What’s the Difference? Home Warranty vs. Home Insurance

Home buyers and homeowners know that they need to budget for homeowners insurance coverage: Most mortgage lenders require it for protection of their own risk, and often the payment is made from the escrow account with the lender. So what is a home warranty? While it may sound similar to insurance, the protection provided by a home warranty has a different scope than the protection offered by a homeowners insurance policy. Although insurance will cover damage and loss, a warranty covers repair or replacement costs for covered home systems and appliances that fail as a result of 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 to a homeowner. This guide will explore the differences between the two and compare home insurance vs. a home warranty.

1. Homeowners insurance covers the structural damage or loss of a property, while a home warranty offers discounted repair on appliances and systems.

First of all, what is homeowners insurance? If a homeowner takes a look at their homeowners insurance policy, they will typically find a specific list of the kinds of accidents, damage, and disasters the company will pay to cover. Even a cheap homeowners insurance policy will cover the interior and exterior of the home from covered perils. In addition, homeowners can add coverage for scheduled personal property such as expensive jewelry, musical instruments, and fine artwork, and homeowners insurance can also cover liability in the event the homeowner or a resident of the home is responsible for causing damage or injury to a third party. What does homeowners insurance cover? The best homeowners insurance companies have policies that include the following:

• Fire
• Windstorms and hail
• Damage from ice and snow
• Frozen pipes
• Natural disasters (excluding floods and earthquakes, in most cases)
• Vandalism
• Damage or loss caused by burglars, accidents, or theft
• Personal property
• Personal liability

What a homeowners insurance policy does not cover is the repair or replacement of major home systems and appliances unless they are damaged or destroyed by one of the listed perils in the policy—so if the HVAC system isn’t working properly, it is the homeowner’s responsibility to pay for repairs. This is where a home warranty comes in: If the HVAC system has been properly maintained and the malfunction is the result of age or normal use, the home warranty will likely cover the repair. The homeowner will have to pay a small service fee, but it will be a substantially lower cost than the cost to replace the HVAC system. Home warranty coverage includes the repair (and potentially replacement) of home systems along with appliances that are included in the policy. It is also usually possible to add extra coverage for an additional fee. For example, some homeowners will opt for a home warranty with roof coverage. A home warranty costs between $264 and $1,425 per year on average, 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 was selected when the policy was purchased, with a lower premium corresponding to a higher service charge and vice versa. To get the most benefit from the policy, it’s a good idea for homeowners to plan and schedule routine maintenance on a regular basis and avoid DIY fixes. So what does a home warranty cover specifically? Plans can include the following:

• Electrical systems
• Plumbing systems
• HVAC
• Washers and dryers
• Refrigerators
• Dishwashers
• Water heaters
• Additional appliances
• Add-ons for swimming pools, septic systems, roofs, etc.

2. Homeowners insurance often provides liability protection.

Homeowners may not imagine that someone could be badly injured on their property. Say the front step is icy, however, and a neighbor slips, falls, and is injured. The homeowner is likely going to be paying out of pocket for the neighbor’s hospital and doctor bills. If the homeowner’s nervous dog bites an unfamiliar person, the same scenario is likely to unfold. Homeowners insurance policies usually offer liability protection or medical payments coverage that will help with those costs. Most policies include a base amount of liability coverage that can be increased, at an additional cost, but some may require the purchase of an additional liability policy, called a personal liability umbrella. For homeowners who anticipate kids playing in their yard, have a pool, or have a dog, it’s worth possibly increasing the base amount. But homeowners will want to make sure they read the policy carefully: Many policies exclude certain dog breeds from coverage, along with some structures such as trampolines or high-risk pool equipment, because of the higher risk to homeowners insurance companies.

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. Because of this risk, most mortgage lenders require that borrowers take out a homeowners insurance policy to protect their investment. Many even require that the insurance policy be paid through the lender to ensure the policy is ongoing. Other policies allow the borrower to make the insurance 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. Homeowners will want to keep this in mind while shopping for homeowners insurance quotes.

A major difference between a home warranty and home insurance is that home warranties are never required. While the lender is at risk if the home is damaged or destroyed and so requires protection against that, the lender is not at risk if the oven breaks down or the water heater fails, so a home warranty is not required.

4. Homeowners insurance may not be enough, and home warranties can often “fill the gap” in coverage.

Most people are required to purchase homeowners insurance to stave off disaster and ruin: The homeowners policy will cover much of the physical and financial burden after an accident, fire, or natural disaster. While homeowners may spend a lot of time deciding how much homeowners insurance they need, they may not consider that home insurance excludes disasters caused by wear and tear or natural aging. A catastrophic failure of a home system can be 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 and replacement costs of systems excluded by homeowners insurance policies.

5. Home warranties can cover the repair of a home’s systems, whereas homeowners insurance can cover the cost of the damage caused by the issue.

Imagine a homeowner wakes up one morning to 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. After locating the water shutoff and the power breaker, they find 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 damage?

If a homeowner has both a homeowners insurance policy and a home warranty, the answer is both. 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 the water heater has been properly maintained, the home warranty may cover those costs.

The 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. The homeowner will need to meet the policy’s deductible, and sometimes, if the replacement items are more expensive than the value of the destroyed items, they may have to chip in to get the materials they’d prefer, but beyond that cost the damaged items will be covered for replacement.

In other words, the warranty will likely cover the appliance that failed, and the homeowners insurance will cover the damage that failure created. This is what makes a home warranty worth it: The insurance will still cover the damage, but it won’t cover the cost of 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 the home complete.

6. Homeowners can opt for both a home warranty and homeowners insurance for the best coverage.

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 will keep everything humming along. Unfortunately, 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. Homeowners will want to choose policies carefully for a solid understanding of what’s covered, what’s excluded, and what conditions need to be met for the policies to be valid; they’ll also want a clear recognition of homeowners insurance costs and warranty service charges. In doing so, 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 a home.