A service contract is not a warranty, although many times they are called extended warranties. I will refer to them as a service contract. The reason people purchase these types of contracts is fear. Let’s face it a catastrophic failure on your car can cost big money. Transmissions, electronic control systems, computer-controlled everything, late model suspension systems are all very high-tech, (that’s Greek for expensive.) So a service contract transfers risk from the vehicle owner to the contract company, this is basically an insurance policy. You’re betting the repairs of the vehicle will exceed the contract cost. The contract company is betting the repairs won’t, that’s how they make money after all.
What do I tell my customers when they ask which contract type is best? First I tell them if they place the money they would pay for the contract, many times several thousand dollars, in a bank account and slowly add to it they will have the cash to pay for expensive repairs, if they don’t need an expensive repair – guess what – they still have their money. If they do need to pay for the repair, the money is available. However, some people really like to transfer that risk at any cost.
If you will sleep better with an extended service contract, we need to understand the different types offered. Most contracts are offered by third-party companies that may not be around after the sale. Even contracts offered at the dealer may be from a third party. (Buyer beware) Many states have insurance regulations apply to service contracts; this is from the federal trade commission website:
Insurance regulations generally require companies to:
- Maintain an adequate financial reserve to pay claims.
- Base their contract fees on expected claims. Some service contract providers have been known to make huge profits because the cost of their contracts far exceeds the cost of repairs or services they provide.
- Seek approval from the state insurance office for premiums or contract fees.
Now, getting to the actual contracts, there is the type of contract that has a very long list of very impressive-sounding parts that seldom fail. For example, crankshaft, connecting rod, wrist pin, rocker arm, camshaft, camshaft follower, timing chain, main bearings, roller bearings, needle bearings, muffler bearings (I made that last one up) all internally lubricated parts, and so on. Now really, have you ever replaced many of these parts? Some of you may have, but not very often.
Then there is the policy that reads: everything is covered EXCEPT…. and that is followed by a fairly short list of items not covered like brakes, filters, belts, battery, and other maintenance items normally not covered by the factory warranty. If you can find the latter policy, you will find many repairs will be covered.
So what is the real issue here? I have personally received many offers in the mail to act now and prevent costly repairs, or I have seen the TV commercials stating “the entire cost was covered”. I’m here to tell you, just like reality TV, that’s just not always the case. We have seen a large number of cars coming in with extended service contracts that actually cover very little in the way of needed repairs and when they do cover a repair the entire cost of repairs is not always covered. Many companies are making it more and more difficult for the vehicle owner to have a repair covered. Keep all your service records, and please don’t miss any factory maintenance, that’s almost a guarantee to have a claim declined.
When we do see a repair covered, many companies are opting for low-quality replacement parts that they want to supply or they will only offer to pay a small portion of the repair cost because the contract dictates that they can, that’s the fine print part we all miss. Or worse yet they are insisting on a used part being installed when a new or remanufactured part is a far better choice.
Now, if you’re paying for the repair I think you should be able to choose the repair option that best fits your needs, perhaps a used part is the best option, but it should be a choice you discuss with your service provider. Many people are purchasing these contracts thinking their car will be repaired at the best possible level with the best possible parts. That’s just not happening.
So if you would still feel better with an extended service contract choose very carefully, make sure they list the parts NOT covered vs. the list of parts that are. Make sure you discuss the company you’re planning on getting the service contract from with your service provider. Never give in to high-pressure sales calls. Get information about the covered components in writing before making a purchase decision. Understand the details of how much a company will pay for the repairs that are covered. Visit the Federal Trade Commission website for information. We have seen some bad apples out there, and please consider saving your money and keeping it if you don’t need those expensive repairs.
©Frank Scandura, President, Frank’s European Service 2013, 2019
Have Questions? You can reach me at [email protected]
