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Home Warranties Not Always What They Seem

Pre-existing conditions not covered, response time often lengthy

By David Wood
ConsumerAffairs.com

March 26, 2008

Not to be confused with a builder's warranty, a so-called home warranty -- actually a service contract -- is typically purchased for existing homes, especially homes sold by real estate agents. These service contracts generally cost $300 to $600 for a yearly basic coverage plan that includes items such as ceiling fans, water heaters, and the furnace.

Here's how a home warranty is advertised: Instead of calling a repair company when something breaks down, you call the warranty company, which sends out a local contractor to diagnose the problem. You'll pay the contractor a service-call fee, typically $50 to $100, and the contractor informs the warranty company what needs to be done to fix the problem.

Once the okay is given, the contractor repairs or replaces the problem item and you don't pay a cent more. Or so the ads promise.

Many consumers do find that these plans work just as advertised. However, many others are reporting serious problems with their warranty company, including American Home Shield (AHS).

Popular with Realtors

Owned by ServiceMaster, which also operates TruGreen and Terminix, AHS is a favorite among real estate agents who use the warranty as a home-selling perk.

One such agent is Anna, of Northern California. "My clients used to complain about AHS, but I always gave benefit of doubt to AHS," Anna admitted. "I figured every company has their share of unhappy complaints."

What Anna didn't know is that the same issues that plagued her clients would soon strike her personally.

Anna had a bathroom faucet go on the blink, so she called AHS. Their contractor refused to make the repair, so Anna paid out of her own pocket for a different plumber to make the 10-minute repair.

Her next problem came in the form of a malfunctioning air conditioner.

"The service technician reported that there was lack of maintenance and therefore it has to be replaced and cannot be covered under AHS," Anna wrote. "I paid separately to another vendor and he said the A/C unit is perfectly fine except that there is a leak that has to be fixed."

"Every time I call AHS for a problem, they deny the service either on grounds of lack of maintenance or abnormal wear and tear. How do you define abnormal wear and tear and lack of maintenance?" Anna asked.

No response

We contacted American Home Shield to ask the same questions, but they did not return our calls.

In reality, AHS is no different from other home warranty companies when it comes to exclusions and small print. Warranty company contracts say that a claim can be denied for lack of maintenance, improper maintenance, improper installation, pre-existing problems, code violations, and numerous other reasons.

Further, the contract says that coverage only applies if the item or system breaks down due to "normal wear and tear."

Considering that most home warranty plans do not require a prior inspection, the contractors and warranty companies are the sole judge of what is classified as "normal wear and tear" and "lack of maintenance."

"Our furnace self-destructed and AHS denied to fix it," said Phil, of Lake Forest Park, Washington. "AHS says we did not properly maintain the system, so they cancelled the warranty until we replace the furnace. I don't understand how a warranty we have been paying on for 7 years can be declared non-existent," Phil complained.

Fine print

The reason that a warranty company can call the shots is because of the contract. If you signed it, you're stuck with it, whether you read it or not.

Steve, of Land O' Lakes, Florida, discovered the details of his contract when he filed a claim with Old Republic Home Protection .

Steve's air conditioner was having major issues and Old Republic decided the unit needed to be replaced. As a real estate agent, Steve had recommended Old Republic to his clients, so he didn't think that getting his own problem fixed would be a problem.

"Boy was I wrong," Steve said. "Even though I was told a replacement unit would cost at least $4,000.00, Old Republic said they would pay me only $500.00."

After useless discussions with Old Republic managers, Steve ended up paying $4,200.00 to replace the unit himself. "Old Republic never did send me the $500.00," Steve said.

Steve ran into a brick wall because of the Old Republic terms and conditions that say: "We reserve the right to provide cash in lieu of repair or replacement in the amount of our actual cost (less than retail) to repair or replace such item," a clause commonly found in warranty contracts.

Contractors fume

Home owners aren't the only people that have had issues with warranties. We also heard from contractors who weren't pleased with their dealings with the warranty companies.

Ron, who owns a Louisiana-based heating and air conditioning company, told us that Old Republic called him, unsolicited, and asked him to be a contractor.

"They faxed me a sixteen-page contract ready to sign me up as a repair company," Ron said. "It included ridiculous low rates where I would have to get the local permit, recover the Freon of an air conditioner, buy the equipment, and warranty the job for 30 days."

Ron said that the pay was so low that his company would have made no profit and would have even lost money on labor costs. Additionally, there was the issue of getting paid.

"I had a bad past experience with a warranty company who took months to pay me," Ron said. "Old Republic assured me this wouldn't be an issue, but to get paid promptly I would have to give up 5 percent of the invoice amount."

Another contractor who asked to remain anonymous said that on the more expensive items, many contractors know they will lose money on the covered item. However, they will make it up in other ways such as upgrading the appliance or system to code specifications, hauling away the broken item, or cleaning an item before it can be serviced.

Additionally, contractors typically still get paid the service fee even if the claim is denied.

Insider advice

So what's a homeowner to do? Many consumer advocates would say it's better to "self-insure" -- setting aside a reasonable sum each year to cover routine maintenance and finding reliable local contractors to do the work. This is true of "extended warranties" in general.

Surprisingly, some industry insiders might agree.

"I would not recommend someone buy a warranty when the home has lots of known pre-existing conditions," said Lorna Mello, Vice President of Old Republic Home Protection. "Home warranty plans cover items that fail due to normal wear and usage after the effective date of the plan."

Mello also emphasizes the importance of reading the contract.

"I would advise they read the home warranty plan to clearly understand the terms and conditions of coverage so they have a clear understanding of what to expect."

Also keep in mind that it's the warranty company that decides what an emergency is, not you. This is a lesson that Nancy of Columbus, Ohio, learned the hard way when her furnace failed in February.

"We called AHS and was told no-one was available to take care of emergencies. We informed them that we had a 9-month-old infant in the house, and the home was very cold (Ohio winter weather)," she told ConsumerAffairs.com.

Nancy also learned that the homeowner generally has no choice about which contractor shows up to do the work.

"The company, Brokaw Heating, was assigned to come out within 1-2 days (horrible service). When we called Brokaw, they hung up on us and continue to be unresponsive. We have called 6 times to AHS only to hear the same thing -- nothing."

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