A Home Warranty Is Not the Same Thing as Homeowners Insurance
A homeowners insurance policy and a home warranty can both involve something going wrong with your house.
That's about where the similarity ends.
They cover different risks, work differently and serve different purposes. Yet I regularly hear the terms used almost interchangeably.
They're not interchangeable.
Homeowners Insurance Is Insurance
Homeowners insurance is designed primarily around losses caused by covered events.
Think fire, hail, wind, theft and certain types of water damage, depending on the policy and circumstances.
It can also include liability coverage if someone is injured or property is damaged and you're legally responsible.
Exactly what's covered — and what's excluded — depends on the policy. That's why your insurance agent is the person to ask when you want to know whether a particular loss is covered.
If you have a mortgage, your lender will generally require homeowners insurance because the lender has a financial interest in the property.
A Home Warranty Is a Service Contract
A home warranty is different.
It's generally a service contract covering certain appliances and home systems when they fail under the terms of the warranty.
Depending on the plan, that might include things such as:
- Furnace or heating equipment
- Air conditioning
- Water heater
- Plumbing components
- Electrical components
- Refrigerator
- Dishwasher
- Range or oven
The specific list matters because plans vary.
So do exclusions.
A warranty isn't a promise that anything that breaks in your house will be fixed for free.
Let's Say the Furnace Quits
This is an easier distinction to understand with an example.
Suppose your furnace simply stops working because a covered component fails through normal use.
That's generally not what homeowners insurance is designed to cover.
A home warranty **might** provide coverage, depending on the contract, the cause of the failure and its exclusions.
Now suppose a covered fire damages the furnace along with part of the house.
That's potentially an insurance claim rather than a home-warranty issue.
Same furnace.
Very different reason for the loss.
Home Warranties Usually Have Service Fees
Even when a repair is covered, a home warranty generally isn't free to use.
You typically pay a service-call fee when a contractor comes to evaluate the problem.
There may also be coverage limits.
If your furnace needs a $9,000 replacement, don't assume the warranty company is automatically writing a $9,000 check. The contract may limit what it will pay for a particular system, component or type of work.
There can also be exclusions based on the cause of the failure, improper installation, maintenance issues or other conditions specified in the contract.
This is one of those times when reading what you're actually buying matters.
Why Do Home Warranties Come Up During Real Estate Transactions?
Home warranties are commonly discussed when a house changes hands.
A buyer may decide to purchase one.
A seller may agree to pay for one as part of the transaction.
In some situations, a seller may already have coverage in place.
The appeal isn't difficult to understand. You just bought a house, you've spent quite a bit of money, and you'd prefer not to discover three weeks later that the dishwasher and furnace have independently decided to retire.
A warranty can shift some of that risk.
But it doesn't eliminate it.
I Don't Treat a Home Warranty as a Substitute for an Inspection
This is an important distinction.
If the inspection raises a concern about the furnace, I don't want to shrug and say, “Don't worry about it. We'll get a home warranty.”
The warranty company has a contract.
That contract has terms and exclusions.
If we know about a potentially significant issue during the inspection period, I'd rather understand the condition of the system and make an informed decision about it.
A warranty can be an additional layer of protection.
It isn't a reason to stop investigating a problem we already know may exist.
Is a Home Warranty Worth It?
Sometimes.
That's not a particularly satisfying answer, but it's the accurate one.
It depends on the cost of the plan, what's covered, the exclusions and limits, the age and condition of the home's systems and appliances, and your own tolerance for repair expenses.
Someone buying a house with several older systems may look at a warranty differently from someone buying a newer home with equipment still covered by manufacturer warranties.
And some homeowners would rather keep the money and handle repairs themselves.
Neither approach is automatically right.
Know Which Problem You're Trying to Solve
Homeowners insurance protects against certain insured risks.
A home warranty is a service contract that may cover certain failures of specified systems and appliances.
You may have both.
You may make a claim under one and not the other.
And having either one doesn't mean every unfortunate thing that happens to your house is covered.
Before relying on either, read the policy or contract and ask the appropriate professional about anything you don't understand.
Insurance and home warranties can both be useful.
They just aren't the same thing.