Home Equipment Breakdown

Systems that keep homes safe, comfortable and efficient have become more complex, expensive and prone to breakdown. With consumers seeking to protect their new investments, insurance that covers the cost of the breakdown of home systems, appliances and electronics provides broad coverage at a much lower cost than extended warranties.

Energy costs, climate change and an aging population are driving home systems today. Appliances can now think, talk and network to help save money on energy, reduce environmental impact and make life easier.

That new washing machine can text a homeowner when a washing cycle is over; a phone app can remotely set the refrigerator to its energy-saving vacation mode; and the dishwasher can let a user know when it is time to run a cleaning maintenance cycle.

The smart appliance market is forecast to grow to US$34.9 billion in the United States alone by 2020, note figures released in early 2013 by Pike Research, part of Navigant’s Energy Practice. This amount compares to US$613 million in 2012. Implications for the insurance industry include increasing home values and heightened exposures.

Climate change and severe storms are encouraging many people to install back-up generators, a new, expensive item that requires regular maintenance and safe storage of fuel. The aging population is also making its impact. Seniors opting for in-home care now own medical equipment that monitors blood pressure, promotes circulation and delivers oxygen therapy. This type of machinery is not only expensive, but is equipped with sensitive electronics.

Sensitive electronic controls on appliances and other equipment make them more vulnerable to power surges and electrical breakdown. When systems become interconnected, damage in one machine can impact a home’s entire electrical system. A furnace, boiler, air conditioning and owned hot water heater are also subject to electrical and mechanical breakdown.

The question is, what is the best way to cover home systems breakdown?

FACTS TO CONSIDER

Typical property policies do not respond to home systems breakdown

Property policies typically exclude loss or damage caused by electrical and mechanical breakdown, as well as the tearing apart, cracking, burning or bulging of a steam or hot water heating system or an air-conditioning system.

For example, a gear box in a home chair lift system suffers mechanical failure as a result of stress. Replacing the gear box could cost $1,900, certainly a hefty amount for any senior to pay. The loss is 100% mechanical and not covered by a homeowner’s property policy.

Typical response of manufacturers’ warranties

A manufacturer’s warranty – in essence, its promise to stand behind its product – is included free in a product’s purchase price. Providing repair and/or maintenance for a limited period, the warranty will expire and typically is not renewable. A so-called “limited warranty” may cover only parts and require the consumer to cover shipping.

EXTENDED WARRANTIES

An extended warranty covers an individual product and is sold at the time of product purchase. The separate and additional cost of an extended warranty distinguishes it from a manufacturer’s warranty.

It is “excess” over the manufacturer’s warranty, providing repair for a specific period – for example, one, three or five years. It is renewable for multiple years, generally with material rate increases. A typical extended warranty can be quite expensive, at approximately 20% of the product’s retail value.

SERVICE CONTRACTS

A service or maintenance contract, often sold by a contractor, provides periodic maintenance and necessary repairs for specific equipment, such as heating, cooling and plumbing. Only a limited range of parts is covered, and a service contract will not replace complete units if a part is no longer available, or if equipment is no longer repairable.

Warranties and service contracts will not cover consequential losses, such as loss of use or spoilage; or human error, such as faulty installation, operator error or lack of maintenance.

HOME EQUIPMENT BREAKDOWN INSURANCE

Another option is home equipment breakdown insurance, which provides broad coverage at a lower cost than purchased warranties. Possible coverages include direct damage caused by the sudden or accidental mechanical or electrical breakdown to any home system, including heating, cooling, appliances and electronics, regardless of the equipment’s age.

Unlike warranties and service contracts, the aforementioned damage caused by human error is covered, as is loss of use or additional living expenses if a home becomes uninhabitable, and spoilage of perishable foods resulting from refrigeration breakdown.

Some policies also pay efficiency incentives, as much as 150%, for upgrades to systems that are more energy- and water-efficient or that are environmentally friendly.

Examples of possible losses for which home equipment breakdown insurance could offer protection include a furnace’s broken fan/blower, which causes damage to other parts of the furnace, requiring that the whole unit be replaced. Or it may be an air-conditioning compressor that, after operating in an overheated condition for an extended period, fails electrically and must be replaced.

There may also be optional coverage for service lines. This pays for the failure of a homeowner’s underground water, sewage, heat, steam or power service line.

Most homeowners are unaware that they own the service lines running from their dwelling to their property’s boundary line, for example, outdoor water and sewer piping; or that the cost of repair or replacement of damaged service lines is not covered by property policies. It can cost thousands of dollars to repair an underground sewer pipe that collapses due to a tree root invasion.