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What Is a Residential Service Contract?
A residential service contract, sometimes called a home warranty, home service contract, or RSC, is a service policy with the primary aim of safeguarding a property buyer from unexpected repairs to home systems. As a homeowner or buyer, you can use this type of policy to repair or replace major appliances or mechanical systems in your home. Alternatively, if you're selling a home, you can protect your property with this type of policy while the house is listed and also offer this contract to the buyer when you sell the home.
All in all, a residential service contract functions to reduce the costs of repairs and replacements for policyholders if a mechanical item covered by the policy fails. Most policies last for one year, though some insurers do offer longer policies.
How Does a Residential Service Contract Work?
If you're thinking about purchasing a residential service contract, there are a few different things you should know about how these contracts work:
Choosing Your Coverage
You usually get to pick whether your residential service contract will cover only home systems, appliances, or a combination of the two categories. Some insurers also offer different tiers for coverage, such as one tier for major appliances and another tier to cover all appliances.
Additionally, you get to choose the insurance provider you use. Keep in mind that insurers usually contract service calls to their network of local contractors. Before signing a contract, you should make sure that the insurance you plan to use has contractors near you.
Placing a Claim and Diagnosing a Problem
If you are a homeowner holding a residential service contract, you can either call or go online to place a claim with the warranty company if a problem occurs. The warranty company then notifies a licensed, insured third-party contractor. The contractor reaches out to you to set up an appointment, during which they diagnose the cause of appliance or system failure.
Once the contractor makes a diagnosis, they contact the warranty claims department with their findings, and then the claims department checks the terms of the contract to determine if they will approve or decline your claim. If the claim is approved, the level of coverage you have previously chosen will determine any out-of-pocket or non-covered expenses for your claim.
Most insurance policies include a deductible, which is a minimum payment you have to make before your insurance pays for any expenses. This is true of home warranties as well. You will usually make this payment as a call-out fee, a small sum of money you pay for someone to come to your house.
Call-out fees are usually around $100 or less, but you should make sure that you know what your call-out fee would be as well as any other additional deductibles before you sign your contract. That will also help you decide if it would be better to make simple repairs yourself instead of paying more for a call-out fee.
Advantages of a Residential Service Contract
If you're selling a home, you'll find many benefits to offering a residential service contract to your buyer as part of the real estate transaction. For example:
- A residential service contract minimizes the risk that your buyer will ask you for additional help if a home appliance unexpectedly fails right after the sale.
- Giving the buyer a residential service contract at the close of your sale can help convince the buyer to move forward with you instead of another property holder.
- A residential service contract makes it easier to discuss repairs with potential buyers. This is especially true if you have a functioning older device in your home that will likely require a replacement in the near future. The buyer may feel reassured that that device is covered for at least a year, giving them the confidence to complete the real estate transaction.
What Do Residential Service Contracts Cover?
A residential service contract may cover appliances, systems, or both. Exact coverage varies from policy to policy. Most contracts cover systems and appliances no matter how old they are, just as long as they are in working order. You will always want to check directly with an insurer if you have any questions.
Appliance plans generally cover major appliances, including:
- Water heaters
Systems plans generally apply to home systems, including:
- Alarm systems
Combination plans cover both systems and appliances.
What Don't Residential Service Contracts Cover?
It's important for anyone considering a residential service contract to understand what these plans do and don't cover. Residential service contracts commonly do not cover:
- Any pre-existing or known conditions
- Commercial-grade appliances
- Commercial properties
- Design flaws
- Foundations, which are covered by homeowners insurance and not a residential service contract
- HVAC systems undersized for your home
- Intentional damage or misuse
- Items that do not experience mechanical failure
- Items that fail because of a manufacturer defect
- Items that the contract does not state are covered
- Residential properties that have been converted into businesses ( here is an article about changing residential properties into businesses)
- Services that you have performed without prior approval
- Structural issues, which would also be covered by homeowners insurance and not a residential service contract
- Upgrades of existing items that are otherwise covered (in other words, you cannot upgrade from a 40-gallon water heater to a 50-gallon water heater using a residential service contract)
When you take out a mortgage, you will usually be required to take out homeowners insurance as well. That will cover you for foundational and structural problems in your home. Take a look at this article about homeowners insurance to learn more.
Image via Unsplash by tierramallorca
Questions to Ask When Buying a Residential Service Contract
Whether you are buying a residential service contract for your home or you are looking into buying a property in a real estate transaction that involves a residential service contract, there are certain things you should watch out for:
- Make sure that you get the right type of plan that will really cover anything you would not be able to afford to fix on your own.
- Carefully check all call-out fees and deductibles to make sure you can afford them. Keep in mind that this is a balance: These fees are often much cheaper than being forced to pay for repairs to appliances and systems out of pocket.
- Ask about any coverage limits on your plan. Most residential service contracts pay only up to a set amount in a given year. If you experience a catastrophic problem that knocks out various appliances in your home at one time, you could run out of coverage.
- If you are buying a home with a residential service contract, double-check that home's warranty. Most people are not unethical, but it is relatively easy for an inexperienced homeowner to give you information that misrepresents the contract policy. So, always ask to see the paperwork. An honest seller will not mind showing you exactly the contract you are buying.
Whether you are buying or selling a home, you should always work with an experienced contract lawyer who can help you make sure that your residential service contract covers exactly what you need it to cover.
Meet some of our Residential Service Contract Lawyers
Peter W. Y.
Perceptive, solution-driven counselor and experienced attorney. Record of successful verdicts, settlements, negotiations, arbitrations, mediations, and deals. Effective claims management, litigation strategy, and risk consulting. Proven ability to oversee litigation teams, communicate to stakeholders, manage multiple projects effectively, and expand business relationships. Extensive experience handling legal issues in engineering and construction, environmental litigation, corporate and contractual, and insurance issues.
Advised startups and established corporations on a wide range of commercial and corporate matters, including cross-border deals, technology law, and M&A. Commercial and Corporate • Advised companies on commercial and corporate matters and drafted corporate documents and commercial agreements—including but not limited to —Convertible Note, SAFE, Promissory Note,Terms and Conditions, SaaS Agreement, Employment Agreement, Contractor Agreement, Joint Venture Agreement, Stock Purchase Agreement, Asset Purchase Agreement, Shareholders Agreement, Partnership Agreement, Franchise Agreement, License Agreement, and Financing Agreement. • Drafted and revised internal regulations of joint venture companies (board of directors, employment, office organization, discretional duty, internal control, accounting, fund management, etc.) • Revised joint venture agreements and master land lease agreements, and so forth. • Drafted legal memos on finance regulations Global Blockchain Projects • Advised blockchain startups ICOs, securities law, business license, regulatory compliance, and other commercial and corporate matters. • Drafted or analyzed coin or token sale agreements for global ICOs. • Assisted clients with corporate formations, including filing incorporation documents and foreign corporation registrations, drafting operating and partnership agreements, creating articles of incorporation and bylaws. Litigation and Dispute Resolution • Conducted legal research, document review, and drafted pleadings, motions, and other trial documents. • Advised the client on strategic approaches to discovery proceedings and settlement negotiation. • Assisted clients with business dispute settlements.
Bruce Burk practice is in the area of small business, labor and employment, contracts, real estate and civil litigation. Bruce has litigated over 40 trials as well as many appeals. He prioritizes client communication and satisfaction as well as delivering high quality work product.
Attorney Cory Barack specializes in business, real estate, probate, and energy law. He can help you with oil/gas leases, easements, property sales, drafting contracts and wills, setting up companies, and resolving disputes. He is licensed to practice law in Ohio and is located in Eastern Ohio.
A commercial contracts lawyer with over 25 years of experience (both at large law firms and in-house as general counsel of a public company)
Brittany advises startups and emerging and public companies at all stages of growth, with focuses on formation and corporate governance matters, securities, venture capital financings, M&A and other strategic transactions, commercial contracts and general corporate counseling. Brittany represents clients across a broad spectrum of industries, including technology, automotive, mobility, digital health, consumer products and manufacturing.
Tech leader and General Counsel with 12 years of in-house experience.