BE CAREFUL ABOUT YOUR HOME WARRANTY REQUEST

April 13th, 2012 at 6:55 pm

As you know, in most deals it is common for the seller to purchase a home warranty for the buyer. The policy covers many of the property’s systems and, by paying for repairs, can save everyone headaches after close of escrow. On the other hand, if not dealt with correctly, the contract terms around that warranty can be a problem. Specifically, paragraph 4D(6) of the Purchase Agreement deals with the allocation of costs for the home warranty. That clause reads that either the buyer or seller “shall pay the cost, not to exceed $___________, of a one-year home warranty plan, issued by _________________, with the following optional coverages:” The contract then has 4 checkboxes for optional coverages: air conditioning, pool/spa, codes and “other.” As you know, the disputes we see arise from the interpretation of this clause, and more particularly, how you fill it out.

For example, we have a deal where paragraph 4D(6) provides that the seller shall pay the cost of the warranty, “not to exceed $600.” The buyer only checked the box for one optional coverage, air conditioning. As a result, escrow ordered the policy, with optional HVAC coverage, for a total cost of $400. Two days before escrow was to close, the buyer’s agent called escrow and said they also wanted optional roof coverage at a cost of an additional $100. In other words, with that extra coverage, the seller would still be paying less than their “not to exceed” amount of $600. Is the seller obligated to pay for the roof coverage?

The answer to that question, quite simply, is no. The $600 “not to exceed” amount specifically refers to a one year policy with “the following optional coverages.” Since roof coverage was not indicated in the contract, it was not a “following” coverage. Further, since the $600 is a “not to exceed” amount, the seller is not obligated to pay that full amount. Rather, they are just not required to pay more than that amount. On the other hand, if the seller can provide the buyer with what they asked for in the contract, in our case a one year policy with HVAC coverage, for less than $600, they are free to do so and have properly performed the contract.

So what does this mean for the buyer’s agent? It means you need to be sure to designate the optional coverages you want. The way the contract is written, the “not to exceed” amount will not protect you if you don’t ask for the proper coverages. So, when you represent the buyer, talk to them about the condition of the house and the optional coverages available, and make sure to check the box for all coverages they want. That is the only way to make sure your buyer gets the warranty they bargained for.

As always, please contact us with any questions you may have.

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