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Insurance Offer Has Louisville Water Company's Logo, But a Private Company Is Behind It

Louisville mailboxes are regularly stuffed with letters warning residents they could pay thousands of dollars in repairs if they don’t have water line warranty coverage.

Though the envelopes bear the logo of Louisville Water Company, they are actually from a private warranty company called HomeServe USA, which has run afoul of several state attorneys general, including Kentucky, in recent years over allegations of unfair and deceptive advertising.

Customers across the country have called their utilities to ask whether or not the service is legit, and numerous state officials have warned residents to read the fine print.

Earlier this year, a British regulatory agency slapped a $51 million fine against HomeServe’s parent company for overcharging and misleading its customers. It was the largest retail fine in British financial history.

Homeserve has assured Louisville Water Co. that the problems were overseas and didn’t affect Louisville customers. And Louisville water officials say there’s no pressure to buy the warranty, anyway. It’s voluntary.

But the utility is also making millions from the marketing deal. And consumer advocates have raised concerns about partnerships like the one between HomeServe and Louisville Water Co.

“Is there any doubt you should be concerned about that?” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “If they engage in abusive behavior…  why would you think that when they come to the United States that behavior is going to change?”

The UK’s regulatory agency stated that HomeServe developed a culture of “putting profits before treating customers fairly.”

Regulators found that HomeServe Membership Ltd. encouraged staff to boost sales regardless of customers’ needs and that the company’s failings were particularly serious given that a large number of its customers were vulnerable senior citizens.

A Contract Worth Millions

For the past seven years, HomeServe USA has used Louisville Water Co.’s brand – and its database of customer information – to sell water and sewer service line warranties to customers. Those warranties cover repairs to water and sewer lines that start at the city’s pipes and end at the home, costs not covered by LWC and not always covered by a homeowner’s insurance policies. The advertised monthly charge for water line protection is $5.49.

In return, the utility receives a 15 percent commission on the sale of those products.

HomeServe has similar partnerships with nearly 40 utilities in the United States and plans for more. Last year, Louisville Water reaped $1.7 million out of its deal – and $5.1 million since the partnership began through the end of 2013. Roughly 83,000 out of LWC’s 243,000 residential customers have one or more contracts with HomeServe, according to the utility.

Kelley Dearing Smith, a spokeswoman for Louisville Water, said utility officials spoke to HomeServe about the fine in Britain and were told the issue had been resolved and that the issue had no effect on HomeServe’s work with Louisville Water Co.

“If people were truly dissatisfied and thought they were being ripped off, I’d be hearing about it,” she said. “Our president would be hearing about it. I’d be getting calls from metro council folks, which I don’t. The mayor would be hearing about it. And I don’t see that.”

According to the contract, the utility facilitates the promotion, sale and marketing of these warranties. Over time, those products have expanded from water and sewer lines to internal plumbing and drainage, and water heater coverage.

The contract includes several types of bonuses for the utility, including one for the launch of new products and a referral fee for Louisville Water’s help in expanding HomeServe’s partnerships with other utilities.

Consumer Advocates Question Partnership

The letters tell homeowners that “the water service line buried underground on your property could fail without warning, leaving you responsible for the cost of repair.”

Though the utility insists that the warranties are voluntary, some consumer advocates say the idea of personal choice can be misleading.

Despite wording in the solicitations that the program is voluntary and from a private company, simply using the utility’s logo can lend legitimacy to the product because customers consider it a trusted brand, according to Susan Grant, director of consumer protection at the Consumer Federation of America.

Partnerships like the one between Louisville Water and HomeServe also raise concerns about privacy, she said. Utility customers don’t expect their information to be shared with a third party.

“The real motivation here is not necessarily in the interest of the consumer but just pure profit,” Grant said. “I think it’s misguided. I wish that utilities would not allow themselves to be used essentially by companies who just want to profit off of their customers.

“I understand why the profit is appealing, but I think on balance… utilities and others should think twice before doing it.”

History of Complaints

HomeServe USA has been accredited by the Better Business Bureau since February of this year and has an A- rating. But it hasn’t always had good reviews. The BBB has had 305 complaints about the company in the past three years. Sixty-six of those were in the past 12 months. And several state attorneys general have forced the company to change its advertising practices.

In 2010, HomeServe came to an agreement with the Kentucky Attorney General’s office to change the wording in fliers that suggested its service was a mandatory fee charged by the utility. The company also paid $7,500 in civil penalties and the cost of the investigation.

The same year, the company came to a similar agreement with the state of Ohio and paid $15,000 for the cost of the investigation and attorneys fees. The company agreed not to use “unfair, deceptive and/or misleading advertisements.”

In 2011, HomeServe paid $75,000 to the Massachusetts Attorney General and agreed to disclose to customers that it was not part of the local utility and that its services were optional.

In each of those cases, HomeServe denied any wrongdoing.

Despite the confusion among homeowners, Homeserve’s spokesman said the company’s intentions are clear.

“In all of our materials that we use today and have, in fact, for the last several years, it’s very clear about who we are, what the product is and the fact that it’s optional and HomeServe is an independent entity separate from the local community,” said Myles Meehan, senior vice president of public relations for HomeServe.

Meehan said concerns about the problems in Europe “have been eliminated and addressed.”

In the UK, the country’s Financial Conduct Authority found serious problems with the company’s business practices from 2005 to 2011. Customer complaints weren’t resolved fairly. The company incentivized staff to close the files on as many complaints as possible. And employees provided misleading information to customers during sales calls.

Meehan said the U.S. business is a separately operated subsidiary with its own management team that runs under a different set of rules in America. Louisville customers need not be concerned, he said.

( See more in HomeServe USA's "program review" with Louisville Water Co.)

Do customers need this?

The utility doesn’t track whether these warranties are useful or necessary. Neither does any regulatory agency. KyCIR attempted to interview several plumbers but none wanted to go on record.

“There’s no way for Louisville Water to do a cost-benefit analysis for a customer because we don’t know – every customer is unique – the age of your home, the age of your line, where you live, how was your line put in,” Dearing Smith said. “As a consumer you would do that yourself. You would decide: Is this advantageous or not for me to do for this particular policy?”

That HomeServe is exempt from Kentucky’s insurance laws might make that determination a bit more difficult for consumers.

HomeServe is one of 84 companies in the state that provide coverage through service contacts. A provision in state law allows those companies to provide coverage as long as they register and provide an acceptable form of security or bond.

Being exempt means those companies don’t have to provide rate information the way traditional insurance companies do. So there’s no regulatory agency that collects market information on these companies.

Dr. Burke Christensen, an Eastern Kentucky University professor with 30 years of experience as an attorney and executive officer in the insurance industry, called the partnership between HomeServe and Louisville Water “affinity marketing gone amok.”

“HomeServe is trading on the fact that you trust your water company,” he said. “So they pay the water company to let HomeServe use the water company’s name to urge people to buy this product…  And the more people that participate in it, the more money the sponsor – the water company – is going to make.”

Christensen took a look at the company’s services online.

“I wouldn’t call it bogus or illegitimate, but … there is a lot of what I would describe as deceptive advertising or at least misleading advertising of the product.”

And HomeServe doesn’t provide the utility with detailed information about how many claims customers file or the individual cost of those claims. That’s because the contract is between HomeServe and the customer, not Louisville Water, Dearing Smith said. HomeServe doesn’t provide detailed information to any of its partners.

A HomeServe spokesman said that in 2013 the company paid out $2.2 million for roughly 4,100 claims for Louisville Water customers. Nationally, over the past three years, the company has provided more than $150 million in services to its 1.5 million customers.

Amber Halloran, treasurer of Louisville Water, said the utility’s largest financial expenses are capital infrastructure and labor. That additional money helps offset costs. If the $1.7 million from HomeServe hadn’t been part of the budget last year, rates likely would have increased by 1 percent. That would have meant an additional 22 cents per month on the average water bill.

Because the program is voluntary, the utility also sets aside 10 percent of its HomeServe revenues for a program that helps low-income consumers pay their water bills.

Mixed reviews

With all the controversy surrounding the company, there’s a mixed reaction when it comes people’s perceptions of HomeServe.

HomeServe USA provided some customers’ names to the Kentucky Center for Investigative Reporting to interview about their experience with the company and its products.

They included Mary Wayne, a Louisville resident who has both the water and sewer line warranties. She called HomeServe when there was a blockage in her sewer line. She guessed the repair would have been in the thousands of dollars if she’d had to pay the full cost, something she surely couldn’t afford.

“They dug it out and replaced it, and now I have no problem,” she said. “And they did all this with one little phone call.”

Larry Cooke, who lives in the West End, said he kept receiving advertisements in the mail and finally decided to buy all of the warranties three years ago.

“I’m glad I did,” he said. “I had a water leak, and it proved beneficial for me. There was a water leak from my main valve coming up to my house.”

He isn’t sure why he had to pay $200, but he said that doesn’t matter.

“It was about $1,400 to $1,500 worth of work,” he said.

But there are people who still wonder whether the solicitations are a scam.

Hilton Brooks, of Middlesboro, is one of a handful of Kentucky residents who’ve filed complaints to the state attorney general’s office since January 2012 after he bought the warranty. He sent a letter after HomeServe sent contractor after contractor who couldn’t determine the problem with his sewer line.

“It was very frustrating,” he said. “It required an extensive amount of correspondence and effort to fix the problem.”

The issue was eventually resolved, but he was unhappy with the service and canceled the sewer line warranty. However, he kept two other warranties for internal plumbing and water line service.

“I remain suspicious,” he said. “But I still want to kind of give them the benefit of the doubt.”

Nancy Ragland, who lives in Madisonville, also sent a letter to the attorney general’s office, asking about the legitimacy of the company.

The attorney general’s office wrote back to say Ragland should check with her local utility and determine which repairs she’d be responsible for and decide for herself the likelihood of problems.

Ragland never took the warranty.

“I just didn’t think that was anything we needed to be concerned with -- never had before,” she said. “We never had any reason to have that kind of a service.”

Reporter Kristina Goetz can be reached at kgoetz@kycir.org or (502) 814.6546.