Why home warranties aren't a good bet for homeowners

Home warranty companies run lots of ads promising to save you thousands of dollars when something goes wrong with your refrigerator, furnace, plumbing, and other appliances and systems. But don't count on the peace of mind these plans promise. These warranties are bad deals and simply aren't worth their price tags or hassle.

Home warranty companies generally take in way more fees than they ever pay out for repairs. Checkbook looked at the financial filings of the parent company of American Home Shield and several other warranty providers. For the nine months ending in September 2018, American Home Shield reported revenue of $979 million. The cost of providing services to customers was $532 million. That means that customers received about 54 cents in services for every dollar they paid the warranty company. That difference makes home warranty businesses incredibly lucrative, compared to other insurance products.

While the sales pitches for these plans usually make it seem like you'll never pay for a home repair again, it's not all that simple: For most homes, warranty companies charge from $400 to more than $1,000 for the first year of coverage.

In addition to monthly or annual premiums, you'll be responsible for a "trade service fee" of around $65 to $125 to cover the repair company's initial visit. Even if the warranty company denies your claim, you still pay the initial service fee.

There are also lots of fine-print gotchas, with long lists of exclusions. Most are designed to limit the companies' financial exposure from things that break often or that can be costly to fix or replace. Think you're covered if your roof leaks? Not with most plans. Is your refrigerator's icemaker on the fritz? Water heater sprung a leak? Those problems often aren't covered either. The same goes if you have trouble with a window air conditioner, heating system humidifier, home security system wiring, or solar heating system.

Even when these companies actually cover claims, they often limit the amount they have to pay out. For instance, the sample contract Checkbook reviewed for America's First Choice Home Club says the company won't be liable for more than $500 per year for covered interior plumbing repairs and caps reimbursement at $1,500 per covered item for most other problems.

The biggest problem with these programs is you don't get to choose the company that does the work. You call the warranty company and it dispatches a repair service with which it contracts. Since repair services work for the warranty companies — not you — they may be all too willing to find reasons the provider can use to deny your claim.

Warranty companies boast that their repair services are prescreened, but there's much evidence that they don't thoroughly vet them. Consumer agencies receive thousands of complaints each year about home warranty providers — American Home Shield, the largest U.S. home warranty company, has been the subject of nearly 10,500 customer complaints to the Better Business Bureau over the last three years.

Common gripes include claims being denied, repairs performed incorrectly, and repairs taking days or weeks to schedule or complete. Consumers reported that just reaching a customer service representative sometimes required waiting on hold for an hour or more. Some complained that if a covered item couldn't be fixed, the company refused to pay the entire cost of replacing it and sometimes offered only the wholesale price.

Even though the warranty companies select the technicians, the contracts of at least four policy providers Checkbook examined say they're not responsible for the negligence or other conduct of the workers they dispatch.

Some warranty companies have been targeted by government action. In 2015, Choice Home Warranty and its principal executives agreed to pay nearly $800,000 to settle a lawsuit brought by the New Jersey attorney general that accused them of "using creative and deceptive means to deny their customers' claims." Among them, the complaint said, it required customers to provide maintenance records even when technicians reported that an item had been properly maintained or that lack of maintenance didn't cause the problem.

Problems continue. In the three years since Choice Home Warranty signed the agreement, the Better Business Bureau has received more than 4,600 complaints against the company.

Be cautious about websites that purport to rate home warranty companies; it's hard to know how independent or accurate they are. For instance, the site "Top 10 Home Warranty Reviews" lists Choice Home Warranty — a company with a very poor track record — as its top pick. The website's advertising disclosure acknowledges that it accepts money from the companies it features and that those fees may influence its ratings.

Twin Cities Consumers' Checkbook magazine and Checkbook.org is a nonprofit organization with a mission to help consumers get the best service and lowest prices. We are supported by consumers and take no money from the service providers we evaluate. You can access all of Checkbook's ratings free of charge until May 8 at Checkbook.org/StarTribune/Warranties.