A Home Protection Plan, also called a Residential Service Contract, is an agreement between the company and the owner of a house, apartment, condominium, or other residential unit which provides that for a stipulated fee and over a stipulated period of time the company will "repair, or replace all or any part of the appliances, electrical system, plumbing, heating, cooling, or air conditioning sys
tems of residential property." There are similarities between a residential service contract and the standard definition of an insurance policy. Both contracts seek to substitute a small certain loss (premium or contract fee) for a potentially much larger but uncertain loss (destruction or failure). In many jurisdictions a home warranty may or may not be considered insurance and is often regulated by the Department of Insurance. In some jurisdictions it is regulated by the Real Estate Commission and is considered distinctly different than insurance. A home protection plan is used much more often than a standard insurance policy with an average of it being used twice per year nationwide. The best way to draw distinctions is to compare the most common insurance policy written on a house with the typical residential service contract. The homeowner's policy covers fire, lightning, windstorm, hail, explosion, riot and civil commotion, vandalism and malicious mischief to the entire dwelling and its contents. It specifically excludes loss due to "mechanical failure" or "normal wear and tear." These exclusions are significant because they offer the inevitability of loss. Property insurance commonly shies away from perils which experience shows will inevitably occur. A home protection contract, on the other hand, covers the inevitable perils of mechanical failure and wear and tear. It anticipates that it will be called upon frequently to provide repairs but seldom ones which will approach the dollar value of the catastrophic perils covered in the homeowner's policy. As an example, take a hot water heater in a single-family residence. If the hot water heater burst due to pressure or corrosion, the homeowner policy will repair the consequences of this failure. It will pay for cleaning carpets, replacing warped floorboards, damage to walls, floors, and furniture. It will not pay for repair or replacement of the hot water heater itself. A home protection plan will pay for repair or replacement of the hot water heater itself including the plumber's charges for installation, but it will not pay for the consequential damage resulting from this failure. This is an example of how a homeowner's insurance policy and a home protection plan compliment each other. No homeowner should feel fully protected unless he or she has both types of coverage.
