What Does a Home Warranty Cover?

Nothing beats the sound of keys to a new home jingling in your hand. However, excitement can quickly turn to anxiety once you move in and problems arise. A new air conditioner or heater can cost $3,000 or more, and a plumbing problem can add $1,500 to your credit card balance.

A home warranty, on the other hand, can protect your home's systems while potentially saving you money in the long run. You can even get one for a house you've lived in for a long time. However, home warranties are not without limitations and exclusions, and they do not cover your home from foundation to roof. They do, however, provide excellent protection that most standard homeowners insurance policies do not.

What Is a Home Warranty?

A home warranty is a service agreement that covers home systems like air conditioning and heating units, electrical infrastructure, kitchen appliances, and plumbing. When a covered system fails, contact the warrantor, who will dispatch a technician to repair or replace it. You pay an annual or monthly contract fee as well as a service fee when you request a service call in exchange.

Typically, warranty companies provide a variety of coverage options. Some companies provide a basic package as well as premium plans that cover more home systems. Other companies provide plans that bundle items such as kitchen appliances or major systems such as electrical, heating and cooling, and plumbing components.

Cost

Home warranty prices vary depending on the size, location, and type of residence, such as condominium, duplex, or single-family house. The average homeowner should expect to pay at least $400 per year ($33 per month) for a home warranty contract, but could pay well over $900 per year ($75 per month) depending on the company, property type, and extent of coverage. When you purchase a warranty, you will only be charged a trade call fee (usually $100 or less) when you request a service call.

Typically, there are no deductibles with home warranty plans. However, warranty companies impose coverage limits. First American Warranty, for example, will cover up to $2,500 for a refrigerator, $1,500 for saltwater pool equipment, and $1,000 for a roof leak.

What’s Included in Home Warranty Coverage?

Home warranties don't come in one-size-fits-all packages, so it's worth shopping around to find the best fit for your home's systems. However, most basic home warranties cover the following:

• Electrical systems
• Heating systems
• Plumbing systems

Many also include:

• Ceiling fans
• Ovens, cooktops, and ranges
• Dishwashers
• Ductwork
• Garage door openers
• Garbage disposals
• Built-in microwave ovens
• Plumbing breakdowns
• Trash compactors
• Water heaters
• Whirlpool baths

Landmark Home Warranty, for example, covers major systems such as air conditioning and heating, electrical, and plumbing in its Home Systems Plan (its basic plan).

Other basic plans, such as Home Warranty of America's Premier Plan, are less likely to cover air conditioning but may include other coverages, such as dishwashers, ranges, and garage door systems.

Premium Coverage Options and Add-Ons

Home warranty companies typically offer premium packages, the ability to combine plans, or the addition of systems and specific coverages to a basic plan.

For example, with Landmark, you can supplement the basic plan with coverage for your refrigerator (for $4.17/month) or a well pump (for $7.50/month).

What’s Not Covered by a Home Warranty?

A home warranty will not cover systems that have pre-existing issues before you sign a contract. So forget about purchasing a home warranty to replace an air conditioner that is already blowing hot air.

Furthermore, while warranties contain exclusions, the following incidents are generally not covered by home warranty coverage:

• Losses resulting from "acts of God": Damage resulting from earthquakes, landslides, lightning, or windstorms may be covered by your homeowners insurance policy but not by your home warranty.
• Accidental losses, electrical surges, and fires: These incidents are also more likely to be covered by your homeowners policy.

Exclusions vary by provider, but the following types of coverage were frequently excluded from the plans we surveyed:

• Pest control services
• Routine maintenance
• Alarm systems
• Drywall
• Exhaust and attic fans
• Toilets
• Hot water pump
• Smoke detectors
• Clothes washer and dryer

Purchasing a home warranty does not absolve you of maintenance duties. If you do not properly maintain your home systems, the warrantor may refuse to honor a claim. For example, if your heating system breaks down because you haven't changed the filter in several years, the home warranty company is unlikely to pay to repair or replace it.

As you can see, a home warranty is not a panacea for all home system issues. Remember that you will be charged an annual contract fee as well as trade call fees, and payout limits may apply. Before signing a contract, read the fine print to understand what is and is not covered.

Home Warranty vs. Homeowners Insurance

While a home warranty covers your home's systems and/or appliances, homeowners insurance protects your home's structure, detached structures, and personal belongings from perils such as fire or storm. For example, if a fire destroys your living room, your home insurance policy may pay for structural repairs as well as the replacement of items such as furniture and electronic equipment. A homeowners policy may also cover legal fees if you are sued for an accident that occurs in your home, as well as hotel and restaurant bills if you are displaced from your home due to a covered loss.

Unless they are involved in a covered loss, standard home insurance policies typically do not cover faulty equipment such as refrigerators or air conditioning units. For example, if an electrical short in your clothes dryer destroys the machine and causes a fire in your laundry room, your home insurance policy may cover the structural damage as well as the replacement of the dryer. However, unless your policy includes an equipment breakdown endorsement, if the electrical short only damages the appliance, your homeowners insurance will not pay to repair or replace it.

Is a Home Warranty Worth It?

You might not need a home warranty if you have a well-stocked emergency fund. However, if the prospect of replacing a major system, such as a central air conditioning unit or water heater, sends you into a mental tailspin, a home warranty may provide the peace of mind and coverage you require.

Consider the age and condition of your home's systems, how much it would cost to replace them, and whether you have the funds to do so when deciding whether to buy one or how much coverage to get.