The Home Warranty
The offer you should have refused.
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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) operates, they have several local capos… that is, they have several local heating and air conditioning (AC) contractors on call. When you request service from the HWC for a heater or AC, one of those contractors is dispatched. While the HWC sends work to many contractors, the contractor with the lowest ticket average is favored. “Ticket average” is HWC parlance for a 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 HWC favors the cheapest contractor within its fold. What’s surprising is the very existence of a cheapest contractor. Since the HWC dictates how much they pay for repairs, and since most failures are random, the contractor shouldn’t have any control over how much a particular repair will cost. Therefore, with enough volume, the law of averages should take over. In other words, the HWC’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 who comes to your home has two choices. His first choice is to repair your heater or AC under the warranty. His second choice is to get your coverage denied, thereby keeping his ticket average down and making more money in the process. (I’ll explain the second choice two paragraphs down.) If he makes that first choice, he’ll get paid very poorly by the HWC. 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’ll get less work from the HWC.
A few contractors do make that first honest choice. Long ago I made it every time. I had just started my business and needed work, so I signed up with an HWC. I didn’t know how the warranty game works, so I didn’t know that working honestly gave me a higher ticket average than other contractors. At the time the HWC was short on contractors, so they had no choice but to send me work. But once the Great Financial Crisis hit, the HWC recruited more contractors who were happy to make the second choice. I was out. They didn’t pull me back in.
The Knockdown
That second choice is to get your coverage denied by any means necessary. One way a contractor does this is by telling the HWC that the failure was caused by a lack of maintenance. That makes it your fault, so it’s not covered. Since the contractor’s trip charge and your deductible are one and the same, the contractor’s trip costs the HWC nothing. That certainly lowers the contractor’s ticket average. Having just gotten your coverage 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, you may pay him twice what the HWC would’ve paid him.
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 heater and AC parts are sealed. Most sealed 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. In most cases they don’t. In my experience the HWC’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 companies don’t tell their contractors to do any of this, at least not in writing. 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 gets the most work from the HWC. The contractor least willing gets the least work. If the willing contractor gets caught playing this game then the HWC can claim ignorance; give that contractor the proverbial bacio della morte; and recruit another contractor who plays the exact same game. Like any good mafioso, the HWC benefits from grift while taking no obvious part in it.