FHA / VA:
Most home warranty policies have an arbitraiton clause that takes away your right to sue. Arbitration can be biased in the company's favor, and it's private so others can't find out about complaints. But if the buyer has FHA or VA financing on the house, the following federal housing regulation may help them out:
It states that court must also be an option. This appears to only apply to third-party home warranty policies, not builder contracts or a builder's own warranty. Third-party warranty policies are purchased similar to insurance policies, usually by the builder, for a few hundred dollars. The warranties sound like a lot of protection, (10 yrs), but some homeowners say they are more protection for the builder. Not a lot of lawyers know about the CFR regulation and a lot of FHA/VA buyers may be being forced to arbitrate warranty policy claims who shouldn't have to, because this is not well known as a way out for them. I found out about this from HADD, and though it was hard to enforce, it did work for me. I believe that being able to file a lawsuit gave me the leverage that eventually led to recovery of over $100,000 in actual damages in a construction defect case. I was pro se (no lawyer), but I don't recommend going unrepresented, legally, unless you have no choice.
(g) In the event of any dispute regarding a homeowner complaint or structural defect claim, Plans must, unless prohibited by applicable law, provide for binding arbitration proceedings arranged through a nationally recognized dispute settlement organization. The sharing of arbitration charges shall be as determined by the Plan. A Plan must contain pre-arbitration conciliation provisions at no cost to the homeowner, and provision for judicial resolution of disputes, but arbitration, which must be available to a homeowner during the entire term of the coverage contract, must be an assured recourse for a dissatisfied homeowner.
(FYI in 1996 HUD issued a Mortgagee Letter stating that they didn't intend for arbitration to be mandatory, something to that effect. This was significant as a govt agency's opinion on a law/rule can carry a lot of weight in enforcing it. So I was told by a competent attorney. My job of enforcing this might've been a bit easier had I known that earlier.)
Baker v. Osborne Development Corp. (2008) , Cal.App. Case Number S161417
Court found HBW's arbitration clause unconscionable and unenforceable. Read Article http://realtytimes.com/rtpages/20080501_arbclause.htm
NC Dept of Justice
By Attorney General Roy Cooper
Despite our current national economic problems, some families may be thinking about buying a new or existing home because of falling home prices and competitive interest rates. Whether you’re looking for your dream home or your very first place, it’s important to remember that home ownership comes with new responsibilities—and new costs. When you own a home, you may be faced with unexpected repairs. Your builder or real estate agent may suggest that you buy a home warranty to protect against these unexpected costs. But think it through carefully before you decide to sink your money into a home warranty. As many homeowners have discovered, buying a home warranty won’t take care of all of your home repair worries.
My office hears from dozens of frustrated homeowners each year about home warranties that don’t live up to their expectations. In many cases, homeowners bought a warranty from their builder or real estate agent because they were told that that it would cover any problems with the home or its systems. While these warranties may sound good, in reality they can be very limited. Homeowners often find that their claims are denied or that they must pay several hundred dollars extra in permit fees, disposal fees and upgrades in order to get the work done.
Here’s a common scenario: a buyer is looking at a 30-year-old home with its original heating and cooling system. The agent tells the buyer not to worry because the home comes with a warranty that will cover all major repairs, giving the potential homeowner a false sense of security. Several months after the sale, the air conditioner goes out. The homeowner calls the warranty company. After charging the owner a service fee, the technician says that the unit failed due to lack of maintenance and denies the claim. Or, the warranty won’t cover the cost of upgrading the old air conditioner to meet the efficiency ratings of current systems. The homeowner then has to pay out of his or her own pocket to get the air conditioner fixed.
If you’re purchasing an existing home, consider asking the seller to make repairs or replace older items instead of relying on a home warranty. If you’re buying a new home, keep in mind that most builders in North Carolina follow a custom known as the builder’s traditional warranty that covers defects in the first year including minor repairs. The courts also recognize an implied warranty of fitness and habitability that protects new homeowners against harmful construction defects for up to three years.
Think about the following tips before entering into any contract for a home warranty:
Make sure you understand exactly what would and would not be covered under the home warranty. Many home warranties define terms like major structural defects differently than you’d expect.
Find out exactly what you must do to get the home warranty company to pay for a repair. Many contracts state that they will replace your equipment but only with a specific brand or will cover the work only if you use the company’s contractor.
If you’re working with a small contractor who offers his or her own warranty, you may be able to negotiate more favorable terms.
Before you sign or accept a home warranty contract, have your attorney review it carefully.
Never let the offer of a home warranty stop you from having the house and its appliances thoroughly checked out by a licensed home inspector.
Home warranty contracts often require you to use the company’s private arbitration process to settle disputes. That means you give up your right to take the company to court. If your home turns out to have serious defects, you might have a better chance of getting your money back without a home warranty.
Attorney General Roy Cooper and his staff are working to educate consumers and protect them from scams. We are here to be of service when you need us but through consumer education efforts like these columns we hope to help consumers avoid problems from the start.