What’s the Difference? Home Warranty vs. Home Insurance
While the concepts of insurance and warranties are similar—both can protect you financially from system or product failure and damage—their functions are quite different, and you may need both.
Home buyers and homeowners know that they need to budget for homeowners insurance: Most mortgage lenders require it as a protection of their own risk, and often the payment is made from the escrow account with your lender. Home warranties sound like a similar product—after all, nearly everyone has been offered an extended warranty on an appliance or car—but the protection provided by a home warranty has a different scope than the protection offered by a homeowners insurance policy. While your insurance will cover damage and loss, a warranty covers the bulk of the repair or replacement cost for home systems and appliances that fail as a result or age or wear and tear. Homeowners insurance does not cover that type of failure. In other words, a good home warranty and a good homeowners insurance policy complement each other and together provide solid protection of your investment.
1. Homeowners insurance covers the structural damage or loss of a property, whereas a home warranty offers discounted repair on appliances and systems.
Take a look at a homeowners insurance policy. There you’ll find a list of the kinds of damage and disasters the company will pay to cover: It will be a pretty specific list. Usually homeowners insurance covers fire, many natural disasters, vandalism, damage caused by burglars, accidents, and theft. Homeowners insurance covers the interior and exterior of your home, and usually your yard. In addition, homeowners insurance can be customized to cover specific items: expensive jewelry, musical instruments, and fine artwork can be added to the policy for higher coverage (at a higher cost), and homeowners insurance can also cover your liability in the event that someone is injured on your property. This insurance covers you from loss and damage.
What it does not do is cover the repair or replacement of major home systems and appliances unless they are damaged or destroyed by one of the listed perils in your policy—so if your HVAC system is destroyed when a tree limb falls through your roof, your homeowners insurance will cover it, but if the HVAC system fails because of an electrical short in an old component, you’re on your own to pay for it. This is where a home warranty steps in: If you have properly maintained the HVAC system and the short was a result of age or normal use, the home warranty will cover the repair (if possible) or replacement of the HVAC system. You’ll have to pay a small service fee for the repair, but it will be a substantially lower cost than the replacement of the HVAC system. Home warranties cover repair and/or replacement of electrical, plumbing, HVAC, and other home systems, along with appliances that are included in the policy. Add-ons are available for swimming pools or hot tubs and other major appliances. A home warranty requires an annual premium, just as a homeowners insurance policy does, and a service fee is charged for each contractor visit. Some companies charge a flat fee for service calls, others charge a percentage of the total cost of the repair, and others, such as American Home Shield, charge a different fee depending on which level of coverage you selected when you purchased the policy, with a lower premium corresponding to a higher service charge and vice versa. To keep the policy in place, you’ll need to plan and schedule routine maintenance on a regular basis and avoid trying to DIY your own fixes.
2. Homeowners insurance often provides liability protection.
You’ve just moved into your house, and your friendly new neighbors arrive at your doorstep to bring you a plate of brownies—a great sign that you’ll be welcome in your new neighborhood! If your front step is icy, however, and the neighbor slips, falls, and is injured, you’re likely going to be paying out of pocket for their hospital and doctor bills—possibly for quite some time. If your nervous dog bites an unfamiliar new person, for example, the same scenario is likely to unfold. Homeowners insurance policies usually offer liability protection that will cover those costs for you. Most policies include a base amount of coverage that you can choose to increase, but some may require an additional liability policy. If you’ll have lots of kids playing in your yard, have a pool, or have a dog, it’s worth possibly increasing the base amount. But read your policy carefully: Many policies list exclusions of certain dog breeds from their coverage, along with some structures such as trampolines or high-risk pool equipment, because of higher risk to the insurance company.
3. If you have a mortgage, a homeowners insurance policy may be mandatory. A home warranty is optional.
Mortgage lenders take a big risk when they lend a home buyer hundreds of thousands of dollars to buy a home. While they can assess the risk of the borrower’s likelihood of making payments on time, there’s no way for them to reasonably assess the risk that the home will be damaged in a storm or destroyed in a fire, which would leave the lender holding a note for repayment of a house that no longer existed. Because of this risk, most mortgage lenders require that borrowers take out a homeowners insurance policy to protect their investment. Many go so far as to require that the insurance policy be paid through the lender, so the borrower pays their mortgage each month and a certain amount of the payment goes into an account that will pay for taxes and homeowners insurance. Other policies allow the borrower to make the homeowners payments themselves but require proof of insurance several times a year. Depending on the location of the home, the lender may require higher levels of insurance coverage, especially in flood-prone areas.
While the lender is at risk if the home is damaged or destroyed and so requires protection against that, they are not at risk if the oven breaks down or the water heater fails, so they do not usually require a home warranty.
4. Homeowners insurance may not be enough, and home warranties can often “fill the gap” in coverage.
Most people choose or are required to purchase homeowners insurance to stave off disaster and ruin: The homeowners policy will cover the physical and financial burden after an accident, fire, or natural disaster. The problem is that homeowners insurance policies specifically exclude disasters caused by wear and tear or natural aging, and for many homeowners a catastrophic failure of a home system is as financially disastrous as a tree crashing through the roof. Especially for new homeowners who haven’t had time to build a solid financial safety net for unexpected costs, a home warranty can save the day by covering maintenance costs (which make the bigger failures less likely) and replacement costs of systems excluded by homeowners insurance policies.
5. Home warranties can cover the repair of a home’s system, whereas the homeowners insurance can cover the cost of the damage caused by the issue.
You wake up one morning, hop in the shower, and are blasted by freezing cold water. Racing to the basement, you discover that the hot water heater has failed, dumping 70 gallons of water onto the basement floor and continuing to pump out more as it tries to refill itself. Ankle-deep in water, you locate the water shutoff (and the power breaker, depending on your home) and look around at soaked carpeting, wallboard, a furnace with water dripping down the side, a washer and dryer knee-deep in water, and waterlogged furniture. Who’s going to pay for all of this?
If you have both a homeowners policy and a home warranty, the answer is both your home warranty provider and your homeowners insurance provider. Your homeowners insurance will specifically exclude the replacement of the water heater itself, along with the cost of the visit to have it replaced, the labor, and the haul-away—but if you have properly maintained the water heater in the past, your home warranty will cover those costs.
Your homeowners insurance policy will, however, cover the cost of equipment to remove the standing water and dry out the basement, tear out and replacement of the wet carpet, removal and replacement of the waterlogged furniture and appliances, replacement of the wallboard that was soaked, and any mold or mildew abatement that is necessary, in addition to any other property that was damaged. You’ll need to meet your policy’s deductible, and often if the replacement items are more expensive than the value of the destroyed items, you may have to chip in to get the materials you’d prefer, but beyond that cost the damaged items will be covered for replacement.
In other words, the warranty will cover the appliance that failed, and the homeowners insurance will cover the damage that failure created. If you don’t have a home warranty, the insurance will still cover the damage, but you’ll be on the hook for the new water heater itself, the plumber, and the disposal of the failed water heater. The two policies can work together to make the restoration of your home complete.
6. Homeowners can opt for both a home warranty and homeowners insurance for the best coverage.
While everyone would love to assume that properly maintained systems and appliances will last exactly as long as they’re supposed to, and that planned replacements that can be appropriately budgeted for will keep everything humming along well, that’s not always the case. Appliances fail, sometimes for no reason. Systems short out, pieces give way, and those expenses can mount quickly to a point where they’re not sustainable. Homeowners insurance policies will protect homeowners from damage and liability from outside the home or within, and the best home warranty companies can help ease the expense of system failures by covering professional repairs and covering the cost of repairs when systems give way. By carefully choosing policies; reading the policies with great care for a solid understanding of what’s covered, what’s excluded, and what conditions need to be met for the policies to be valid; and a clear recognition of deductibles and service charges, homeowners can be comfortable that they have done their due diligence to guard against disaster. The combination of a homeowners insurance policy and a home warranty covers as many bases as possible and provides the ultimate in protection against physical and financial threats to your home.