Last reviewed: 27 October 2026

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What happens if a home warranty or service contract company goes out of business

Does a state fund pay your claims if a home warranty company fails? The NAIC's model guaranty-fund law (Model #540) says it does not apply to "insurance of warranties or service contracts."¹ Instead, the NAIC's Service Contracts Model Act (Model #685) sets out backing for service contracts, and Texas Occupations Code chapter 1304 and Louisiana R.S. 51:3143 require it up front, such as a reimbursement insurance policy, a reserve and deposit, a bond, or a net-worth test.²³⁴ This guide quotes what those model laws and statutes say.

What the NAIC's model guaranty-fund law says about service contracts

Section 2 of NAIC Model #540, the Property and Casualty Insurance Guaranty Association Model Act, states its purpose as providing "a mechanism for the payment of covered claims under certain insurance policies" and minimizing loss to claimants "because of the insolvency of an insurer."¹ Its Section 3 (Scope) says that the Act "shall not be applicable to" a list of products. Item E of that list reads, "other than coverages that may be set forth in a cybersecurity insurance policy, insurance of warranties or service contracts," including insurance that "provides reimbursement for the liability incurred by the issuer of agreements or service contracts that provide such benefits."¹

Section 2L of NAIC Model #685, the Service Contracts Model Act, defines a "reimbursement insurance policy" as "a policy of insurance issued to a provider" under which the insurer agrees "to discharge all of the obligations and liabilities of the provider… in the event of non-performance by the provider."² To learn how your own state's guaranty-association law treats service contracts, ask your state insurance department.

Separately, a drafting note in NAIC Model #685 says the model "assumes that service contracts are exempt from the insurance code."² Section 6A says a provider "shall not use in its name the words insurance, casualty, guaranty, surety, mutual" or similar words, and that a company already "using the prohibited language in its name shall conspicuously disclose in its service contracts a statement in substantially the following: 'This agreement is not an insurance contract.'"² Texas Occupations Code § 1304.005 exempts service contracts from "the Insurance Code and other laws of this state regulating the business of insurance."³ For state detail, see our California and Florida guides.

What protects you instead: backing required up front

Section 3C of NAIC Model #685 requires each provider, "in order to assure the faithful performance of a provider's obligations to its contract holders," to "insure all service contracts under a reimbursement insurance policy," or to "maintain a funded reserve account" of "not less than forty percent (40%) of gross consideration received, less claims paid" and "place in trust with the commissioner a financial security deposit," or to "maintain a net worth of $100 million."² Two state examples:

• Texas: under Texas Occupations Code § 1304.151(a), a provider must insure its service contracts under a reimbursement insurance policy, maintain a funded reserve account and place a financial security deposit in trust with the executive director, or maintain (or have a parent company that maintains) a net worth or stockholders' equity of at least $100 million.³ Section 1304.151(b-4) says the security deposit "may not be less than $25,000 for a provider of a residential service contract."³ Under § 1304.151(f), "in the event of a provider's bankruptcy or a similar event," the executive director of the Texas Department of Licensing and Regulation "may distribute any funds held in trust as financial security for the provider under this section" to eligible service contract holders "as payment for claims."³ See our Texas guide.
• Louisiana: under La. R.S. 51:3143(E), "in order to assure the faithful performance of a provider's obligations to its contract holders," each home service contract provider must file with the secretary of state "a surety bond issued by a company licensed to do business in Louisiana in the amount of fifty thousand dollars."⁴ See our Louisiana guide.

Section 5B of NAIC Model #685 says a contract insured under a reimbursement insurance policy "shall contain a statement in substantially the following form": if the provider "fails to pay or provide service on a claim within sixty (60) days after proof of loss has been filed, the contract holder is entitled to make a claim directly against the insurance company." The contract "shall also conspicuously state the name and address of the insurer."² Texas Occupations Code § 1304.156(d) says an insured contract must "state the name and address of the insurer" and "state that the service contract holder may apply for reimbursement directly to the insurer if" a "covered service is not provided to the service contract holder by the provider before the 61st day after the date of proof of loss" or "a refund or credit is not paid before the 46th day after the date on which the contract is canceled."³ See also our guide to reimbursement insurance and funded reserves.

If the backing does not cover you: other routes

A credit card claim. Under 15 U.S.C. § 1666i(a), part of the Fair Credit Billing Act, a card issuer "shall be subject to all claims (other than tort claims) and defenses arising out of any transaction in which the credit card is used as a method of payment" if three conditions are met: the cardholder "made a good faith attempt to obtain satisfactory resolution" with the seller; "the amount of the initial transaction exceeds $50"; and the transaction took place in the same state as the cardholder's mailing address or "within 100 miles from such address."⁵ Section 1666i(a) also says the $50 and distance limits do not apply when the seller is the card issuer, is controlled by it or under common control with it, is a franchised dealer in its products, or got the order "through a mail solicitation made by or participated in by the card issuer."⁵ Under § 1666i(b), the amount you can assert "may not exceed the amount of credit outstanding" for that transaction.⁵

A bankruptcy claim. If the company files for bankruptcy, 11 U.S.C. § 507(a)(7) gives priority to "allowed unsecured claims of individuals" arising from a deposit of money made before the case, "in connection with the purchase ... of services, for the personal, family, or household use of such individuals, that were not delivered or provided."⁶ That priority is limited to a dollar amount for each individual: FR Doc. 2025-02207 states that 11 U.S.C. § 104 "provides for an automatic three-year adjustment of dollar amounts," raises the § 507(a)(7) amount from $3,350 to $3,800, and says the adjustment "does not apply with respect to cases commenced before April 1, 2025."⁷ United States Courts publishes the proof-of-claim form, Official Form B 410.⁸

Questions people ask

Is there a fund that pays claims if a home warranty company closes?

Not under NAIC Model #540, whose scope section says the Act does not apply to "insurance of warranties or service contracts."¹ Under Texas Occupations Code § 1304.151(f), "in the event of a provider's bankruptcy," the executive director "may distribute any funds held in trust as financial security for the provider under this section" to eligible service contract holders "as payment for claims."³ La. R.S. 51:3143(E) requires a $50,000 surety bond.⁴