TERMs and TIPS to help you purchase the right extended warranty

The Federal Trade Commission says consumers, before signing any extended coverage contract, should fully understand its terms and coverage. The agency also stresses that what consumers are actually buying is not an extended warranty but a "service contract." A service contract is a promise to perform, or pay for, certain repairs or services. Although a service contract is sometimes called an extended warranty, under federal law, "it is not a warranty, the FTC  said." A warranty comes with the original price of the car, whereas a service contract costs extra. It is mainly this separate and additional cost that distinguishes a service contract from a warranty." There are many things to consider when you're offered an "extended warranty" or "service contract" with your purchase.

Q. What are vehicle service and vehicle maintenance contracts?

Vehicle service contracts are known by several names including mechanical service agreements, extended service contracts and extended warranties. These products were developed in response to consumer needs for mechanical breakdown coverage and ancillary services after the expiration of the manufacturer's warranty. A vehicle service contract pays the cost of vehicle repairs Dependent on the manufacturer, vehicle maintenance contracts may cover basic maintenance during the warranty period.

Q. Do I need a vehicle service contract?

Most likely you'll own or lease your vehicle beyond the manufacturer's warranty. Unexpected repair costs can be costly, not to mention the difficulty of being without your vehicle.

Cost-Benefit Analysis - Very often consumers don't take into account the replacement cost of the product they're buying when they're considering a warranty. The cost-benefits analysis assesses whether your vehicle warrants the consideration of the purchase of a warranty. Is the vehicles resell value low enough to not warrant the purchase of the warranty…such as a vehicle with 150,000 miles with a resell value of  $1800.  It probably is not a good value to spend $1500 to warranty this vehicle since its replacement value is not much more than the cost of the warranty.

Insurability

When considering the purchase of an extended warranty, an important question is just who is guaranteeing this product? Is it the merchant who is selling the product or someone else? Will the entity providing the guarantee be around if you ever file a claim?

In August 2003 hundreds of thousands of American motorists found they were holding worthless extended warranty policies following the bankruptcy of National Warranty Insurance Co. Offering Smart Choice extended warranties through 5,000 car dealers nationwide, the company had about a million active contracts when it went under. Though Smart Choice has been out of business over two years, some consumers are only now finding out they have a problem.

"I bought a 1999 Saturn in August 2002 and, at the same time, bought the Smart Choice extended car warranty for $1500.00. All of my routine service and repairs were done at the Saturn dealership; however, none of the repairs seemed to be covered under this extended warranty," Donna, of Cortland, Illinois told ConsumerAffairs.com." In late 2004, I began looking into this matter and learned that Smart Choice went bankrupt, though I was never notified or received any compensation for the warranty. I have had to spend out of pocket dollars getting my car repaired. I have a car loan on this vehicle which also includes the $1500.00 for the extended warranty.

"Smart Choice is not the only warranty company to have solvency problems. Toni, of Allen, Texas got a nasty surprise from Corp.” I paid $2,200 for an extended warranty for my car from Platinum Warranty Corp. I found out, when I put my car in the shop for $4,000 worth of work, the company is under investigation for fraud by the Attorney Generals office for the state of Ohio. I'm out the cost of the warranty plus car repairs and rental car charges." Stacey, of Hanover, Pennsylvania had a similar experience after purchasing a two year, 24,000 mile warranty from Platinum. "Now that my car needs repairs, I call to get information on how to get the car fixed. None of telephone numbers are good. I get a recording saying this number is no longer in use!!! I cannot get in contact with them. And my car needs repairs. I have never even filed a claim with them. I purchased the warranty back in December 2004. What do I do? Where are they? Are they out of business?” In fact, they are. Platinum Warranty Corp ceased operations September 30 after being sued by the state of Ohio last year and filing for Chapter 11 bankruptcy in May. A Cleveland bankruptcy court converted the Chapter 11 filing to Chapter 7 on October 12.

Parts and Labor - This refers to the parts of the warranty which covers both the cost to replace the affected parts and the necessary labor to remove the failed piece and install the replacement piece or pieces.

Some contracts offer a choice of deductibles. The deductible may be zero ($0), meaning that nothing is owed on a covered expense, or as high as $200 for the out-of-pocket amount paid by the customer. Deductibles may apply per individual repair or per claim.

Premium - This is represented by the amount of money it takes to purchase a policy for any chosen time and/or mileage limitation.

Exclusionary -This term refers to coverage of the entire vehicle less a listed number of items.  Other than the specific items listed, the complete vehicle is covered.  The reason this was done was to incorporate the more than 5000+ parts that are comprised of your vehicle.  It became much easier to understand what was not covered than to explain all the parts that are covered.

Underwriter

When you buy a service contract, you transfer the risk of future repair costs to a company, trusting them to pay your covered repairs sometime in the future. The company must be in business for the long haul, well into the future.   

Q. Why is the company offering the contract important?

Regardless of the type of coverage selected, the company behind the plan is very important. A service contract is a promise to pay, in the future, for covered repairs and services. That contract is only as good as the company that backs it.

Third  Party Warranty - A third-party warranty is so named because it has no direct business relationship with the product it covers, in this case your car. These warranties differ vastly from "manufacturer extended warranties," which use original parts and factory-trained technicians to repair your vehicle at a dealership.

Third-party warranty companies may give you the option to take your car in to the dealership, but the reimbursement process is often a hassle if a company doesn't want to cover a part. Manufacturer warranties cost more than third-party warranties, but we feel they also provide a much greater level of convenience and protection.

A number of these third-party warranty companies are fly-by-night operations that go belly up within a few years, costing consumers hundreds of dollars and leaving them without coverage. When a Carspace forum member posted about how her warranty company went out of business, she found out that she wasn't alone.

"Welcome to the club," said Mikefm58. "Many of us here have been burned by similar third-party warranty companies just like Continental. In my case, Warranty Gold did it to me. Your warranty company will or has gone bankrupt and you are fortunate to get anything back. I got nothing. Most likely, the crooks that started the company will eventually be back in business under another name. That's why no regular [member of the forum] here will recommend any warranty other than a manufacturer-backed one."

Third-party extended-warranty companies promise to offer you peace of mind in the event that your vehicle breaks down. But all too often, their shady practices scam people out of their money Chris Thetford, director of communications for the St. Louis Better Business Bureau, said that his office has seen a repeating pattern of complaints against third-party warranty companies. Even when a company resolves individual complaints, it may not be a sign of repentance. "The fact that a company responds to a complaint does not mean that they have changed their business model," Thetford said. Thetford added that consumer complaints fall into two general categories: The first is the consumer who purchased a third-party warranty, wants to cancel it, but has difficulty getting a refund. The second is the consumer who buys a third-party warranty, files it away until they need repairs, but then realizes that the repairs are not covered because there are too many exclusions in the service contract. Instead of giving them real coverage when they need it. Not every extended warranty company is out to rip you off, but over the course of our research, we found that the honest ones are few and far between.  Third-party extended-warranty companies promise to offer you peace of mind in the event that your vehicle breaks down. But all too often, their shady practices scam people out of their money instead of giving them real coverage when they need it.

Third-party extended-warranty scams were widespread enough that the Federal Trade Commission (FTC) issued a consumer alert on its Web site. We gathered a few of their tips along with some of our own.

Research the company before you sign up with them: A quick Google search is easy to do, and will reveal quite a bit about the company. You can also ask about them on message boards, or look them up on your state's BBB Web site.

Know what's covered and what isn't: This is often the biggest source of confusion when it comes to extended warranties. Although they are called extended warranties, they don't function in the same way that your original bumper-to-bumper warranty does. Think of these as service contracts that minimize your costs in the event of high-priced repairs.

Since their coverage is limited, it is all the more important for you to know what is covered by your extended warranty. You'll want to get an exclusionary policy. These types of warranties more clearly state everything that is not covered, with the understanding that everything else is. This way, you don't run into any surprises down the line.

Administrator - This is the party that administers the policy.  This will include claims, towing and related services, transfers, cancellations. This can be an entity of the vehicles manufacture if the policy is a manufacturer backed plan, or an entity of the insurance company if the plan is underwritten by an insurance company. Usually these are the go to people for any needs or questions about the policy.

Transfer - All quality plans carry a transfer provision, which allows you to sell or trade in your vehicle and increase the value of the vehicle for the sake that the next owner is insulated against covered repairs expense.  Some plans carry a modest fee to enact a transfer-$25-$100(max).

Ratings  

An Insurance rating is an opinion of the rating agency of the insurance companies’ financial capacity to meet the financial obligations of its insurance policies in accordance with its terms. Each of these independent rating organizations has assigned its rating based upon a variety of factors including, the companies operating performance, asset quality, financial flexibility and capitalization.  A rating is not a recommendation to purchase, sell, or hold insurance contracts.  Ratings are subject to change at any time. The insurer may have paid a fee to the rating agency (Simple Terms). Will and can this company pay the claim when presented to it?

It’s important to buy an ESC from a source you can trust. Major retailers and manufacturers are generally a safe bet since their contracts are usually underwritten by insurance. As with all Internet purchases, it makes sense to use caution when purchasing a direct-to-consumer ESC online. Look for evidence that the ESC is backed by insurance; you can find this information in the contract’s terms and conditions. Read the terms and conditions carefully to learn what is and what is not covered. And finally, don’t be put off by the length of the terms and conditions; it’s a sign that the contract is regulated by state law and that gives you an added layer of protection. Considering the degree of technology in today’s automobiles, extended service contracts seem a no-brainer. Repairing those items, especially those little black computer boxes, can be very expensive. And that is precisely why we need to get to the plain truth about these contracts as much as possible.

The extended service contract is like an OEM auto warranty and often more inclusive, but with a separate charge (like insurance). The true obligor is the underwriter of the extended warranty (service contract), a.k.a. an insurance company or a company large enough to bear the financial obligations. The obligations under the service contract are usually controlled via an insurance entity or a company with at least $100M of net worth. Point is the underwriter of the contract is already fully regulated by the state, because it is an insurance product and marketed as one. Regardless of the category, that clearly means your signing on the dotted line for any automotive service contract is with the insuring entity, not the auto manufacturer, the salesman or the dealership, the place of purchase.

Furthermore, the insurance contract itself already falls under the jurisdiction of state laws on the books, and explains why there is no need for further laws to regulate it. Should auto purchasers still spend as much time researching their choice of extended warranty as much as they do the choice of their auto dealer?

Trust but Verify! That means beware of phone and mail solicitations for extended warranties, whether for a car or a television. The key here is to be wise at all times.  You also do not have to purchase the first extended warranty offered by the dealer either, as if it might be withdrawn if you didn't; that is unlawful.  Many times the purchase of an extended warranty from an affiliation to the manufacturer is better than the purchase of an extended warranty from the dealer. Truth is these contracts can be purchased at any time. However, what you may pass up at the time of auto purchase is the opportunity to include the cost of the extended warranty into your new or used auto’s monthly payments. This carries added risk since you are now paying extra interest on you warranty price over the term of loan.  Also, the term of the warranty may not equal the length of your auto loan. This I know from experience, which is why you should plan ahead.

Cost and Convenience

With the technology used in today's cars, repair costs have risen and will probably continue to do so. One major out-of-warranty repair can exceed the cost of buying a vehicle service contract.