Who regulates home warranty companies in California?

Who regulates home warranty companies in California?

Nina Smith

Nina Smith

Nina is a writer with more than 5 years of experience. She is experienced in such topics as home warranty and home maintenance. She enjoys giving a piece of helpful advice, so don't hesitate to ask her in the comments.

Regulation of residential services contracts and home warranty companies offering these contracts is extremely important to prevent fraud, manipulation, malpractice, and other problems for the customers. Each state has its laws under the defined federal guidance for home warranty companies’ regulation. As such, the rules in California differ based on the separate home warranty companies’ regulatory bodies in the state. Here, the article will discuss who regulates home warranty companies in California, including:

  • Difference between a home warranty and home insurance
  • Regulations in California over home warranty companies
  • Why strict measures and high standards are required?
  • Are the strict regulations in California always effective?
  • The home warranty association of California

Difference between a Home Warranty and Home Insurance

It is important to know the difference between home insurance and home warranty before discussing their regulations. Home insurance is a compulsory requirement for most mortgages. Here, the focus is to maintain the home’s integrity, i.e., issues caused by theft, fire, and weather. Thus, home insurance companies are focused on maintaining the property’s value to ensure that if the mortgage is not repaid, the mortgage company can sell the home to recover their money. As such, home insurance companies do not cover the insides of the house.

On the other hand, a home warranty company focuses on maintaining the house’s components, systems, and appliances. The homeowner has to pay an annual premium (and monthly payments in some cases). Then, the home warranty covers most breakages and systematic issues related to the house.

Regulations in California over Home Warranty Companies

In California, there are numerous companies offering home warranty services. However, a resident must only purchase a home warranty from a company with an official license given by the California Department of Insurance.

The California Department of Insurance maintains a high standard, and requirements that any company willing to be licensed to sell home warranty services has to be met. First, the company must have the required capital reserves to meet the requirements. Similarly, the net worth and financial assets of the company are scrutinized as well. Additionally, the home warranty provider has to adhere to specific accounting and book-keeping practices as well. The California Department of Insurance audits these accounts.

Why Strict Measures And High Standards Are Required?

It is illegal to operate without having a formal license issued by the California Department of Insurance. The main reason is that companies that operate without a formal license often fail to maintain the department’s minimum cash and capital services. Consequently, such illegal companies are likely to go bankrupt, causing major issues for the clients. In other cases, they may disapprove a lot of the customer claims unfairly. The expensive and timely procedure ensures that every customer receives the best service and their claims are not denied unfairly. Another issue is that the federal level of requirements is minimal and does not adequately ensure customer safety from malpractices. Thus, state-level strict measures become necessary to protect the homeowners availing home warranty services.

Are the Strict Regulations in California Always Effective?

There have been numerous instances where home warranty companies have conducted many frauds and malpractices despite strict regulations. For example, First American Home Buyers Protection Corporation faced a legal proceeding in the United States District Court for the Southern District of California brought by Emily Diaz in 2013. Here, Emily Diaz claimed that First American Home Buyers Protection has a poor contractor network that fails to make timely repairs. Similarly, the company has been denying the claims unfairly as well. However, the court decided against Emily Diaz, who had to pay a large bill for the legal proceeding at the end as well. As such, the regulations are less effective when large-scale corporations are concerned, with individual homeowners having no power over them, even in courts.

The Home Warranty Association of California

Joining the Home Warranty Association of California is not a legal requirement. However, it ensures transparency of the home warranty companies because each member has to follow a strict code of ethics. As such, they have to provide professional quality services and be transparent about their prices. However, despite such benefits, only a few home warranty companies in California have joined the Home Warranty Association of California. These members are Buyers Home Warranty, American Home Shield, First American Home Buyers Protection, Continental Home Services, and Hisco Home Protection Plan.

Conclusion

Home warranties can be a beneficial option if properly regulated and under strict scrutiny for any malpractices and embezzlements. However, California’s current state of regulation fails to provide such a level of security to homeowners. Strict actions must be taken against illegal home warranty providers to ensure the best services for the homeowners in the area.

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