Home Warranty Terms Explained
If you’re new to the idea of getting a warranty for the appliances and systems in your home, home warranty terms can be confusing. Think of your home - and all the appliances and systems in it - as an investment. You paid for them and need them to keep working, so it makes sense to look for a way to provide a financial safety net if something breaks down, and home insurance typically only provides coverage under certain circumstances.
What is a home warranty?
A home warranty is sometimes referred to as a “service contract.” In essence, a home warranty is a monthly or yearly contract between the homeowner – or renter – and a provider that’s designed to provide a financial safety net for when the home’s appliances and systems break down.
Home warranties can be purchased for a monthly fee or paid for on a yearly basis in one lump sum, depending on how your chosen provider designs their plans. Many people confuse home warranties with home insurance. They do overlap in some areas, especially when the breakdown is caused by a known peril that’s typically covered by home insurance, such as weather-related damage or damage caused by a falling object.
For some perspective, here’s a quick list of what home insurance covers:
Water damage
Wind and hail damage
Fire and smoke damage
Theft and vandalism
Liability
Dog bites
Falling objects
Freezing damage
Mold damage
Home insurance doesn’t cover:
Earthquakes
Frozen pipes (when your home is left unattended for more than four days in a row)
Flooding (when it’s not related to burst pipes and broken appliances)
Vacant properties (home insurance won’t provide coverage if a property has been vacant for 30 days or more)
Neglect (insurance won’t provide coverage if the damage is caused by neglect)
A home warranty typically covers the following:
Oven, stovetop, range
Water heaters
Garage door opener
Electrical systems
Garbage disposal
Heating
Refrigerator
Plumbing
Dishwasher
Ducts and vents
Re-keying of locks
Jetted bathtubs
Stand-alone ice machines
Ceiling fans
Trash compactors
A home warranty doesn’t cover:
Faulty installation
Cosmetic defects, like scratches
Misuse or neglect
Pest-related damage
Items covered by a manufacturer’s warranty
As outlined above, there are areas in which home insurance may overlap with a home warranty. However, appliances and household systems can break down without it being the result of damage from the known perils covered by insurance, so that’s where a home warranty comes into play.
There are typically three types of home warranty coverage: appliance coverage, system coverage, and combination coverage.
Home warranty add-on coverage
Home warranty add-on coverage is exactly as it sounds: it’s coverage that you can add onto your existing warranty plan. Home warranty add-on coverage can help you save money when expensive repairs are needed for typically covered items. The useful thing about add-on coverage is that it allows you to only pay the necessary premium instead of paying for blanket coverage that encompasses items you may not even have. Add-on coverage can be a valuable addition to your warranty because it provides a safety net for some of your most costly investments.
Home warranty add-on coverage can provide coverage for the following items:
Built-in microwave
Air conditioning
Septic tank
Spa equipment
Well pump
Pool equipment
Sump pump
Free-standing freezer
Free-standing ice maker
Swimming pool
Central vacuum system
Appliance home warranty coverage
Appliance home warranty coverage refers to a plan that’s designed to provide coverage for home appliances, such as your refrigerator or dishwasher. Generally, this type of plan includes only the major appliances – those that form a major part of your home’s infrastructure. This type of plan is a basic starting point for home warranties.
System home warranty coverage
System home warranty coverage is the next plan up from appliance home warranty plans. It covers your home’s basic mechanical systems, like electrical, plumbing, and HVAC.
Combination home warranty coverage
If you want a more complete coverage option, consider combination home warranty coverage. This type of plan offers both appliance and mechanical system coverage, so if something on the lists above breaks down, you’ll have a safety net to fall back on.
Coverage limits
The term “coverage limits” can be used to refer to the length of time a home warranty contract provides coverage for your appliances or mechanical systems. Typically, it applies to the maximum financial amount you can expect from your plan for any given repair or replacement. The main purpose of coverage limits is to allow home warranty providers to offer the best possible coverage at the most reasonable price. Beyond that, they allow the provider to continue offering a level of coverage and service that their clients have come to expect.
To illustrate how coverage limits work, let’s say your refrigerator breaks down. Without the benefit of a home warranty, you can expect to pay at least $340 to have it repaired or at least $1,370 to replace it – all out of pocket and upfront. With a home warranty in place that includes appliance coverage, you may pay a service fee (typically $65-$100). If the cost of your repair or replacement falls beyond your coverage limits, you would be expected to pay the service fee plus the difference between your coverage amount and the cost of the work. It's important to note that coverage limits can often be increased.
Some examples of coverage limits include:
Electrical – $2000
HVAC – $2000
Oven/range/cooktop – $1000
Built-in microwave – $500
Service fee
When you make a claim on your home warranty plan, the provider sends out a repair technician to assess the job. It’s up to you as the plan holder to pay the service fee for that visit, which typically falls between $65 and $100. If you didn’t have coverage and you needed to have your refrigerator repaired, a repair technician would charge you for that visit, then tack on the cost of parts and repair work. The service fee is basically the same as the amount you would have paid for a repair technician to visit your home without a warranty plan in place.
Wear and tear
Over time, household appliances and mechanical systems may rust, corrode, fill with sediment, or just plain fall apart as a result of age and everyday use. If your appliances and systems are generally well taken care of but they suddenly break down, they may be labeled as victims of wear and tear. In this case, where neglect is not an issue, the repairs and replacements resulting from wear and tear are likely covered under the terms of your home warranty.
Coverage gaps
A coverage gap occurs when the maximum amount of allowable coverage falls short of the cost of a repair or replacement. For example, let’s say your refrigerator is so badly broken down that it needs to be replaced. If comparable refrigerators cost $2500, but your coverage limit is $2000, then you’re left with a coverage gap of $500. To minimize the possibility of a coverage gap, you can usually increase the limits in your home warranty plan. If you increase the coverage limit at the time of the claim, you’ll be liable for the remaining $500.
Like the terms used in any other contract, home warranty terms can be confusing. Between the different plan types, coverage limits, and home warranty add-on coverage, it pays to arm yourself with knowledge. Your appliances and mechanical systems make up a significant part of your home investment, and since home warranty plans are designed to provide a financial safety net for that investment, having one in place can help protect you against a huge outlay of money.
