To help consumers choose the right contract for them, the NHSCA would like to answer some of the most commonly asked questions regarding home service contracts.
What is a home service contract?
What do home service contracts provide?
Do contracts cover everything?
Are there limitations?
I’ve heard home service contracts referred to as warranties, like the ones I have purchased for my electronics – how are they different?
There are other service contract industries. Retail service contracts on new consumer products or automobile services contracts are separate industries from the home service contract industry. The business of warranty for new consumer products is generally regulated under a federal law known as the Magnuson-Moss Warranty Act.
Home warranty is a descriptive term and was coined because the home service contract industry evolved by providing home service contracts purchased by homeowners for home buyers as a form of “warranty” that the appliances in their house would still be working after the sale. The term home warranty seemed to fit and has persisted. It’s a good label, but is largely a marketing term. Because of this, many home service contract companies still widely use the term “home warranty” in their name or on their contracts. In more recent years the industry has moved towards using the term home service contract.
So what is an extended warranty?
It’s another term for a retail product contract that may extend the warranty beyond the manufacturers warranty period. Usually this is done for an additional fee and may be offered direct by the manufacturer or by the retailer or a third party. This is the item most consumers hear about every day when they buy a television, computer or a simple toaster from major retailers. These contracts may provide immediate benefits such as accidental damage coverage. They commonly activate after the manufacturers warranty period has expired, hence the term, extended warranty.
Isn’t a home service contract like insurance?
Actually, there is no similarity between service contracts and insurance. Insurance pays you indemnity in the form of money for risk of partial or total loss due to sudden and fortuitous events such as fire, wind, hail, theft, collision or other accidents. Insurance does not cover breakdowns due to normal wear and tear. Service contracts cover breakdowns due to normal wear and tear. The two products complement each other – they do not overlap.
Is the industry regulated?
Is a home service contract really a good choice?
At an average cost of $400 – $550 a year, home service contracts are highly recommended by real estate brokers for both the seller and buyer of a home.
For the seller, they offer increased marketability. By including a home service contract as a condition of the sale, sellers instill an added sense of confidence to prospective home buyers because the buyer feels comfortable, knowing that covered systems and appliances will be repaired in the event of failure after closing. In addition, most home service contract companies offer seller’s coverage, which protects the seller in the event of a system or appliance failure during the listing and escrow period. Not only is the seller protected from additional cash outflow, if the home is under contract when a system or appliance fails, the service contract can help to keep the transaction flowing along smoothly.
