The Power of Protection

Extended Warranties = Peace of Mind

When HVAC contractors offer extended warranties, they are not just providing a peace of mind for their customers, but they are also creating “stickier” relationships and ensuring a year-round workflow – all of which can boost the bottom line.

To be successful, contractors need to conduct thorough due diligence on third parties that provide extended warranties – and if done in-house, contractors must comply with the various requirements of each state they offer the products, experts say.

Extended warranties have become “safe options” for customers to protect themselves in the long run, says Edward McFarlane, vice president of marketing and development Haller Enterprises Inc. in Lititz, Penn.

“It makes sense for most customers to spend a little more than they expected upfront compared to spending a lot more later on repairs,” McFarlane says.

It’s the job of a contractor to explain that HVAC systems are comprised of high-vibration equipment with many moving parts, and the best way to keep the equipment running at peak efficiency and prevent any kind of breakdown is with a maintenance program, he says. However, even maintenance programs do not prevent parts from failing, so the best way to prevent future out-of-pocket expenses is with an extended warranty.

“When customers understand what potential service calls cost, it’s normally a no-brainer to move forward with a protection plan that will cost less than multiple repairs,” McFarlane says.

Haller offers extended warranties provided by third parties, and the most popular product is a three-year labor warranty, he says. When customers are presented options on terms, they can say no to just one of the options compared to saying no to the idea of an extended warranty option altogether.

Offering maintenance and protection plans in-house

Isaac Heating & Air Conditioning in Rochester, N.Y. offers in-house warranties in the form of maintenance agreements and protection plans, says Jeremy Noll, service manager.

“As a company, we really want to be the ones in control of the relationship between us and our customer, and so we don’t deal so much at all with third parties,” Noll says. “If we do something right, we want it to be ours, and if we do something wrong, we want to make it right.”

Isaac’s plans include the contractor going into the homes each year and providing maintenance on equipment, and also providing protection on the equipment, “which gives our customers a piece of mind if unwanted or unexpected breakdowns occur at the most inopportune time,” he says.

There are also multiple benefits for the company to offer such plans.

“Primarily, it takes a customer and turns them into a client,” Noll says. “A client is someone who you see on a year-by-year basis, versus a customer who you may see once. By selling maintenance agreements and protection plans, you can build a strong client base.”

The plans are offered in one-year and two-year increments — with the two-year plan being the most popular. Noll says that if the plans had longer terms, the contractor would have to meet additional state requirements, but the firm has been successful at getting clients to renew for the shorter terms, and some have renewed for more than 20 years.

These plans are primarily sold by Isaac’s service technicians on every service call to every new customer. On new installments, the contractor includes a one-year Isaac Warranty. At the end of the warranty, the firm sends a technician out to the home to perform a quality control check, and at that time the technician talks about continuing coverage. The firm also automatically generates a new offer for a protection plan via both mail and email.

“We have an entire maintenance agreement and protection plan group, in which we have systems in place to ensure that we have put the agreements in front of clients,” Noll says. “The group makes sure clients properly understand what kinds of coverage the plan provides throughout the year – not only on new arrangements, but also on current plans.”

Isaac’s Gold Seal program is the most popular program – the contractor has served roughly 22,000 customers on the fully comprehensive plan, in which technicians come out to the home every year and provide maintenance on equipment. All parts and labor are covered under this plan.

“It’s a no brainer to get this plan – a small amount of money for all of the savings if they do have a part that could malfunction,” he says. “Considering the new equipment these days – which has a lot more bells and whistles – there’s a lot more things that can go wrong, and at a higher cost.”

Isaac recently rolled out an alternative payment option, which Noll calls the “Netflix model” – offering a monthly automatic charge to a customer’s credit card or checking account. The younger generations particularly like this option, he says, and it’s a great way to increase sales volume, as well as renewal rates.

“As a professional organization, you can’t afford not to have these kinds of plans,” Noll says. “Our business is so much dependent on the weather, and the only thing we can do to level out the workflow throughout the entire year is to build our client base with maintenance agreements.”

Complying with state regulations

Most states have requirements if contractors want to offer extended warranties and service agreements – particularly if they’re backing up the contracts themselves.

“Regulators look at this as that you’re not just providing a service – you’re asking for money in advance for something which may or may not happen,” says Greg Mitchell, an attorney who leads the insurance regulatory practice group of the law firm Frost Brown Todd.

“If something happens, you’re taking this risk for your customer, and because of the risk transfer element, extended warranties and service agreements are looked at as quasi-insurance,” says Mitchell, who is based in Lexington, Ken.

Regulations vary depending on the state, and on the coverage provided, he says. Regulations are also different for the party that is actually standing behind the benefits provided, and for the administrator that communicates and sells the contract to customers. In some states, extended warranties are regulated by that state’s department of insurance, whereas in other states it could be the real estate regulatory agency or the consumer protection agency, or multiple agencies.

If an HVAC contractor wants to provide in-house extended warranties and service contracts, state regulations can vary widely, Mitchell says. Regulations are light in states like Alaska and Delaware that don’t have many regulations at all because the products are not treated as insurance. Other states like California have extensive regulations.

Generally, though, most states will require the contractor to register and submit the contract form for approval, he says. In some states, people interfacing with consumers may need their own license or registration permit, whereas in other states, the company itself will need to obtain that.

Most states require some form of reserve, such as holding a portion of the service contract fees in a segregated bank account, or by virtue of a surety bond, or by virtue of a contractual liability insurance policy, Mitchell says. In those policies, an insurance carrier stands behind that contract, so in the event a contractor can’t provide the service, the insurer can step in and provide the benefit to the consumer that they thought they had purchased.

“Wording matters in these contracts,” he says. “If a contractor wants to provide an in-house contract, they should get with a professional who is comfortable with the requirements.”

Mitchell recommends that contractors require the entity helping them draft these contracts represent and warrant that all state compliance laws and regulations were properly followed.

“We spend a great deal of time cleaning up messes, but it’s much more economical to do it right on the front end, than have to spend money if something goes wrong and contractors have to get out from under a regulatory exam because they haven’t complied – especially if they have customers jumping up and down that they haven’t provided benefits,” he says.

Providing extended warranties offered by third parties

HVAC contractors can opt to provide extended warranties offered by third parties, and then perform any additional work themselves.

A key value of an extended warranty program is that it can help cut the expense of continuously generating leads, says Tommy Cue, sales manager at JB & Associates in Irving, Texas.

“A lead for a contractor could cost $400, but selling an extended warranty can both give a homeowner a peace of mind and put the contractor in front of the homeowner for the length of the contract,” Cue says.

When selling the warranties, contractors should tell customers who are buying a $14,000 air conditioning system, that for a very nominal fee for the life of that system, they could insure that system for a certain time period, he says.

“That way, consumers know that when they’re spending that fixed cost during that period, it’s a very nice budget item to have,” Cue says.

Contractors should conduct due diligence on providers of extended warranties, which includes checking the company’s background as well as the history of its contracts with customers to determine whether that have been issues, he says.

 

“The industry has evolved and has become much more regulated and scrutinized, and it’s easy to determine whether there’s been a problem with certain companies,” Cue says.

Contractors should also look for longevity in an extended warranty company, whether it’s claims payout process is done in a timely manner, whether there is transferability free of charge, and whether an A-rated insurance underwriter is backing the program, he says.

John Grimaldi, vice president, business development at Trinity Warranty in Icasca, Ill., says that several years ago, the firm conducted a focus group with contractors who had sold residential equipment with a 10-year parts warranty. The major complaint was the consumer heard they had a 10-year warranty but it was only a parts warranty.

“If a compressor went bad three years down the road, it was covered under the parts warranty — but the person had to write the contractor a check for $800 for the labor,” Grimaldi says. “If the contractor had put in an extended warranty on the unit which would have covered the labor, then when the compressor goes bad, the customer would have owed them nothing.”

Offering this type of extended warranty products will enable contractors to have “happy” customers, “rather than someone who calls the Better Business Bureau on them — happens all the time,” he says.

The best way for contractors to sell the warranties is to include the warranty in the original quote for the equipment, including parts and labor, so there’s no out-of-pocket expenses for their customers, Grimaldi says.

“Since 90 percent of jobs are financed or put on a credit card, contractors can roll the warranty into the financing, which may be only a few dollars more a month,” he says.

Susan K. Schneider, national warranty advisor at HVAC Warranty LLC in Columbia, S.C., says that contractors should be aware of the differences between the way a manufacturer’s warranty covers the contractor’s customers, versus how an extended warranty company offers protection to both the contractor and their customers.

“For example, HVAC Warranty never comes between a contractor and their customer — when a contractor purchases our extended warranty plans, they are the only authorized service provider for that client,” she says.

Many residential clients who don’t have an existing warranty or service agreement in place can elect to add on extended warranty coverage later, depending on the age and condition of their HVAC equipment, Schneider says. This tool allows contractors to gain new customers with existing equipment, and secure a partnership with them for future equipment needs.

“Every HVAC contractor’s goal is to provide their customers with the highest quality and value of service, meeting their needs for uninterrupted heating and air conditioning, while keeping prices competitive in their market area,” she says.

Katie Kuehner-Hebert

Katie Kuehner-Hebert

Katie Kuehner-Hebert is a freelance writer who writes for IE3. She has more than two decades of experience writing about corporate, financial and industry-specific issues. She is based in Running Springs, CA.
Katie Kuehner-Hebert

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