Wednesday, October 24, 2007

Are home warranties worth it?

Home warranties have been on my mind lately. It seems to me that much attention has been paid to the cost of title insurance and related claims but no one thinks twice about the home warranty.

Let's say you are purchasing a home here in western PA at a cost of $100,000. The title insurance premium at reissue would be $772.88. That one time premium pays for the examination of title and owner coverage up to $100,000. In the title business there is a true risk of catastrophic loss and therefore the title company could be forced to pay a claim up to the $100,000 mark. Title insurance has no expiration. Owner coverage continues so long as you have an interest to defend.

Got it? It's $772.88 for examination and insurance.

Now let's consider the physical components of the structure. A home inspection would cost about $400 and home warranty around $400, too. So to examine and then insure certain of the physical components of the structure you'd have to pay roughly $800.

Read this article. Here's a blurb:

By Tuesday, she had been referred to five plumbers. Four of them wouldn't call her back and the one who did said he couldn't come out for four days.

The customer service representatives at First American were unsympathetic, she said.

"There was no hurry, no urgency," she said. "I would be on hold for 45 minutes at a time."

So Ledford got estimates on her own from two plumbers.

But she said First American told her that it wouldn't pay the bill because she had to use one of the plumbers it referred to her.

After two days of missed work, endless phone calls and no running water, Ledford had enough and called The Watchdog.

After some research, we gave her the name of the company's chief operations manager and a number for corporate headquarters.

Suddenly, Ledford starting getting some help.

Shortly after leaving a message for the executive, Ledford received a call back from Rebecca Richwine, a claims analyst for the company.

Richwine apologized profusely, Ledford said, but more importantly, by late Wednesday afternoon she got Ledford an authorization code to use a plumber outside First American's referral network.

Four days after the pipe burst, it was fixed and the water was turned back on.

Ledford had to pay the $350 plumbing bill out of pocket and submit a claim for reimbursement. She received the check last week.

Richwine told The Watchdog that Ledford did everything she was supposed to do under the terms of her warranty contract.

I have some questions. Perhaps you, dear Reader, have the answers.

  • How often are claims made against home warranties?
  • How long does the warranty last?
  • Does the Realtor earn a portion of the warranty premium as a commission or referral fee?
  • If a referral fee or commission is earned, is it disclosed to the consumer?


Doug Miller said...

I too have often wondered about these Home Warranties. In fact, I know that in the past a commission was paid to the person who sells these - not sure if still the case. I would love to find out though because I guarantee you that it isn't being disclosed.

The other point is whether or not this "Warranty" is really the unauthorized sale of insurance.

Diane Cipa, The Closing Specialists® said...

Well, there's no doubt that home warranty is insurance. FATIC groups it in their specialty insurance are. Here are some remarks from their March 2007 investor conference call.

"Now let me spend a few minutes talking about our Specialty Insurance business. The Specialty Insurance business
has been a very consistent performer all year long and did report record pretax profits for the year. Our fourth
quarter results were strong as well, with total revenues up 6.1% relative to last year, and pretax profits up 13.5%
relative to last year.
For the full year, the P&C business which is primarily homeowner’s insurance, increased pretax income by
approximately 27%, and this was driven primarily by very, very strong underwriting results and a combined ratio of
83% for the year. The Home Warranty business also continued to produce strong results, with an 8% increase in
pretax income and a combined ratio of 90% for the year. The growth in this business was driven by three factors.
The first was geographic expansion of our Home Warranty company. The second was higher renewal rates, and the
third was very strong underwriting results, particularly in our Homeowner's segment, which experienced a 2
percentage point improvement in its loss ratio."

Along those lines, I am thoroughly confused about monoline restrictions. How is it that title insurers restricted by statute to one line of insurance are able to sell other lines?