal wear and tear.

“It’s not a builder’s warranty,” says Art Chartrand, national counsel of the National Home Service Contract Association, who notes that the industry has been evolving over the past 40 years as consumer needs have changed. One thing that has evolved is the name; the industry tends to favor “home-service contract” to distinguish it from builder and other types of warranties, although the term “home warranty” is favored by Realtors and others as a marketing term. Consumers also may see references to a “home protection company” or “residential service company.”

Such warranties generally do not cover exterior foundations, walls or structural finishes. Nor will warranties necessarily cover all the costs involved in replacing, say, a furnace or air-conditioning unit, but they will help defray those costs. The plans, which are in effect for one year, generally cost between $350 and $500, with charges for service calls ranging from about $50 to $100 each time a contractor arrives to diagnose a problem. More expensive contracts also can cover an array of optional items, such as “roof leak coverage.”

Industry executives caution that a home warranty is not insurance and should be considered a complement, rather than a substitute, for the array of insurance plans available to homeowners.

So when Mr. Smith had to deal with a constantly running toilet during his first year in his row house, he called his warranty company, American Home Shield. He spent about $60 for his service call on a plan that cost him $395 at the time.

“When I told people what had happened who had the same problem and no home warranty, I found they had ended up paying a lot more to fix it,” he says.

And when Mr. Smith’s furnace broke down three years into his residence, he again made use of his home-service contract, which he renewed year after year.

“That time it really paid off,” he says, “and I’ve used them for a stove and a couple of plumbing issues later on.”

Mr. Smith’s home-service contract didn’t cover everything. He ended up having to shell out about $2,000 on the $4,000 bill for his furnace, but a couple thousand dollars can make a big difference in the budget.

Indeed, Mr. Smith was so happy with his service contract that he has given one to his parents every Christmas for the past five years. They live in Shreveport, La., so the home-service contract also gives Mr. Smith some added peace of mind.

“They’ve replaced two air conditioners and the hot water heater,” Mr. Smith says. “They never would have allowed me to replace these things for them myself.”

Providing help to senior citizens, especially when their children may live some distance away, is another reason home-service contracts have proved more popular in recent years, Mr. Chartrand says.

Even when the children live nearby, they can’t always help. Technology is a lot more complicated today. Gone are the days when someone could tinker successfully with the water heater or air conditioner.

“There’s a lot more gadgetry,” Mr. McDaniel says. “The repair expenses alone are cost-prohibitive.”

Meanwhile, today’s homeowners move a lot more often than they used to, and they may not know the best handyman or plumber in the neighborhood. With a home-service contract, homeowners can simply call an 800 number, 24 hours a day, seven days a week, and get the ball rolling to get the problem fixed.

Home-service contracts often are especially attractive to two-income families, as parents rarely have time to make dinner, much less take apart the dishwasher.

There are a few pitfalls, however, when it comes to home warranties. In the past, unscrupulous and unlicensed companies have taken advantage of homeowners, refusing to fulfill the terms of the contract or fix the problem at hand. Homeowners complained of long wait times and sometimes shoddy workmanship.

A little more than a year ago, Virginia’s insurance regulators imposeda $25,000 fine on one company, National Home Protection Inc. of New York, and cautioned consumers against doing business with it after numerous complaints that the unlicensed company routinely denied customers’ valid claims and arbitrarily canceled contracts.

Service-contract industry executives take pains to point out that such experiences are hardly the rule for most consumers. Instead, they note that waiting times have improved and most companies try hard to be responsive to consumers.

“Everybody is challenged to work with the best contractors,” Mr. Chartrand says, “and it is a pretty competitive market.”

Home-service contracts all have some limitations. They typically do not cover pre-existing conditions or cases in which items fail because of a situation other than normal wear and tear. (That’s where homeowner’s insurance should kick in.) They won’t cover appliances already broken. Items not listed in the contract and items that were improperly installed or modified in some way also may not be covered.

“It’s got some flaws, but for the most part, it comes through,” Mr. Smith says. “Companies have gotten a lot better at listening to customers.”

In the end, many find that the comfort that comes with knowing they have a home warranty to protect them when something fails is worth the cost of the contract.

That definitely was the case for Lisa Santucci, who bought her first home – and first home warranty – in Florida when she was still single.

“I had a little toolbox ,and that was about it,” she says. “I kept thinking, ‘What if something should happen?’ ”

How did she know to get a home warranty? She worked for Florida’s Department of Insurance, the industry’s oversight agency.

Later, when she moved to Kansas and back again to Florida, she made sure each new property had a home warranty. Since then, she and her husband have bought and sold several homes, and they’ve made sure to highlight the home warranty as a selling point.

“Home warranties were part of the incentive package,” says Ms. Santucci, who is now retired. “Getting one when we were buying was an incentive for us, too.”

Yet in all those years, she’s never had to use her warranty. Not once.

“I never had to file a claim for anything,” she says. “But the peace of mind I got was definitely worth it.”

As a real estate agent himself, Mr. Smith frequently advises home sellers to buy a home warranty and “gift” it to the homebuyer at closing. (Most warranties are transferable from owner to buyer.) Many real estate agents think properties with home-service contracts may sell more quickly over other homes on the market and help keep buyers engaged with the property.

“It’s especially useful for first-time homebuyers who have always had a landlord to deal with repairs,” Mr. Smith says. “This is kind of like having your landlord’s name on a refrigerator magnet. If your dishwasher stops working, you just have to make one call.”

Of course, there are some circumstances that preclude a home-service contract. When Mr. Smith decided to move from his town house to a brand-new condominium, he didn’t need a home-service contract; the builder provided one. And, he says, if you are planning to gut your house for extreme renovations, a home-service contract probably would be a waste of money.

For many homebuyers and sellers, however, carefully researched home-service contracts may well be the way to go.

“More and more, it can mean the life or death of the sales contract,” Mr. Smith says. “It’s a great thing to have to pull out of your hip pocket when you need it.”