Sam Ali

No guarantee - Many consumers are finding home warranties can be a bad deal

SAM ALI STAR-LEDGER STAFF

2134 words

Dawn Inserra thought she had all the bases covered when she purchased her first home in July.

She said she hired a home inspector to survey the 35-year-old, three-bedroom ranch in Toms River for any hidden deficiencies and followed him around for four hours. Then, there was a one-year home warranty the seller threw in as a closing gift, just in case anything major broke.

Sure enough, two months after she moved in, Inserra said her furnace stopped working. A local contractor concluded the furnace was on its last leg and could potentially leak hazardous carbon monoxide through the ductwork in her home.

She said she expected the warranty company, American Home Shield, to pick up the tab. Instead, she said American Home Shield, the nation's largest warranty company, initially refused to foot the $4,000 bill to replace her furnace because, a service representative told her, the heating system had not been maintained properly.

The company declined to comment on this specific case and eventually paid a portion of the cost after she complained to her Realtor. But it still rankles the 29-year-old Inserra.

"When I bought the house, it came with the warranty, and I was reassured that I wouldn't be stuck with any huge unexpected bills and it turns out to be the opposite," she said.

Home warranties have become a popular sales tool in the real estate industry, touted by sales agents as a low-cost way to make a house stand out in a crowded market. American Home Shield said in documents filed with the Securities and Exchange Commission it serves 1.3 million homeowners, amounting for more than 35 percent of a $1.3 billion market.

But interviews with consumers, real estate agents, attorneys and consumer advocates across the country show the largely unregulated industry is clouded by complaints of poor service, questionable practices and in some cases, alleged fraud.

Consumer message boards and internet sites such as ripoffreport.com, and scam.com buzz with angry tales of warranty companies refusing to replace equipment and delaying or denying claims for repairs.

Last month, home-warranty companies were named the "most complained about" service in 2007, by Angie's List, a consumer website that provides its members with reviews of local contractors and service companies.

American Home Shield, a division of Memphis, Tenn.-based ServiceMaster, said its warranties are fair and beneficial to consumers.

"We work very diligently to keep our customer satisfaction ratings up and that is something that leads every decision we make in our company," said spokeswoman Heather Wilson of American Home Shield.

The nature of public message boards and blogs make the attacks unfair, she said.

"Because of the anonymity on blog sites and a lack of a forum for a corporate responses, we're not able to work with those homeowners," she said.

While every industry is hounded by critics, what makes this situation especially unusual is some of the people who have traditionally marketed warranty products - real estate agents - are now taking shots at warranty providers.

Kerry Constantine, who owns two Power Brokers Real Estate agencies in Fort Meyers, Fla., said she recently cut ties with American Home Shield after buying a home warranty for her best friend after the purchase of a home last year.

"They found excuses on why not to cover anything," Constantine said. "I thought I was protecting her, but I feel like I was scammed."

Warranties are increasingly important - in part because Realtors are looking for any possible edge - given the collapse of the housing market. A Gallup Poll commissioned by warranty companies found homes with warranties sell up to 27 days quicker and for up to 3 percent more money than those without.

In July 2006, the largest real estate brokerage in the country, Parsippany-based Realogy, which owns Coldwell Banker, Century 21, ERA and Sotheby's, signed a five-year deal with American Home Shield to exclusively market their home warranties to their customers.

American Home Shield said in a regulatory filing that real estate agents are responsible for generating nearly 30 percent of the company's annual revenue.

Mark Panus, a spokesman for Realogy, defended his company's relationship with American Home Shield. Realogy gets a "nominal" annual fee from the warranty company for marketing their brand and providing them with visibility, Panus said.

"AHS earned our business as a result of its capacity to deliver outstanding customer service and operational excellence," Panus said. He said Realogy has not fielded any complaints about home warranties from its franchisees or customers.

But Inserra said she called Coldwell Banker headquarters in Parsippany to complain about American Home Shield - one reason she thinks the company finally relented and agreed to pay a portion toward her new furnace in late December, three months after it broke down.

MIXED REVIEWS

Inserra's story had a relatively happy ending.

But last year, homeowners in California sued American Home Shield, alleging the company routinely engaged in "deceptive and unconscionable conduct" to deny claims for repairs. It's one of at least two-class action lawsuits filed against American Home Shield.

Wilson, the company spokeswoman, said the bulk of consumer complaints are due to misunderstandings about what home warranties cover.

Home warranties only cover items that malfunction as a result of "normal wear and tear," she said. Anything that's broken before the contract is purchased or fails due to "lack of adequate maintenance" is not covered. Neither are items that show signs of rust, corrosion or sediment build-up.

Prospective homebuyers should try to obtain any maintenance records for appliances from the previous owners, she said.

"Having those records is key," Wilson said.

Certainly, American Home Shield has satisfied customers.

Lisa Velie, a 41-year-old Lindenwold resident, said she had an American Home Shield warranty for nearly three years and never had a problem.

"Anytime I called them, they would come out and fix what I needed, no problem," she said.

Cindy Rauch, a homeowner in Virginia, said she plans to return to American Home Shield after switching to another provider a few years ago to save money. The other warranty company declined a claim for a hot-water heater problem, saying she hadn't followed a maintenance schedule.

"I always seem to go back to American Home Shield," she said.

But others said the language embodied in home-warranty contracts is often too broad and vague. Terms such as "normal wear and tear," for example, or "lack of adequate maintenance," are highly subjective and often a matter of opinion, they argue.

Wilson said the company is aware some consumers don't understand warranties. Educating them is a "real concern of our industry," she said.

UNDER NEW MANAGEMENT

ServiceMaster was founded in Chicago in 1929 by Marion Wade, a former minor league baseball player, who "had a strong personal faith and a desire to honor God in all he did," according to the company's website.

An 11-foot white marble statue of Jesus washing the disciples' feet graces the lawn outside ServiceMaster's corporate offices in Downers Grove, Ill., where the company also operates TruGreen ChemLawn and Terminix pest control. Last year, a New York private- equity firm, Clayton Dubilier and Rice, bought ServiceMaster for $5.5 billion.

During the third quarter of 2007 - the last financial statement filed with the Securities and Exchange Commission before the company went private, ServiceMaster reported American Home Shield division generated $431 million in sales for the first nine months of 2007, down from $441 million in the same period a year earlier.

Delane Burrage, whom American Home Shield describes as a disgruntled former employee, said he worked in the company's authorizations department, approving claims for repairs, for 2 years.

"You'd see a customer, who had been with the company 20 years and had made virtually no claims, then all of a sudden they need something repaired and it gets denied," said Burrage, 42, who lives in Memphis.

The word "maintenance" is critical to everything, he said. Most people don't know the first thing about routine maintenance when it comes to their home's mechanical systems and appliances, he said.

He said he was fired in August 2007 for being a self-proclaimed "pain in the butt."

Depending on the coverage and the location, a homeowner can expect to pay between $400 and $500 for a one-year home warranty, plus $55 to $95 each time a contractor makes a service call.

Critics said an inherent weaknesses is the person buying the policy is rarely the one covered by it. A real estate agent or home seller typical buys a warranty on the buyer's behalf.

The end result: In the hustle and bustle of signing paperwork at closing and moving from one home to another many homebuyers don't take the time to review the contract. And many others don't even remember they have one, so they never use it.

"We try to engage the home- owners after the close of the sale and send out messages to remind them," she said. "We want our customers to use the warranty. If they don't use it they won't see the value and they won't renew. Renewals are the lifeblood of our company."

The company's "customer retention rate," has ranged from 54 percent, to 61 percent, according to regulatory filings.

INCENTIVES

Jamie Sheller, a Philadelphia attorney who is investigating another class-action suit against American Home Shield, said the company builds in incentives to keep contractors' fees - and their exposure - in check.

Contractors agree to keep their costs per customer within a certain threshold, she said, citing company documents. In exchange, they get a certain volume of calls, but when their average cost per customer starts to go up, the contractors get less work, Sheller said.

She said American Home Shield assigns contractors grades based on things such as the percentage of customer claims they deny, the average cost of every invoice they submit, and the percentage of repairs they make versus replacement.

In one contract, dated September 2006, she said the contractor was supposed to get 802 clients for the year and keep his average cost per invoice to about $134.

By the end of the year, American Home Shield had only sent him 633 clients and his average cost per invoice was $143.63 - higher than the agreed upon rate, she said. His denial percentage - the amount of claims he denied - came to 18.96 percent. The contractor received an "A" for the quality of his service, but a "C" for cost.

Wilson denied American Home Shield rewards contractors for denying customer claims.

"That is absolutely not the case," Wilson said. "Yes, their ratings do affect the amount of business they get, but it's not based on how many denials they provide our customers."

Burrage, the former employee, said one way contractors "keep their numbers down" is to hit customers up for additional fees on items that are not covered by their policies.

Holly Johnson, a real estate agent at Eagle Creek Realty in Scottsdale, Ariz., said she paid $550 for a one-year home warranty on her own private residence. When a heater compressor broke down, a contractor said it would cost $400 to dispose of her old one. Two other repairman said the customary charge was $50, she said.

Johnson said she was told by American Home Shield under her warranty, contractors were free to charge what they wanted for disposal fees. She said American Home Shield agreed to assign a new contractor to her case after she hired an attorney and threatened legal action.

Sam Ali may be reached at sali@starledger.com.

Photo Credit: 1. PATTI SAPONE/THE STAR-LEDGER