Are home warranties replacing home insurance for some customers?

Home insurance and home warranties are not created equal. Despite this, some consumers are using home warranties to replace the mechanical breakdown endorsement on a standard home insurance policy.

When you think about it, this isn’t too surprising, as home warranty contracts are enticing, especially when someone closes on a new home.

“They give the buyer peace of mind as they cover wear and tear damage to the appliances and systems in the home they’re buying,” said Shannon Stamps, Division Revenue Leader at World Insurance Associates.

If a consumer is unaware of the differences between home warranties and the mechanical breakdown add-on on a home insurance policy, they may believe they are making a savvy decision.

Let’s take a closer look at how home warranties differ from optional mechanical breakdown coverage in a home insurance policy and what agents can do to educate consumers and ensure their homes – and finances –  are fully protected.

Home warranties vs. home insurance

Home warranties are essentially service contracts for a home. While coverage varies by company and plan, a home warranty usually covers wear and tear of HVAC, electrical, and plumbing systems, as well as kitchen appliances and water heaters. Some companies also offer add-ons for other items, like water softeners and pools.

Home insurance policies, on the other hand, address property damage and loss after qualifying events, such as fires, theft, and vandalism. In many cases, they’re required by mortgage lenders and available with optional mechanical breakdown coverage.

At first glance, mechanical breakdown insurance may seem the same as a home warranty. However, it differs in that it only covers select appliances after mechanical or electrical failures, such as short circuits or power surges. Unlike a home warranty, it won’t reimburse homeowners for inevitable damage due to normal wear and tear.

How this trend affects consumer education

The fact that some consumers are confidently choosing home warranties over the equipment breakdown component of a home insurance policy highlights the increasing need for consumer education.

“Wear and tear is not covered under a homeowners policy, as insurance is designed to defend and indemnify against sudden and accidental losses, not inevitable or expected events. Consumers need to understand the difference and which policy covers which kind of loss,” explained Stamps.

According to Stamps, the desire for a more maintenance-focused policy is leading some carriers to look into smart home technology and shift their models to focus on loss prevention.

“These days, it’s not uncommon for insurance companies to offer discounts or free devices, allowing consumers to take advantage of water leak detection and automatic shutoff devices, smart smoke and carbon monoxide detectors, freeze sensors for pipes, and electrical monitoring systems,” added Stamps.

Carriers are also implementing proactive marketing campaigns, websites or apps to remind homeowners about seasonal maintenance needs.

“Where I see the demand is after the home warranty has expired and the homeowner does not renew and then still expects the same type of coverage with their insurance policy,” explained Stamps.

How agents can support customers

At the end of the day, agents are risk advisors, making it important for them to educate customers. It’s their job to support those who might forgo mechanical breakdown coverage for a home warranty or expect home insurance to step in once their warranty expires.

These tips can help steer customers in the right direction:

Follow up

Home warranties expire and are expensive to renew, especially when compared to the cost of a mechanical breakdown policy. As a result, it’s a good idea for insurance agents to set reminders to follow up before these warranties expire. This is a great opportunity to convey how equipment breakdown endorsements might help bridge the gap.

Share informational materials

“Agents may also consider sending out maintenance checklists, seasonal home-care guides, or loss prevention newsletters,” said Stamps. They don’t have to make these from scratch, as most national carriers offer these in their agent toolkits to help mitigate their loss ratios.

Focus on customer needs and risk levels

Whether a customer can benefit from a home warranty and/or mechanical breakdown coverage depends on their unique situation.

If someone is buying an older home with appliances and systems that are long past their prime, a home warranty might be a solid investment, especially when paired with mechanical breakdown insurance.

Agents should figure out what risk each customer can take on? “Know your customer and talk to them about their risk level to help them make the best decision for their situation,” explained Stamps.

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