Home warranty vs homeowners insurance: what each one covers

What homeowners insurance does

The Texas Department of Insurance sums it up: insurance pays for damages from events your policy covers, like fire or theft, but not wear and tear. California's Department of Insurance says a homeowners policy covers damage to your dwelling and personal property caused by major events, including natural disasters like wildfires, depending on your policy. If your loan has a lender, you will almost certainly be required to keep insurance on the home.

What insurance generally does not cover is an old furnace that stops working or a dishwasher that wears out. That gap is what warranties are sold to fill.

What a home warranty does

California calls them home protection contracts and describes them as contracts in which the company promises to repair or replace parts of home systems or certain appliances. They can cover wear and tear, deterioration or defects that existed when you bought the home. Some cover extras such as air conditioning, pools or garage door openers for an added fee.

The DC Attorney General describes a home warranty as a one-year service agreement, not an insurance policy, and says a basic plan can cost $500 a year or more. You typically pay a service fee each time a technician comes out.

Exclusions and limits

This is where expectations and reality often split. California's Department of Insurance warns that all home warranties contain dozens of exclusions and that many buyers only discover them when a claim is denied. It recommends reading the exclusions, conditions and dollar limits before agreeing.

The DC Attorney General adds that warranties may exclude kitchen appliances, water heaters, plumbing or furnaces unless you pay more, and that most do not cover structural defects, well pumps, septic tanks, roofs, leaky windows or chimneys. Contracts may repair rather than replace, limit replacements to specific brands and not let you choose your contractor.

California law requires home warranties sold there to clearly state covered items, exclusions and limits, the contract period, fees and renewal terms, and service fees.

New-home warranties are different

A builder's warranty on new construction is a separate thing. For FHA- and VA-financed new homes, HUD's form HUD-92544 provides a one-year warranty from the builder that the home was built in substantial conformity with its plans and specifications. Builders may offer longer warranties on their own terms.

Is a warranty worth it?

It can make sense when:

• the seller is paying for it;
• the home has older appliances or systems you cannot afford to replace at once; or
• you value having one number to call.

It may make less sense if the systems are new, you have a solid repair fund or the exclusions cover your biggest risks. Either way, the warranty sits alongside insurance, not instead of it.

Check the company

Texas requires residential service companies to be licensed by the Texas Department of Licensing and Regulation. California regulates home protection companies through its insurance department. Check your state's rules and complaint history before buying.

The bottom line

Insurance covers sudden, covered damage. A home warranty is a service contract for appliances and systems that wear out, with exclusions and caps. Keep your insurance, read any warranty closely and keep a repair fund regardless.