Licensed Firm Key to Home Warranty Contract : Insurance: Consumers can avoid liability by using state-approved companies only.

Before purchasing a home warranty contract, consumers and real estate professionals should make certain the home warranty company selected is licensed by the California Department of Insurance, according to the Home Warranty Assn. of California (HWAC).

“Unlicensed companies represent a potential threat to home sellers, buyers and real estate agents because they may not have the required financial assets to honor the home warranty contracts they sell,” said Phil Branson, president of the HWAC.

“Avoid potential liability and other problems which may arise by using only licensed home warranties companies, easily verified through the Department of Insurance,” he added.

To operate legally in California, a home warranty company must meet rigid statutory requirements, which include significant paid-in capital, net worth and capital reserves, before it can be licensed to sell home warranty contracts in the state. In addition, the Department of Insurance requires warranty companies to maintain stringent bookkeeping procedures, submit detailed quarterly reports about sales, claims and renewals, and allow comprehensive audits by the Department of Insurance.

Although the home warranty industry is regulated by the state, warranty contracts are not insurance policies; rather, they are more like service contracts. However, the Home Protection Act of 1979 mandates that home warranty companies meet minimum financial requirements for licensing, according to John Fogg, senior counsel for the California Department of Insurance.

“The department is concerned about home warranties sold by unlicensed companies that are poorly capitalized and unable to provide the repairs or replacements of items covered in the contracts,” he said. “Unlicensed companies or individuals, operating illegally in California, should be reported to the Department of Insurance, which will take action to stop their fraudulent sales of home warranties.”

In addition to verifying that a home warranty company is licensed and certified by the Department of Insurance to sell warranty contracts in California, consumers and real estate professionals can protect themselves against fraudulent companies by using members of the Home Warranty Assn. of California.

While all home warranty companies selling contracts in California must be licensed and are regulated by the Department of Insurance, not all companies are association members, Branson said.

HWAC member companies abide by a strict code of ethics to ensure that fair, sound and clear coverage at published prices is provided and service requests are handled promptly and professionally.

Established in 1985, the HWAC monitors developments and standards in the industry and is committed to providing accurate and timely information about home warranty contracts to consumers and real estate professionals. The association also has been instrumental in strengthening consumer protection through new legislation.

HWAC member companies sold about 90% of all home warranty contracts in California in 1990 and represent seven of the 12 licensed home warranty companies in the state.

Current members of the HWAC are American Home Shield, Buyers Home Warranty Company, Continental Home Services, Electronic Realty Associates (ERA) Inc., First American Home Buyers Protection, HAA Home Protection of California Inc. and Hisco Home Protection Plan.