Home Warranties vs Homeowners Insurance – Who Covers What?August 25, 2015
Over the years, while teaching risk management classes, I realized that many people are not aware of the differences between homeowners insurance and home warranties. Easily mistaken, it is sometimes not until a catastrophic failure and damage occurs that the owners learn about a missed opportunity, the home warranty. Buyers may think they have purchased “homeowners insurance” to protect themselves but learn quickly that they don’t have coverage for the broken component. Without having a knowledgeable real estate agent or someone to explain the differences, this can be quite confusing and sometimes an expensive mistake.
The difference in homeowners insurance and a home warranty is critical when devastating damage occurs due to the failure of a system in your home. The home warranty protects the owner by repairing or replacing the system that breaks. The homeowners insurance protects the owner by repairing the damage that was caused by the broken system. The damage that occurs from the failure of a system is called “consequential damage.”
To further explain consequential damage, let’s use a hot water heater as an example. The water heater burst in a closet while the homeowner was out of town. Water continued to run without anyone realizing it’s failure. Within a few hours, the flooding caused the floor upstairs to buckle and the ceiling in the room downstairs to collapse.
In this case, the home warranty company would be called for the replacement of the hot water heater. The consequential damage from this breakage would require a claim be placed to the homeowners insurance policy. Repairs to the walls, floor and ceiling would then be handled and paid for by the insurance company. This could be an extremely expensive experience, but the cost is minimized when the owner has to pay only the deductibles for both policies to bring the home back to livability.
Another difference between home warranties and homeowners insurance is that mortgage lenders require homeowners insurance on any home that has financing involved. This protects the lender’s interest in the home should damage occur due to unplanned events that can be catastrophic. To date, home warranties are not a requirement in all states, but are available to all builders across the country to provide additional coverage on a home. This additional coverage protects a homeowner for the systems of a home and minimizes the out of pocket expense at the time of the occurrence.
There are several different home warranty companies from which a builder may choose and a homeowner should be sure to look for builders who offer a home warranty on their homes for this additional coverage. One of the countries leaders in home warranties is Professional Warranty Service Corporation. The first step from a builder or realtor to determine home warranty coverage is to call a PWSC Regional Sales Director to make sure that your clients’ homes are covered from the day that they close. As a realtor or builder, you may be your clients hero!