COVERAGE DECISIONS

Home warranty vs homeowners insurance: what each pays, and who regulates the warranty

Homeowners insurance pays for sudden damage from perils the policy covers, such as fire, hail, theft or a burst pipe. A home warranty, called a residential service contract or home protection contract in state law, pays to repair or replace listed systems and appliances that fail from wear and tear, which the homeowners policy excludes. The two are built to meet at a line, and the costly mistakes happen on that line.

General information, not insurance or legal advice. This site does not sell, rank or link to home warranty companies or insurers. Policy wording quoted here comes from the ISO HO 00 03 10 00 sample form (edition 10 00, copyright 1999, published by the Insurance Information Institute); your own policy and contract control. Flood is excluded from standard homeowners policies.

The line, as the homeowners policy draws it

Start with the policy, because it defines what is left over for anything else. The HO-3, the most common homeowners form, insures the house against "risk of direct physical loss," then lists what it will not pay for. In the ISO sample, paragraph 2.c.(6) of the dwelling coverage excludes loss caused by "Wear and tear, marring, deterioration" and by "Mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself." Rust and other corrosion are on the same list.

That one paragraph is the reason home warranties exist. A furnace that stops because its parts wore out, a dishwasher motor that dies at year twelve, a water heater whose tank finally corrodes through: each of those is wear, deterioration or mechanical breakdown, and none is a covered loss to the item itself. A furnace board destroyed by an outside surge is a different case, judged by where the current came from; our power surge damage guide sorts those causes.

The same paragraph then carves out an exception that matters just as much. Unless otherwise excluded, the sample covers loss to the house "resulting from an accidental discharge or overflow of water or steam from within a" plumbing, heating or air conditioning system or a household appliance on the premises, including the cost "to tear out and replace any part of a building" when necessary to repair the system or appliance. And then the sentence that splits every appliance leak into two claims: "We do not cover loss to the system or appliance from which this water or steam escaped." So when an old water heater leaks across a finished floor, the floor and the drywall are the policy's problem and the heater is not. Our burst pipe and slow leak guide traces how that rule plays out, including the separate rules for freezing and long-term seepage.

The line, as warranty laws draw it

State statutes describe the warranty from the other side, and they mark the same boundary.

California calls the product a home protection contract. Section 12740(a) of the Insurance Code defines it as a contract by someone other than the builder, seller or lessor of the home to repair or replace "all or any part of any component, system or appliance of a home necessitated by wear and tear, deterioration or inherent defect" during the contract period, for a predetermined fee. The next sentence draws the line: the contract "shall provide for a system of service for effectuating such repair or replacement and shall not include protection against consequential damage from the failure of any component, system or appliance." In plain terms, the California warranty fixes the broken thing and is barred from paying for what the broken thing damaged.

Florida reaches the same place by a different route. Section 634.301(2) of the Florida Statutes defines a home warranty as a contract to pay for, or perform, the repair or replacement of "any structural component or appliance of a home, necessitated by wear and tear or an inherent defect." The same paragraph says the part "does not permit the provision of indemnification against consequential damages arising from the failure of any structural component or appliance of a home, which practice constitutes the transaction of insurance subject to all requirements of the insurance code." If a contract promised to pay for the flooded floor, Florida would treat it as insurance.

Texas's real estate commission puts the split in consumer language. Its page on residential service companies says a homeowner's insurance policy covers loss from "theft, weather-related perils (rain, hail, the wind), and fire" but "will not typically cover loss to an appliance or household system due to mechanical failure or normal wear and tear," while a residential service contract "will cover those types of losses but it will not cover damage to an appliance or system caused by those perils typically covered by an insurance policy." The Texas Department of Insurance said the same in a January 26, 2026 post: insurance pays for damage from covered events "like fire or theft but not wear and tear."

Read the matrix by row. Where an item fails from age, only the warranty is built to pay, and only for items the contract lists. Where a peril like fire, hail or theft causes the damage, only the insurance is built to pay. The two rows that take both products, the leaking water heater and the split washer hose, are the same pattern: an appliance wears out and lets water go, so the warranty is built for the item and the policy for the damage it caused. Frozen pipes are deliberately not in the matrix, because freezing has its own exclusion in the sample form, lifted only if you "used reasonable care to" maintain heat in the building or shut off the water and drain the system; our burst pipe guide covers that condition in detail.

A leaking water heater, worked through both products

Here is one failure priced with invented numbers, to show how the two pay side by side. A 13-year-old tank water heater in a finished basement corrodes through overnight. By morning, water has soaked the carpet pad, the bottom of the drywall and a run of baseboard.

Now apply the two out-of-pocket rules. With a $1,000 homeowners deductible, the policy would pay $9,200 minus $1,000, or $8,200. With a warranty that lists water heaters, a $125 service fee and no cap below $1,900, the contract would cover the heater, and the owner pays the $125 fee. The owner's share is $1,000 plus $125, or $1,125, out of an $11,100 loss.

Change one fact at a time and the split moves. If the warranty caps water heaters at $1,000, the owner pays the other $900 of the heater as well, for $2,025 in all. If there is no warranty, the owner pays the $1,900 heater plus the $1,000 deductible, $2,900. If the leak had been a slow drip for months rather than a sudden failure, the homeowners side becomes a different argument: the word "accidental" in the discharge coverage, and the wear, deterioration and corrosion exclusions, are where an insurer would look, and your own form may add wording about long-term leaks that the 1999 sample does not have. And if the house had no homeowners policy, the warranty would still pay only for the heater; $9,200 of damage would sit with the owner. Whether a $9,200 damage claim is worth filing at all is its own question, which our guide to filing a small claim works through.

Two practical points follow from the sample wording. First, the tear-out language matters: the policy pays "to tear out and replace any part of a building" when that is necessary to repair the system or appliance, so opening a wall to reach a leaking supply line can be part of the insurance claim even though the line itself is not. Second, because mold that follows a leak is handled by its own exclusion and exception in the same form, a fast dry-out protects both claims. Our guide to mold and homeowners insurance covers that clock.

When insurance pays for an appliance, it pays what the appliance was worth

There is a second line between the two products: how the homeowners policy values an appliance when it does pay. In the ISO sample, the loss settlement condition puts "household appliances" in the same group as personal property, carpeting, awnings and "outdoor antennas and outdoor equipment, whether or not attached to buildings," and settles that group "at actual cash value at the time of loss but not more than the amount required to repair or replace." The building itself is settled at replacement cost; the appliances inside it are not, under that wording.

Worked with invented numbers: a kitchen fire destroys a 12-year-old range that would cost $1,400 to replace. If the insurer values it at $300 after depreciation, the range contributes $300 to the claim, not $1,400, and the deductible comes off the total of everything in the claim. A hail-damaged air conditioning condenser could be treated as outdoor equipment under the same condition, and if so would be valued at actual cash value. If your policy carries an endorsement that changes how these items are settled, the declarations page will list it; under the sample the gap between an old appliance's value and the price of a new one is yours to fill whether the cause was wear or fire.

That gap is what a buyer is really weighing when a warranty is offered on an older house. The warranty, if the item is listed and the cap is high enough, replaces a worn-out appliance after a service fee. The insurance replaces nothing that wore out, and pays depreciated value for an appliance destroyed by a covered peril. Neither pays full new value for old equipment as a matter of course.

Who regulates a home warranty, state by state

A home warranty company is not always overseen by the same agency as your insurer, and the agency that licenses it is the place to check a license and to complain. These are the three states whose rules we read at the source; this is not a list of every state.

Sources: Texas Real Estate Commission, Residential Service Companies (Home Warranties); Texas Department of Insurance, "A home warranty is not home insurance," January 26, 2026; Florida Statutes 634.301 and 634.303 (2026); California Insurance Code 12740 and 12742, read from a reproduction of the official text because the Legislature's site refused our request. Verified Oct 2026.

Florida's statute shows how close the two products sit in law. Section 634.303(2) lets an insurer "authorized to transact property or casualty insurance in this state" also transact a home warranty business "without additional qualifications or authority," while staying subject to the warranty rules. California's Part 7 also excludes some products from its definition: section 12741 says the part does not apply to performance guarantees or service contracts from the builder or the manufacturer or seller of an appliance, so a manufacturer's warranty on a new furnace is a different thing from a home protection contract.

One thing follows for a buyer. A complaint about a warranty claim goes to whoever licenses warranty companies in that state, which in Texas is the Department of Licensing and Regulation rather than the Department of Insurance. TDLR's service contract providers page offers a license search, so a Texas buyer can check a company before signing.

Buying a house: which one the lender asks for

The lender cares about only one of the two. The Texas Department of Insurance's home insurance guide notes that the law does not require home insurance, "But if you still owe money on your home, your lender will require you to have it." For loans it buys, Fannie Mae's Selling Guide, section B7-3-02, sets the minimum: a special-form policy covering at least fire or lightning, explosion, windstorm, hail, smoke, aircraft, vehicles, and riot or civil commotion, settled on a replacement cost basis except for roofs, with a deductible of no more than 5 percent of the coverage amount. None of that mentions a warranty. The Texas Real Estate Commission says it outright: "a residential service company contract is not required when purchasing a home."

Warranties often enter at the closing table anyway. TREC notes the contracts "are typically offered at the point of sale of a home," and a seller sometimes pays for the first year as part of the deal. That can be useful on an older house, but it does not change the insurance timeline. The policy still has to be bound, with the lender named, before the Closing Disclosure is prepared, as our guide to buying homeowners insurance when buying a house sets out. On a house with an older roof, wiring or plumbing, an insurer may also ask for a four-point inspection, and a warranty does not answer that request.

Reading a warranty contract against your policy

There is no regulator-published average price for home warranties in the sources we read, so this page does not print one; the price that matters is the one in the contract in front of you. California's statute gives one structural rule: a home protection contract fee is "the fee established by a home protection company for coverage extending one year from the effective date of the contract," with any longer first term priced as the annual fee plus a separately stated pro rata portion. Beyond that, read these items in the contract itself, and set each against your declarations page:

• The list. Which systems and appliances are named, and which need an add-on. An item that is not listed is not covered, however it fails.
• The service fee. The amount you pay per visit or per claim, and whether it applies once per failure or once per technician trip.
• Caps. Any dollar limit per item, per system or per year. A cap below the replacement cost of a furnace or a heat pump changes what the contract is worth.
• Pre-existing conditions. How the contract treats a failure that started before the contract did, and whether an inspection is involved. California's definition refers to inspections under section 12761(b).
• Code and access costs. Whether the contract pays for permits, code upgrades or opening walls. On the insurance side, code upgrades after a covered loss are the job of ordinance or law coverage; on the warranty side, they are whatever the contract says.
• Cancellation and renewal. How to cancel, what is refunded, and whether the price changes at renewal.

Then read your declarations page for the other half: the all-perils deductible, any separate wind or hail deductible, and any water-damage limits or endorsements. Our guide to reading your declarations page shows where each of those sits. The comparison is not warranty against insurance; it is how the two documents together handle the failures that are most likely in your particular house.

What neither product does

Neither a homeowners policy nor a home warranty pays for upkeep that a homeowner chooses to put off. The sample form excludes wear and tear, and a warranty pays only for listed failures under its own terms. Neither covers flood: the homeowners form excludes it, and our basement flooding guide sorts out which policy, if any, pays for water that enters from outside. And neither is a substitute for the other: the warranty cannot pay for consequential damage in California or Florida as those statutes read, and the policy will not replace a worn-out appliance. Termite damage is another gap of this kind: the sample form lists insects among its exclusions, and the contract that can answer for the repair is a termite company's agreement, read for its own terms, as our termite damage guide explains.

For the full list of coverage choices that sit alongside this one, see the coverage decisions hub.

Warranty or insurance: questions buyers ask