City touts sewer warranty without facts

San Diego’s city government has crossed a subtle but important line.

It’s moved beyond selling naming rights and advertising space into helping a “sponsored” company sell a financial product directly to residents.

In October, thousands of San Diego homeowners received letters — bearing the city’s official logo — alerting them that they were on the hook if the sewer lines broke between their houses and the city’s main pipes.

Of course, the letters offered to cover this surprise liability — for $103 a year if you enrolled before Oct. 27, a discount of 14 percent. There was no mention of Ginsu knives.

It looked like a scam to many owners, who flooded city switchboards to complain and ask questions.

“It’s not a scam; it’s a partnership!” was the answer from city officials.

After researching the company, the product and government records, I confirmed that this particular sewer warranty is not an outright scam.

But it’s also not by any means a bargain, unless you somehow know your sewer is about to break.

One major shortcoming is the hefty cut for San Diego’s government.

Last year, the city sold Service Line Warranties of America an exclusive right to use San Diego’s logo to market the warranty to residents. SLWA agreed to pay $242,000 to the city, plus 12 percent of the gross revenue from local sales.

With up to $1.66 million for the city projected over five years, the City Council unanimously approved the deal.

It’s part of a corporate partnership program, approved in 1999, designed to generate revenue in creative ways. Previous deals with Sprint, Toyota and Qualcomm were limited to rights to sell gadgets to city workers or use public property for advertising.

This warranty deal appears to be the first time San Diego agreed to help sell a financial product to consumers.

I don’t need a calculator to conclude that homeowners are ultimately paying the city’s 12 percent-plus commission on this “discounted” warranty, which appears to be quite lucrative for the seller.

Consumer advocates say extended warranties, whether for electronics or a house, are not worth the money for most people.

They recommend using such payments to instead fund a repair savings account, because you can keep the cash if nothing goes wrong. And most warranties come with long lists of exclusions.

Another problem boils down to risk. Certainly, sewer lines break, usually caused by tree roots or shifting soil. Repairs typically cost $1,200 and up, a city report said.

But along with repair costs, understanding the odds that mine will break is key to knowing whether coverage is worthwhile.

San Diego is endorsing this product without knowing anything about the risk of losses.

In the 1980s in Cincinnati, I spent a princely sum repairing a sewer line in precisely the spot that would have been covered under SLWA’s type of warranty. Then again, my plumber pointed out that the old, cast-iron pipe had gone unbroken for 100 years, so he didn’t expect to see me for another century.

An executive with SLWA told me that its overall loss history, which is how companies assess the risk of future claims, is a trade secret. City officials don’t track breakages on the homeowner’s side of the system, so they don’t know the odds of any one house experiencing a problem.

But let’s say you don’t trust yourself to save for repairs and want to buy some peace of mind.

This SLWA product costs at least $103 a year to cover up to $4,000 in repairs to only the length of sewer pipe that connects a house or condo to the city’s main service in the street.

For perspective, warranties that cover an entire house, including plumbing, wiring and appliances, cost between $400 and $500. And those warranties typically cover sewer lines up to 125 feet from the house, although they are limited to fixing clogs and won’t replace the pipe like the SLWA product does.

The SLWA warranty covers an additional $4,000 to cut into the street or sidewalk if necessary. But there’s a question about who pays to repair the pavement.

This isn’t trivial; I recently spent $1,200 to fix about 20 feet of sidewalk, a job requiring a city permit and special concrete.

I reviewed warranty documents for SLWA’s sewer coverage along with its warranty for water service lines, a separate product due to go on sale this spring, presumably with city help. The waterline warranty specifically excludes repairs of private sidewalks. The sewer contract is silent on the issue.

Jennifer Kearns, the city’s strategic partnerships manager, said sidewalk repair isn’t covered. But SLWA spokeswoman Hayley Martin said public street and sidewalk repair is indeed covered.

However, natural disasters and “acts of God” are excluded, as they are in most warranty or insurance products.

So if you’re worried that a San Diego earthquake would wipe out the company, rest easy — it won’t lose a nickel, because you’re on your own.

How such coverage is priced is a mystery. The council resolution approving SLWA’s partnership requires the company to gain approval from the California Department of Insurance to do business as a “home protection company.”

State officials confirm that SLWA has received such approval, demonstrating it is backed by an insurer and can pay claims. Yet warranty pricing is not regulated.

What’s the difference?

For property insurance, regulators track financial strength and must approve premium pricing.

Insurance covers damage to a home, usually up to the full rebuilding cost. Property insurers operate on razor-thin margins, with claims nearly matching premium revenue. They rely on investment income for most profits.

In contrast, home warranty companies typically pay only about half their premiums in claims, keeping the other 50 percent or so as profits, according to state data. Unlike insurance, warranties pay to repair failed plumbing and appliances, but they don’t pay for damage.

The bottom line is that insurance costs less than a warranty for each dollar of risk, from the consumer’s perspective.

A warranty might make sense if a $4,000 repair would cause financial catastrophe for a homeowner. Then again, people in such fragile condition should probably cover their car and whole house before thinking about the sewer line.

Clearly, the city’s endorsement is valuable for a company trying to mine this narrow niche.

Kearns, the city partnership manager, says SLWA was fully vetted and met standards of service quality. The company has deals with dozens of cities in other states.

Let’s assume this is a strong company with great service. Consumers still have no way of knowing whether its warranty is overpriced or amounts to prudent risk management.

City officials also lack such basic information, raising the question of why they would help raise the cost in return for an official endorsement.