Rosie on the House: Homeowners insurance vs. home warranties

Question: Which one is better, a homeowner's insurance policy or a home warranty?

Answer: Before I answer that question, it is important that we discuss the differences between the two, for there are significant differences.

Mike Lowry, certified insurance counselor for Phocus Insurance Services, a Rosie on the House Certified Partner, explains the differences between homeowners insurance and a home warranty and advice on making a choice.

Homeowners insurance

A homeowners insurance policy is focused on protecting your home as an asset. Homeowners insurance addresses direct physical loss of the asset or a portion of that asset. Typically, a homeowners policy starts with a base policy. This is based on an Insurance Service Office that provides information to the insurance industry nationwide as an Insurance Standard Contract. It is approved by the State of Arizona. From this basic policy, endorsements can be added to customize the policy for your specific needs. Loss events such as fire, theft and lightning are typically covered.

Lowry says the biggest incident not covered by a homeowner's policy is water damage from an outside source. Warranties will usually not cover this either. For this coverage, you will need a separate policy, commonly referred to as "flood insurance." Several factors are scrutinized in determining the cost of premiums you would have to meet to get such protection. The most prominent of these factors is how prone your property is to flooding. That is determined by what flood zone you are in. This information can be found during the disclosure phase of your home purchase. Your real estate agent typically assembles this information, and we highly recommend you pay attention. If not offered, ask. Also, find out if internal flooding, like a busted pipe, is covered.

Home warranties

Home warranties are focused on home repairs. They usually turn up when you buy an older home and are purchased annually. Depending on what is included in the warranty, it can cost between $250 to $500 per year. With every request for a repair or replacement, there may be other fees involved. Systems such as heating and cooling and appliances are the type of items that are typically included in the warranty. It is important to read the policy carefully and to ask questions. You want to make sure that you understand what is covered. A good question to ask is, "what is not covered?" Some home warranty companies can customize a policy, though you will pay more for the additions.

Q: What is the difference when filing a claim against my home warranty program and my homeowner's insurance?

A: Claims or requests for repairs are not handled the same by a homeowners insurance policy and a home warranty agreement.

When you make a claim through your homeowner's insurance policy for loss or damage (assuming the loss is not total, such as the home burned down), the company will likely ask you to solicit a licensed repair provider to obtain a quote to repair or replace the area of your home that needs to be repaired. You get to choose the contractor you want to provide the necessary services.

This is not the way a warranty will likely work. The warranty company will select the service provider to be sent to your home. There will probably be a fee of $25 to $75 or more for this visit.

With the insurance policy, the estimate will be forwarded to an adjuster for review and a visit by the adjuster to the claim site at no charge. The insurance adjuster will decide the amount the company will pay you. Factors that are weighed are typically depreciation, hail damage (a 15-year-old roof will likely pay less than a three-year-old roof, for example), and project repair difficulty (the repair needs to be done on a part that hangs over a cliff, for example).

Home warranty companies tend to select providers willing to work below costs. These folks will likely repair the item as economically as possible because that is all the warranty company will pay.

I highly recommend a homeowners insurance policy instead of a warranty company. You can insure almost everything a home warranty would cover for a much lower premium.

Another overriding factor is you, the homeowner. You get to choose which service provider you want in your home.

If you are buying a home, get a quote from your insurance company for these riders. If the seller wants to offer a home warranty for one year, ask them during negotiations to cover the one-year cost of the homeowner's policy premium instead.

Everybody comes out a winner, the cost is lower, and the buyer is better protected.