Are home warranties very important? The concensus among experts is ``yes''

March 15, 1992|By James M. Woodard | James M. Woodard,Copley News Service

Are home warranties important?

Haven Burke, a regional president of First National Realty, thinks so. "Without home warranty coverage after the sale of a previously owned residence, the seller and his agent are just standing there in their shorts -- a vulnerable target for after-sale problems," he says.

A typical home protection plan covers costs of repairing or replacing "working parts" of a home -- the mechanical, non-structural systems and components.

The plumbing, electrical and heating systems are normally included in the coverage. Other items such as kitchen appliances and garage door openers are often covered, too.

The service contract is usually for a one-year period following the sale of a home, costing a one-time fee of $250 to $400. Some warranty firms will allow the new homeowner to extend the coverage for additional one-year periods for an added fee.

"It provides much-needed protection against liability risks as well as other unexpected financial losses. We strongly recommend it to all owners of our listed residential properties," said George King, another brokerage firm executive.

He noted that the one-time fee for the coverage is usually paid by the home seller, but the cost is sometimes paid or shared by the buyer or broker.

One popular program is HOW, the Home Owners Warranty Corp., used by more than 10,000 home builders across the nation. More than 25 percent of the new homes sold in the United States are included in the program.

The HOW program gives home buyers a two-year limited warranty. Builders who participate in the program buy insurance to cover major structural defects for an additional eight years.

During the past couple of years there has been a sharp rise in the number of home warranty service calls from owners, according to a report by the National Home Warranty Association. It signifies greater use of service agreements by homeowners to repair or replace covered mechanical systems and major appliances.

Two years ago, home warranty companies paid out an average of 74 claims for every 100 home warranty service contracts issued. In 1991, 126 claims were paid out for every 100 homes covered, the NHWA report noted.

"As a result of increased usage, warranty claim costs have jumped as much as 50 percent over the past two years," the report said.

Along with increased public awareness and usage of home protection plans, there has been an influx of new plans. Some of these service contracts are dangerously deficient in coverage aspects.

"It's important to be on the lookout for misleading coverage claims and plans with a poor track record of claim service," said Philip Branson, president of First American Home Buyers Protection Corp., a major home warranty firm based in Van Nuys, Calif.

"The extent of coverage varies greatly from plan to plan. Service call fees and other costs also vary. The key to findilng the best possible plan is to read the terms and conditions in the contract carefully," he said.

Major insurance companies recognize the importance of such coverage. They often reduce their premiums for errors and omissions policies for brokers who provide warranty coverage for their listed residential properties. In effect, they are acknowledging the role of home warranties in reducing claims and costly legal fees.

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