The Home Warranty

The Godfather

The offer you should have refused.

Hey you… yeah… I’m talking to you. You might think comparing home warranty companies to the mob is a little over the top. You might think otherwise after reading this. Home warranty companies aren’t busting kneecaps, but they are busting home warranty contracts and keeping their hands clean while doing it. Wanna know how? Let’s take a walk.

The Setup

For every part of the country that a home warranty company (HWC) does business, they have several local capos… that is, they have several local heating and air conditioning contractors on call. When you call the HWC with a claim for a broken furnace or air conditioner, one of those contractors gets dispatched. While the HWC shares the repair-work with all of its contractors, the contractor with the lowest ticket average is heavily favored. “Ticket average” is home warranty parlance for the contractor’s average cost per repair. What does all that mean? That means the cheapest contractor gets the most work, of course.

It’s not surprising the home warranty company favors the cheapest contractor within its fold. What’s surprising is the very existence of a cheapest contractor. Since the HWC dictates pay, its local contractors are paid the same. Since equipment failures are random, neither the HWC nor the contractor has control over how much a particular repair will cost. Therefore, with enough volume, the law of averages should take over. In other words, the home warranty company’s contractors should all have about the same ticket average. They should, but they don’t. Let’s find out why by seeing things through the contractor’s eyes.

The Near Miss

The contractor that shows up to your home has two choices. His first choice is to repair your furnace or air conditioner under the warranty. His second choice is to get your claim denied, thereby keeping his ticket average down and making more money in the process. (I’ll explain how the second choice works two paragraphs down.) If he makes the first choice he’ll get paid half of normal retail by the home warranty company. While he agreed to such low pay, he certainly doesn’t like it. Even worse, the covered repair will raise his ticket average. If his ticket average goes up too much then he risks getting less work from the HWC.

A few contractors make the first choice. Over ten years ago I made it every time. I had just started my business and needed customers, so I signed up with a home warranty company. I hadn’t yet learned how the warranty game works, so I didn’t know that my habit of making repairs under the warranty gave me a high ticket average compared to the HWC’s other contractors. The economy was booming and the HWC was short on contractors, so they had to send me work despite my high ticket average. But once the economy cooled, the HWC recruited more contractors who make the second choice. I was out. They didn’t pull me back in.

The Knockdown

The contractor’s second choice is to get your claim denied. One way he does this is by telling the home warranty company the failure was caused by a lack of maintenance. That makes the failure your fault, therefore it’s not covered by the warranty. Since the contractor’s trip charge and your deductible are one and the same, the denied claim costs the HWC nothing. A big fat zero certainly lowers the contractor’s ticket average with the HWC. Having just gotten your claim denied, the shakedown artist turns around and shakes you down… that is, the contractor turns around and gives you a bid for the repair. If you approve the contractor’s bid, you may pay him twice what the HWC would’ve paid him if the repair had been covered by the warranty.

Here’s the rub. While a lack of maintenance can indeed cause failures, it’s just not as common as they’d have you believe. Most furnace and air conditioner parts are sealed. Those parts will fail when they fail with or without maintenance. For those parts that actually do fail for lack of maintenance, the contractor should have convincing evidence to that effect. Take it from one who knows, convincing evidence is hard to come by. In my experience the home warranty company’s stated reasons for denying claims, whether it’s a lack of maintenance or something else, are usually trumped up by the contractor so that he’ll get paid full retail by you rather than half retail by the HWC.

The Denial

The Dons at the home warranty company have never told their contractors to do any of this, not even verbally. How could they? They’d get pinched by the feds. So instead they’ve created an environment where it happens by default. The contractor most willing to bilk homeowners will have the lowest ticket average and will, therefore, get the most work from the HWC. The contractor least willing to bilk homeowners will get the least work. If the willing contractor gets caught playing this game the HWC can claim ignorance, give that contractor the proverbial bacio della morte, and recruit another contractor that plays the exact same game. Like any good mafioso, the home warranty company benefits from grift while taking no obvious part in it.