Are Home Warranties Regulated? What You Need to Know About this Industry
Oct 08, 2019 10:02 PM EDT
Home warranty companies have been operating for decades. The booming real estate sector in the 70s gave rise to home insurance companies offering coverage for things like home appliances and home systems. These include all manner of electro-mechanical devices and plumbing systems such as air conditioning units, dishwashers, microwaves, washing machines, dryers, refrigerators, garbage disposal systems, et al. In the United States, each state has specific rules and regulations in place which govern home warranty companies. Many of these companies are regulated at state level, and a few of them operate nationally.
American Home Shield (AHS) was the first US company to start offering home warranty services. The concept of a 'Home Warranty' differs from the legal definition of a warranty. This type of warranty is considered a service agreement between the company offering the home warranty and the subscriber who pays for it. Once a company receives a claim for the repair or replacement of a faulty system or appliance, it will dispatch a technician (at a non-refundable callout fee known as a deductible) to determine whether repair work will be conducted, or whether the item will be replaced. There is no universal system vis-a-vis standards of conduct and performance for home warranty companies across the country.
Each home warranty company must be evaluated on its merits at state level. The regulation of the industry typically takes place through the Commissioner of Insurance, but not always. This government authority serves as a watchdog for protecting customers against unfair, unethical, or illegal conduct. If home warranty companies are found guilty of such activities, they will be sanctioned accordingly. In the state of New Jersey, home warranty plans are automatically provided to anyone who buys a new home. These differ from plans offered to existing homeowners. In the sunshine state the of Florida, home warranty companies are fully regulated, as they are in Texas. These regulatory frameworks ensure that customers are protected against disreputable home warranty providers.
Which Government Agencies Are Responsible for Regulating Home Warranty Companies?
Most US states have a Commissioner of Insurance. In Florida, the Office of Insurance Regulation is responsible for the licensing and regulation of home warranty companies. New companies are required to file articles of incorporation, a certificate of status from the Florida Secretary of State, provide company bylaws, service of process consent and agreement, and if necessary, provide fictitious name filing, a certificate of status from state of domicile, and various financial forms. The extensive process is geared towards data collection, disclosure, and accountability. Customers are strongly advised to pay particular attention to state by state regulation of home warranty companies. Since each state lays down the rules for home warranty companies, it's important to choose carefully.
In California, home warranty contracts are fully licensed and regulated by the California Department of Insurance, under the auspices of the Home Warranty Association of California. All customers are advised to only use fully licensed home warranty providers, or risk non-payment of claims, and fraudulent activity. The legal requirements that must be met by California-based home warranty companies are stringent. For example, all Golden State warranty providers must be able to show that they have substantial capital reserves, net worth, and paid-in capital before they are given the green light to operate. Additionally, financial reporting must be conducted, and audits will be compiled with these companies. All of this information is detailed under the terms and conditions of the Home Protection Act (1979).
The Department of Insurance in California is the go-to government office responsible for regulating the home warranty industry. California home warranty companies comprise the full spectrum including American Home Shield, The Home Service Club, Select Home Warranty, Total Protect, Old Republic Home Warranty, and Home Warranty of America, among others. Overall, federal statutes mandate that individual states must meet a threshold to determine how home warranty companies will be regulated within their territory. Provided this does not contravene federal law, it will hold.
The absence of federal laws governing warranty service agreements means that statutory laws are governed by individual states. This is important insofar as it determines what companies are required to do, and what they are not required to do. When federal laws govern the operations of home warranty providers, there is standardization of rules and regulations. Companies which operate across all states, or most states may be preferable to companies that operate in a limited number of states with different regulations in place. For example, American Residential Warranty, and Select Home Warranty enjoy near universal coverage.
Certain organizations play an important part in the regulation of the home warranty industry. One of them is the National Service Contract Association (NHSCA). This non-profit acts in a self-regulating status for home warranty companies, by advocating an ethical code according to which all member companies must act. This does not automatically disqualify companies that are not affiliated with the NHSCA, nor does it offer automatic endorsements of companies which subscribe to their loosely formulated rules and regulations. It is worth emphasizing that a home insurance plan differs markedly from a home warranty plan.
Both function along similar lines, with customers paying premiums and deductibles in expectation of coverage when loss or damage arises. On this topic, many individual states regard home warranties as identical to home insurance coverage. Given that home insurance companies are all regulated by the Federal Insurance Office and the National Association of Insurance Commissioners (NAIC), one would assume that home warranty companies would be regulated by these agency too. Truth be told, home warranty companies are not put through the ringer like home insurance companies. That's why it's important to throw caution to the wind when choosing a home warranty service provider.