What Does a Residential Service Contract Cover?

How does a residential service contract work?

When you sign up for a residential service contract, you pay for either monthly or annual coverage. Most companies offer different plan types that cover appliances only, systems only or a mix of both, letting you choose the coverage that matches your home.

When a covered item breaks down, the provider sends a contractor (usually from its own network) to diagnose and fix the issue, and foots the repair bill.

Residential service contracts commonly include HVAC, electrical and plumbing systems, kitchen appliances, washers and dryers. Most companies also offer optional add-on coverage for items like garage door openers, septic systems, pools, spas, water softeners and well pumps.

Homeowners insurance covers sudden incidents like fires or theft, while residential service contracts are meant for everyday wear and tear.

To start a repair or replacement, you usually file a claim with the company online or by phone and pay a service fee. This fee usually ranges from $75 to $125, though some companies let you choose the amount in exchange for a different premium. After that, the provider coordinates with the contractor and oversees the repair process.

What a residential service contract covers

While each company varies, base plans will typically cover:

Appliances

• Built-in microwaves
• Dishwashers
• Dryers
• Garbage disposals
• Ranges, ovens or cooktops
• Refrigerators
• Washers

Systems

• Cooling
• Heating
• Electrical
• Plumbing
• Water heater

Add-on coverage varies between providers, too, but you’ll typically see options for swimming pool pumps, hot tubs, well pumps, ceiling fans and garage door openers. You may also find companies that offer services like annual HVAC maintenance or seasonal system checkups.

Limits and exclusions

Residential service contracts can cover many home repairs, but they have limits. These agreements are built around mechanical breakdowns caused by normal wear and tear, not every kind of age or performance issue. They don’t cover items that had problems before you signed up for your plan, known as preexisting conditions.

There’s often a 30-day waiting period before you can file a claim with a new service agreement to prevent claims for preexisting problems.

Most companies also require proof of routine maintenance for claim approval. “The fact that your items must be properly maintained has been a sticking point for many homeowners,” says Angel Conlin, chief insurance officer at Kin Insurance. To avoid a denied claim, keep service records and invoices of all the repairs and maintenance work for each item.

Plans can also have caps on how much they’ll pay toward a repair or replacement. For example, your plan may only cover a refrigerator replacement up to $2,000. If your current fridge costs $3,000, you may have to pay the difference out of pocket — or settle for a cheaper option.

Some other commonly excluded items include:

• Cosmetic or nonmechanical defects
• Some outdoor appliances, like an outdoor kitchen
• HVAC systems that are too small for the home where they were installed
• Commercial appliances

» COMPARE: Home warranty coverage

Residential service contract vs. a home warranty

Residential service contract companies and home warranty companies generally operate similarly. One difference, though, is who does the repairs.

“There is one company in our market who actually refers to themselves as a residential service contract company, versus a home warranty,” explained Melissa Zimbelman, a real estate agent and property manager in Nevada. “And the big difference with them is that all of the techs that come out to do the repairs actually work for the company. With most home warranty companies, the repairs are contracted out by the warranty company to local plumbing, electrical and HVAC companies who will come out and do the repairs.”

“This company claims the benefit to their business model is that they [can] better control the repair timelines and level of service you will receive. … The cost seems comparable to traditional home warranty plans offered.”

In some markets, providers also offer maintenance plans, which are easy to confuse with service contracts. Maintenance plans usually focus on scheduled maintenance, inspections and annual HVAC tune-up visits, while service contracts are meant to help cover repairs caused by wear and tear after something breaks down.

Costs

There are several fees associated with residential service contracts. First is the annual fee to sign up for a plan. This usually ranges from $350 to $1,400 annually, depending on the plan you choose. Many companies will let you pay out the annual fee in monthly payments.

Next, there’s the service fee or deductible. A deductible must be paid before service work can begin, and this fee typically ranges from $50 to $150. Your deductible can be lower or higher, depending on the annual fee payment you choose.

Finally, there may be out-of-pocket costs if your plan has a coverage cap. In most cases, your plan should cover the full repair cost, but a cap on how much the company pays for replacements may leave you to pay the difference.

» MORE: How much does a home warranty cost?

What are the benefits of a residential service contract?

According to Conlin, first-time buyers with no home maintenance experience, those buying an older house or owners with older appliances will benefit most from residential service contracts. The main appeal is the predictable protection against surprise repair bills for systems and appliances that can fail with little warning.

Another perk is the convenience. You don't need to find a service techinican yourself. Instead, the company finds one for you and schedules the appointment. This can be helpful if you're new to the area or don't already have a list of go-to contractors.  

What are the drawbacks?

Not everyone needs a residential service contract. They can be an extra expense to worry about, and you may not recover the costs if you don’t make any claims throughout the year. For some, the financial commitment doesn’t make sense.

For example, if you’re experienced with making repairs around the home, you may save money by doing the work yourself. Or, if you know handymen and contractors in your area who provide quality work at affordable prices, you may not need a service contract.

“Knowing someone you can rely on to do good work fast is often better than the savings these programs can provide,” said Tom Nolan, a home improvement specialist and the founder of All Star Home. “A great contractor will guarantee their work and make sure that you’re happy with their service, so you can feel more comfortable about the work done on your home.”

If you have a brand-new home, you probably won’t need coverage either. Your appliances and systems are new and unlikely to break down. In many cases, they may already be covered by a warranty from the builder or manufacturer. If that’s the case, a residential service contract may actually exclude coverage for any items under another warranty.

Top reasons for claim denials

These situations may lead to a denied claim:

• Preexisting conditions: Claims for items with damage that occurred before coverage started are usually denied.
• Poor maintenance: If you haven’t properly maintained an item, the company might not cover the repair costs.
• Coverage limits exceeded: If the repair or replacement costs more than your plan allows, you may have to pay the difference.
• Improper installation or code violations: Systems and appliances not installed in accordance with code or manufacturer guidelines may not be covered.
• Non-covered items or components: Some contracts cover only specific parts, not the entire appliance or system.

How to choose a provider

Before you dive in, there are several aspects to consider:

• Cost: How much is the contract, and how does it compare to what you'd normally pay for repairs in a year? If you have a brand-new home with new appliances, you might not need one, but it could be a lifesaver if you're in an older home.
• Coverage: Read the fine print. Know what's covered and what isn't. Some contracts offer different tiers of coverage, so pick the one that suits your needs.
• Reputation: Check out reviews and talk to some current customers to see how quick and effective the service is. There's no point in paying for a service that's going to leave you waiting weeks when you need a repair right away.
• Flexibility: Can you choose your own repair service, or are you required to use the company's technicians? Does the company contract out the work? This could make a big difference in the quality of service you receive.

Before settling on a company, ask pointed questions to see if the plan is right for you. What is the average response time for repairs? Are there any limits on the number of claims you can file per year? How are disputes over denied claims handled? Can you see a sample contract before signing? The more clearly you understand the process up front, the fewer surprises you’re likely to face later.

FAQ

Bottom line

Whether a residential service contract is worth it is a personal decision based on your home's condition, your comfort with do-it-yourself repairs and your financial situation. It tends to make the most sense for homeowners with older systems or appliances, or little interest in handling repairs themselves. But if you're good at DIY fixes or have money set aside for emergencies, a residential service contract might not be worth the expense.

Surprise repairs are part of being a homeowner, and having a residential service contract can help protect your budget from their costs. It’s important to know what counts as wear and tear, what maintenance proof you’ll need, what the coverage caps are and how claims are handled. That way, you can decide whether the plan is a useful safety net or just another bill.