Economy

Watch Out: How You Can Get Ripped Off by the Home Warranty Racket

There are many complaints about companies that promise to fix or replace appliances, plumbing or other items in your home.

If you’re a homeowner, you may remember seeing ads on television or elsewhere for home warranties that promise peace of mind if your home’s heating or air conditioning, appliances or plumbing malfunctions. But judging by the thousands of consumer complaints filed against home warranty providers with the Better Business Bureau, government agencies and elsewhere, peace of mind may be the last thing you’ll get after paying hundreds of dollars a year on home warranty coverage.

As with other types of so-called extended warranty programs, getting any benefit from home warranties can be difficult. Some providers are quick to deny claims, blaming a product breakdown on a pre-existing condition or improper maintenance. Contracts for home warranty programs are so full of fine-print exclusions that anyone reading them might wonder what actually is covered. And many customers don’t read them, relying instead on buoyant marketing that makes it seem coverage is all but certain.

Earlier this month, the New Jersey attorney general announced that Edison-based Choice Home Warranty had agreed to pay nearly $780,000 in penalties, restitution and costs to settle state charges that the company used deceptive tactics to deny consumer claims, including requiring some customers to provide years of maintenance records for a malfunctioning appliance or other covered item.

The names of two company principals listed in the Choice Home Warranty case also appeared in a 2009 complaint the New York attorney general brought against a New York City-based home warranty company, now-defunct National Home Protection. That company agreed to pay $900,000 after a New York court found that the company used false and misleading advertising to sell home warranty programs. Some of the allegations were the same as in the Choice Home Warranty case, including that the company routinely denied valid customer claims.

“This company denied homeowners’ legitimate claims, deceived consumers with false advertising, and ultimately ripped off customers who paid good money to protect their investment,” then attorney general Andrew Cuomo, currently New York’s governor, said in a prepared statement.

How Coverage Works

Home warranty companies offer a variety of plans, often under different names. The plans aren’t warranties but service contracts that operate like insurance. The companies promise to repair or replace appliances or other equipment that malfunction due to normal wear and tear. The plans range from around to $300 to $600 a year. Customers also may have to pay a per-call “trade service fee” of around $60 to $100, even if the company decides that a problem isn’t covered.

When they receive a claim for a covered item, the companies are supposed to dispatch a technician to fix the problem or, if the equipment is not repairable, pay to replace it with an equivalent product.

The companies typically don’t have their own technicians but instead rely on independent repair companies they contract with in different parts of the country. If a company doesn’t have a local repair shop, customers may have to find a technician on their own and then seek reimbursement. But repairs made without the warranty provider’s authorization aren’t covered. In his complaint against Choice Home Warranty, the New Jersey attorney general said that customers who in lived in areas where the company had no technicians were forced in some cases to wait weeks for a repair. The company also was accused of sending unlicensed and/or uninsured contractors.

Big List of Exclusions

Although home warranty marketing makes it sound like the coverage is trouble-free, the fine print reveals lots of exclusions that companies use to deny claims. For example, for refrigerators alone, the Choice Home Warranty service agreement excludes “racks - Shelves - Lighting and handles - Freon - Ice makers, ice crushers, beverage dispensers and their respective equipment - Water lines and valve to ice maker - Line restrictions – Leaks of any kind - Interior thermal shells - Freezers which are not an integral part of the refrigerator - Wine coolers or mini refrigerators – Food spoilage – Doors - Door seals and gaskets – Hinges – Glass - Audio/Visual equipment and internet connection components.”

More Reasons to Deny Claims

Even if a malfunction or other problem isn’t related to something on the exclusion list, there’s still no guarantee it will be covered. Companies also deny claims because they determine that the problem was caused by a pre-existing condition or lack of required maintenance. It can be difficult for a customer to prove otherwise. For example, how does homeowners demonstrate that a condition didn’t exist before they signed up for the coverage or that they did every stitch of maintenance required by the product manual?

In his complaint against Choice Home Warranty, the New Jersey attorney general said the company sometimes asked for years of documentation to prove that required maintenance was done. And the company denied some claims even when the technicians they sent to fix the problem said there was no sign of a pre-existing condition or improper maintenance, the state said. If an appliance or other covered item couldn’t be repaired, the state said, the company would pay some customers only a fraction of the replacement cost.

Complaints Abound

The Better Business Bureau reported in June that it received more than 1,000 complaints against Choice Home Warranty over the past three years.

But other home warranty providers also generate hundreds or even thousands of customer complaints. Among them is that companies use fine print exceptions to deny claims, take weeks or months to make repairs, use inept technicians and make it very difficult or impossible to reach customer representatives to resolve problems or cancel coverage. Some customers said they grew so frustrated waiting for a repair that they called in their own technician or fixed the problem themselves, following the advice they found online.

“Ultimately, consumers, many of whom are elderly and/or disabled, paid for repairs or replacement of crucial home systems and appliances out-of-pocket – the very circumstance they sought to guard against by purchasing a CHW ‘home warranty,’ ” said the New Jersey complaint (pdf) against Choice Home Warranty.

Of the four companies we reviewed, the highest complaint generator by far was Memphis, Tennessee-based American Home Shield, with 4,660 complaints as of mid-June. Of the 44 reviews customers posted on the BBB website, 41 reported negative experiences with the company.

“They will make their warranty sound very easy and that they will repair whatever breaks,” says one review posted on the BBB website in May. “But this is not the case. AHS will do everything they can to deny your claim and avoid their responsibility.”

Several customers said the company made it difficult for them to cancel coverage or that it continued to bill their credit cards or bank accounts after they had.

But all these complaints haven’t stopped the BBB from awarding three of the companies we examined at top letter grades ranging from “A-“ to “A+,” as well as BBB accreditation, which eligible companies use to assure prospective customers that they meet high business standards. Companies must pay a fee to be accredited.

A BBB spokeswoman said the number of complaints against American Home Shield is not out of line for companies with similar annual revenue, but it is the reason the company received an A- instead of an A+ rating. She said customers unhappy with the service should file a complaint with the BBB. The company has a record of responding to BBB complaints. That helps it keep its rating and accreditation, despite all the unhappy customers.

Despite the New Jersey attorney general’s action, the BBB still gives Home Choice Warranty a grade of “C,” higher than the “F,” or failing, grade it gives many other companies in various business categories. Still, that prevents the company from qualifying for accreditation.

If a home warranty company violates its contract, customers can have a difficult time enforcing their rights. Some of the contracts we looked at require customers to use private binding arbitration to settle any complaints, instead of suing in court. Some contracts limit the amount customers can recover, even if they win the arbitration. For instance, the Choice Home Warranty contract restricts arbitrators’ awards to $1,500 and bars class action lawsuits and recovery of attorneys fees.

What You Should Do

Skip home warranties or any other type of service contract. Even without all the fine print exceptions and other shenanigans, you can spend thousands of dollars on such coverage for your appliances, plumbing, car, electronics and other items you own. Even if you occasionally make a successful claim, as some have, you still likely will have paid more than you’d ever receive in benefits.

Here’s a better idea: Buy reliable products and maintain them as the manufacturer recommends. Then self-insure by putting the money you would spend on service contracts into a savings account or dedicated product repair and replacement fund. Then if you need to repair or replace an item, you’ll have the money to do it without all the fuss that many customers of home warranty companies have reported. Chances are that most of the items you own won’t need major repairs before they’re obsolete or you decide to replace them with newer models because of better features, energy improvements or anything else. You also can use the money in your repair/replacement fund if you need it for an emergency, such as making your mortgage or rent payments if you lose your job.

For items that do break, there are many ways to get repairs at little or no cost. One way, of course, is to make a claim under the manufacturer’s express warranty, if it’s still in effect. Many companies also have so-called goodwill programs to replace or repair out-of warranty products that malfunction in an unusually short period, especially if it’s a common problem the manufacturer discovered after production. Or the company may offer a repair or replacement parts at reduced cost. The key is to start with a company’s customer service department and, if that’s unsuccessful, work your way upward in the corporate food chain, ending with a written complaint to the company’s executive offices.

If you used a credit card to purchase a product, you may find that the card has a benefit that adds an extra year or so to the manufacturer’s warranty. And depending on the circumstances and where you purchased the item, you may be legally entitled to a free repair or refund from the manufacturer or retailer under the so-called implied warranty of merchantability, which can give rights beyond any express warranty

Another option is to search the web with the type of product and problem. Use search terms like, “sink sprayer won’t spray” or “freezer cold refrigerator warm.” You may find that the problem is easy to diagnose and fix yourself, especially with all the free expert advice and low-cost parts available online these days.

And if you need to call in a technician, you can contact one you choose and that’s answerable to you and not to a third party warranty company that’s trying to hold down its costs.

If you still feel like you want to buy one of these plans, look at the company’s report at the BBB and read some of the reviews and complaints. Or try a web search with the company names and such terms as “reviews” and “complaints.” Also look at the fine print terms and conditions. What you see probably will have you reconsidering.

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Anthony Giorgianni is a longtime consumer and finance journalist. He spent nearly 10 years as a staffer on the Consumer Reports money team and more than a decade as the consumer affairs writer for Connecticut's Hartford Courant.