AN ANALYSIS OF HOME WARRANTY CONTRACTS.

• Author: Marzen, Chad G.

1. INTRODUCTION

   The question of whether a home warranty (1) contract is a wise financial decision for the typical homeowner is a debatable one in the realm of personal finance. (2) With a general rise in housing prices and the housing market in the United States the past couple of years, (3) the sale of home warranties reportedly rose eight percent from 2014 to 2015. (4) Despite the reported rise in the number of issued home warranty contracts in the United States, home warranty companies have been subject to complaints (5) and many home warranty contracts often include exclusions. (6)

   An unexplored area of the literature concerning home warranty contracts is an analysis of the types of contractual provisions that are actually found in home warranty contracts. This article comprehensively examines the contractual provisions of the standard contracts of seventeen different home warranty companies to compare and contrast contractual provisions. (7) As discussed in Part II, almost all of the standard contracts limit home warranty coverage to residential property only, and a number of the contracts not only exclude commercial property, but property utilized in situations such as day care facilities and the homes of fraternities and sororities. Part III discusses the typical coverage grants--in most cases, the standard coverage included within a home warranty contract is an air conditioning system, heating system, electrical system, and often included kitchen appliances. Many home warranty contracts also include additional coverage options which can be purchased outside of the standard contract price, such as pools, spas, and septic tanks. (8)

   Part IV examines the common exclusions and limitation of liability provisions found in standard home warranty contracts. Home warranty contracts commonly include a provision stating that the home warranty company has the sole right to determine whether a covered item will be repaired, replaced, or whether a cash settlement will be offered in lieu of repair or replacement. (9) Home warranty contracts also often include a provision excluding primary coverage or coverage altogether in the event there is coverage for the covered item under an existing warranty or contract. (10) In addition, home warranty agreements often include exclusions for hazardous substances, force majeure events, acts of nature, and other occurrences as well as an overall monetary limitation per contract period. (11)

   Part V of this article analyzes the various waiver of damages provisions found in almost all home warranty contracts. Generally, home warranty contracts often include a waiver of tort, and a waiver of special, punitive and consequential damages. (12) A number of home warranty contracts also contain class action waiver provisions, class arbitration waiver provisions, arbitration clauses, choice of law clauses, and/or choice of forum clauses. (13) Finally, Part VI of this article examines several other miscellaneous provisions which have appeared in various home warranty contracts.

2. HOME WARRANTY CONTRACTS AND RESIDENTIAL PROPERTY

   Home warranties are generally a product intended for homeowners who are utilizing a home for residential purposes. (14) Home warranties are similar in many respects to homeowner's insurance policies, but while homeowner's policies typically do not cover loss due to "wear and tear" a home warranty contract generally will. (15) While the question of whether a home warranty constitutes insurance is beyond the scope of this particular article, throughout this article many comparisons to certain provisions in homeowner's policies will be made to the provisions in home warranty contracts, as both types of contracts contain many similar contractual exclusions.

   One of the most familiar general exclusions in a typical homeowner's insurance policy is an exclusion for commercial activity, which precludes coverage for situations when the home is utilized for business pursuits. (16) Home warranty contracts are similar in that nearly all provide that coverage is exclusively for residential property only and excludes commercial property or residences used as businesses. (17) The contracts of sixteen out of seventeen companies analyzed in this article contain language indicating that the contracts are for residential property only. (18) A prime example of the residential purposes language utilized in a home warranty contract is the following: "This Agreement covers a single family residence (under 5,000 square feet), including a condominium, townhouse or villa, or a multi-family property of two (2) to four (4) units (duplex, triplex, or fourplex) used solely for residential purposes." (19)

   While almost all home warranty contracts specifically note that coverage is only for residential properties, a number of the sample contracts analyzed for this article particularly delineate exclusions where a residence is utilized as a business. (20) Several of these situations include the following in Table A:

   Several of these common exclusions--including properties utilized as a day care facility, school, church, and bed and breakfast facility--are sometimes found in restrictive covenants limiting property usage to "residential purposes" only. (28) The majority of courts have enforced restrictive covenants in situations where a property owner operates a day care facility. (29) For example, in Farmington Woods Homeowners Ass'n v. Wolf, (30) the Nebraska Supreme Court upheld the general legal enforceability of a restrictive covenant, which prohibited "business activities of any kind whatsoever[,]" against a couple who for twelve years operated a day care from their home. (31) However, the Nebraska Supreme Court in Wolf reversed a trial court's summary judgment in favor of the defendants on the homeowners' defense of waiver, as there was evidence that the homeowner's association was aware of the covenant for at least a decade before it sought enforcement. (32)

   On the other hand, the Indiana Court of Appeals in Stewart v. Jackson (33) held that an unlicensed home care operation qualified as a "residential" use and did not violate a residential use covenant. (34) The Stewart Court weighed the fact that the Indiana Legislature did not have a legislative apparatus to regulate home day care operations with fewer than six children and it stated that "[t]he deliberate abstinence from monitoring small home day care is indicative of an intent not to place barriers that inhibit these services. Public policy in Indiana clearly favors home day care." (35) Overall, ten out of seventeen contracts analyzed contained an exclusion of day care from home warranty coverage. (36)

   Similar to several courts which have upheld the validity of restrictive covenants applied to a day care facility, courts throughout the country have upheld restrictive covenants limiting property usage to residential purposes in the cases of a school, (17) church, (38) and bed and breakfast operation. (39) Seven of the seventeen home warranty contracts contained a residential exclusion for fraternity or sorority homes; (40) six of the seventeen contained an exclusion for schools; (41) four contained an exclusion for nursing homes; (42) four included an exclusion for a church; and two included a specific exclusion for properties utilized as a bed and breakfast. (43)

   Properties listed in a historical register are sometimes subject to state or local regulations and restrictions to protect the historical character and quality of the home. (44) While non-federal owners of properties listed on the National Register of Historic Places generally encounter no restrictions on what they can do with the property, (45) some cities, such as Old Town Alexandria, reportedly prohibit property owners from changing the exterior of a home more than 100 years old without first obtaining approval from the city's Board of Architectural Review and City Council. (46) Just as some owners of historic properties face restrictions via restrictive covenants, some owners of historic properties may face exclusions to coverage under a home warranty contract--four of the seventeen home warranty contracts reviewed for this article contained an exclusion for coverage for a home listed on a historical register. (47)

3. TYPICAL COVERAGE GRANTS IN HOME WARRANTY CONTRACTS

   1. Standard Coverage Grants

      The standard coverage in many home warranty contracts includes coverage for the major systems in a home as well as major appliances. (48) The following major systems and appliances typically covered under standard coverage appear in Table B:

      As Table B indicates, thirteen home warranty contracts included the air conditioning systems and fourteen contracts included the heating system among standard coverage grants. (61) One standard contract includes the air conditioning system as an optional coverage. (62) For many homeowners, replacing an air conditioning and heating system is among the greatest home expenses a homeowner may face and likely a primary reason for a homeowner to purchase a home warranty. (63) The average cost of a new air conditioning system for a homeowner is well over $5,000. (64) For a heating system, a natural gas furnace typically costs between $2,250 and $3,800. (65) In addition to most home warranty contracts containing standard coverage for air conditioning systems, twelve contracts included standard coverage for ductwork. (66)

      Most home warranty contracts also include standard coverage for the electrical system as well as the plumbing system. (67) Thirteen contracts analyzed included standard coverage for the electrical system, and thirteen contracts included standard coverage for the plumbing system. (68)

      The clear majority of home warranty contracts reviewed include standard coverage for key appliances in many homes. (69) Fourteen have standard coverage for a dishwasher; (70) fourteen included standard coverage for an oven/range/stove/cooktop; (71)...