A residential service contract or home warranty is usually purchased when a house sells in the resale market. A home under warranty may be more attractive to prospective buyers. It covers major appliances and systems which are in proper operating condition at the time of closing and usually carries a one-year service agreement. It is an agreement on the part of the issuer (the residential service company) to repair or replace certain named components or systems within a home that fail due to normal wear and tear during the contract term. A service fee (a deductible ranging from $35 to $125) may be charged for each service call, and the homeowner is protected against the costly expense of a major breakdown or multiple breakdowns which can occur when a change of ownership and lifestyle subject the equipment to different usage.

A typical homeowners-insurance policy covers loss to the dwelling and its contents as a result of external forces, such as fire, hurricane, hail, or vandalism. The policy excludes loss due to mechanical failure or normal wear and tear.

Conversely, a residential service contract—also known as a home warranty—covers many losses due to mechanical failure and wear and tear. It covers major appliances and systems that are in proper operating condition at the time of closing and usually carries a one-year service agreement. It is an agreement on the part of the issuer (the residential service company) to repair or replace certain named components or systems within a home that fail due to normal wear and tear during the contract term.