August 29, 2017 | Ann Nguyen
Homeowner’s Insurance and Home Warranty Coverage: What’s the Difference?

Your client’s text message says she is “over the moon” about the home you found for her. But now that the seller has accepted her offer, she has a question. “What’s the difference between homeowners insurance and a home warranty plan?” she asks.

Almost automatically, you click on the “return message” arrow on your mobile device and begin tapping out a response. But after three or four false starts, you realize you’re not exactly sure how to respond.

You aren’t alone. Insurance and home warranty companies say it’s one of the most common questions they receive from both REALTORS® and the homebuyers and sellers you serve.

So what is the difference, and how can you explain it the next time a client asks?

Simply stated, homeowner’s insurance protects homeowners by covering the cost of rebuilding or repairing structural damage caused by a fire, storm, or other natural disaster or calamity. If there is a mortgage, the lender will require that the homebuyer obtain adequate “hazard insurance” to protect the bank’s financial interest in the home. Most homebuyers also opt to purchase protection that covers damage to, or theft of, a home’s contents or the homeowner’s personal property, liability coverage in case a third party is injured while on the property, and so-called “riders” that cover damage from specific catastrophic events, such as earthquake and wildfire, or specific valuables, such as art, jewelry or collectibles. Homeowner and hazard insurance premiums often are paid along with the homebuyer’s monthly mortgage payment.

A home warranty, on the other hand, is a service contract designed to protect homeowners’ budgets from having to bear the entire cost of repairing or replacing major components of home systems and appliances that break down over time due to age and normal wear and tear. A home warranty plan is not a replacement or substitute for standard homeowner’s or hazard insurance. However, many homeowners consider a home warranty contract to be an important complement to homeowner’s insurance coverage.
While a homeowner may never suffer a catastrophic weather or other calamity during the time they own their home, the systems and appliances covered under a home warranty contract are quite likely to require repairs, or need to be replaced – particularly as a house ages.

Home warranty coverage can help home buyers ease the worries that come with thinking about how they will pay for repairs or replacement of systems and appliances in a home they have purchased. Home sellers, on the other hand, often purchase a one- or two-year home warranty contract [or] plan on behalf of their buyers. In doing so, they also enjoy the knowledge that a covered system or appliance breakdown is the responsibility of the homeowner once a home sale is completed.
Major home systems and appliances that may be covered by a home warranty contract include:
  • Furnace, central heating and air conditioning systems
  • Ductwork
  • Electrical and plumbing systems
  • Water heater
  • Clothes washer and dryer
  • Refrigerator
  • Range, oven, cooktop, built-in microwave
  • Instant hot/cold water dispenser
  • Dishwasher
  • Garbage disposal
Optional home warranty coverage can include a guest unit, swimming pool, spa and related equipment (including salt water pools and equipment), well or septic system pump, additional refrigerators, ceiling fans, doorbells and electric garage door openers, and telephone wiring.

It also may be helpful to think of the difference between homeowner’s insurance and a home warranty this way: Let’s say lightning strikes your home and damages your rooftop air conditioning unit and surrounding roofing materials. Because the damage was caused by a natural event beyond your control, your homeowner’s insurance would cover the cost of repairing or replacing the unit and roofing. However, if your air conditioning unit simply conked out the first day of summer and had to be repaired or replaced, your home warranty contract could help cover this breakdown.
It is important, of course, that everyone understands what events are included in their insurance policy, what coverages are required by their lender, and any dollar limitations to property coverage. An insurance agent is best equipped to provide important information about homeowner’s insurance, while REALTORS®, home sellers and home buyers should contact a reputable home warranty representative to learn more about coverage options.

*** Reposted with permission from the CALIFORNIA ASSOCIATION OF REALTORS®, copyright 2016, all rights reserved.


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