Facts for Consumers from the Federal Trade Commission

Auto Service Contracts -- July 1993

Auto Service Contracts -- July 1993

Buying a car? You also may be encouraged to buy an auto service contract to help protect against unexpected, costly repairs. While that may sound like a good idea, do not answer "yes" until you fully understand both the terms of the contract and, just as important, who is responsible for providing the coverage.

This fact sheet explains what an auto service contract is, and suggests some important questions to ask before buying one. It also discusses warranty protection that may come with both new and used cars.

The Auto Service Contract: Not a Warranty

Although a service contract is sometimes called an "extended warranty," it is not a warranty as defined by federal law. Like a warranty, a service contract is a promise to perform (or pay for) certain repairs or services.

However, a warranty comes with a new car and is included in the original price, whereas a service contract may be arranged at any time and always costs extra. It is the separate and additional cost that primarily distinguishes a service contract from a warranty.

The Terms: Questions to Ask

To help decide whether to buy an auto service contract, you might consider asking the service contract provider the following questions.

Does the service contract duplicate any warranty coverage?

Do not buy a service contract until you compare it with the manufacturer's warranty or you could be paying for coverage you already have. Most new cars come with a manufacturer's warranty, which usually offers coverage for at least one year or 12,000 miles. Today some warranties last much longer. Even used cars may come with some type of coverage (see pages 6-7).

You may decide to buy a "demonstrator" model--a car that has never been sold to a retail customer but has been driven for purposes other than test drives. If so, be sure to ask when warranty coverage begins and ends. It could start when you purchase the car, or it might have begun earlier, when the dealer put the car into service. Again, it is important to know how much coverage you have before you consider buying a service contract.

Who backs the service contract?

Make sure you understand who is liable either to perform or pay for repairs under the contract's terms. It may be the manufacturer, the dealership, or an independent company.

Many service contracts sold by dealers are actually handled by independent companies, called administrators. These administrators act as claims adjusters, authorizing the payment of claims to any dealers under the contract. Therefore, if you have a dispute over whether a claim should be paid, you should deal with the administrator.

If the administrator goes out of business, the dealership still may be obligated to perform under the contract. The reverse also may be true. If the dealer goes out of business, the administrator may be required to fulfill the terms of the contract. Whether you have recourse depends on your contract's terms and/or your state's laws.

It is important to learn about the reputation of the dealer and/or administrator. Ask for references and check them. You also can contact your local or state consumer protection office, state Department of Motor Vehicles, local Better Business Bureau, or local automobile dealers association to find out if they have public information on the firms. Look for the phone numbers and addresses in your telephone directory.

Be sure to find out how long the dealer or administrator has been in business, and try to determine whether they have the financial resources to meet their contractual obligations. Individual car dealers or dealer associations may set aside funds or buy insurance to cover future claims. Some independent companies are insured against a sudden rush of claims.

You also should find out if the auto service contract is underwritten by an insurance company. In some states, this is required. If the contract is backed by an insurance company, contact your State Insurance Commission to ask about the solvency of the company and whether any complaints have been filed against it.

How much does the auto service contract cost?

Usually, the price of the service contract is based on the car make, model, condition (new or used), what is covered, and the length of the contract. The upfront cost can range anywhere from several hundred dollars to more than $1000.

In addition to this initial charge, you may need to pay another fee, called a deductible, each time your car is serviced or repaired. Under some service contracts, you pay one charge per visit for all repairs--no matter how many. Other contracts, however, require you to pay a deductible for each unrelated repair.

You also may need to pay transfer or cancellation fees if you sell your car or wish to end the contract. Often, contracts limit the amount paid for towing or related rental car expenses.

What is covered and not covered?

Few auto service contracts cover all repairs. Common repairs for such parts as brakes and clutches generally are not included in service contracts. If the service contract does not list an item, assume it is not covered. For example, if the contract covers the "drive train" only, it will not cover the alternator (a part of the electrical system).

Watch out for absolute exclusions that deny coverage for any reason. For example:

If a covered part is damaged by a non-covered component, the claim may be denied.

If the contract specifies that only "mechanical breakdowns" will be covered, problems caused by "normal wear and tear" may be excluded.

If the engine must be taken apart to diagnose a problem and it is discovered that non- covered parts need to be repaired or replaced, you may have to pay for the labor involved in the teardown and re-assembling of the engine.

Even for parts that are covered in the contract, you may not have full protection. Some companies use a "depreciation factor" in calculating coverage. This means the company may pay only partial repair or replacement costs if, for example, they take into account your car's mileage.

How are claims handled?

When your car needs to be repaired or serviced, you may be able to choose among several service dealers or authorized repair centers. Or, you may be required to return the vehicle to the purchasing dealer for service, which could be inconvenient if you bought the car from a dealership in another town.

Find out if your car will be covered if it breaks down while you are using it on a trip or if you take it when you move out of town. Some auto service contract companies and dealers offer service only in a specific geographical area.

For any repair work or towing services, you may need prior authorization from the contract provider. If so, be sure to ask:

You may be required to pay for covered repairs and then wait for the service company to reimburse you. If the auto service contract does not specify how long reimbursement usually takes, be sure to ask. You also should find out who arbitrates or settles claims in case you ever have a dispute with the service contract provider and need to use a dispute resolution program.

Are new or reconditioned ("like") parts authorized for use in covered repairs?

If this concerns you, ask. Some consumers are disappointed when they find out "reconditioned" engines are being used as replacement parts under some service contracts. Also ask whether the authorized repair facility maintains an adequate stock of parts. Repair delays may occur if authorized parts are not readily available and must be ordered.

What are your responsibilities?

Under the contract, you may have to follow all of the manufacturer's recommendations for routine maintenance, such as getting oil and spark plug changes periodically. Failure to do so could void the contract. To prove you have maintained the car properly, you may have to keep detailed records, including sales receipts.

Find out if the contract prohibits either taking the car to an independent station for routine maintenance, or performing the work yourself. The contract may specify that the selling dealer is the only authorized facility for servicing the car.

What is the length of the service contract?

If the service contract lasts longer than you expect to own the car, find out if it can be transferred when you sell the car, or if a shorter contract is available. Remember, there may be a fee for transferring the contract to another owner.

Used Cars: Warranty Protection

When shopping for a used car, look for a Buyers Guide sticker posted on the car's side window. This sticker is required by the FTC on all used cars sold by dealers. It tells whether a service contract is available. It also indicates whether the vehicle is being sold with a warranty, with implied warranties, or "as is."

Warranty. If the manufacturer's warranty is still in effect on the used car, you may have to pay a fee to obtain coverage, making it a service contract. However, if the dealer absorbs the cost of the manufacturer's fee, the coverage is considered to be a warranty.

Implied warranties only. There are two common types of implied warranties. Both are unspoken and unwritten and based on the principle that the seller stands behind the product. Under a "warranty of merchantability," the seller promises the product will do what it is supposed to do. For example, a toaster will toast, a car will run. If the car doesn't run, implied- warranties law says that the dealer must fix it (unless it was sold "as is") so that the buyer gets a working car. A "warranty of fitness for a particular purpose" applies when you buy a vehicle on a dealer's advice that it is suitable for a certain use, for example, hauling a trailer. Used cars usually are covered by implied warranties under state law.

As Is - No Warranty. If you buy a car "as is," you must pay for all repairs, even if the car breaks down on the way home from the dealership. However, if you buy a dealer-service contract within 90 days of buying the used car, state law "implied warranties" may give you additional rights.

Some states prohibit "as is" sales on most or all used cars. Other states require the use of specific words to disclaim implied warranties. To find out about your state laws, check with your local or state consumer protection office or attorney general.

Other Tips: Problems to Avoid

If you are told you must purchase an auto service contract to qualify for financing, contact the lender yourself to find out if this is true. Some consumers have had difficulty canceling their service contract after discovering the lender did not require one.

If you decide to buy a service contract through a car dealership--and the contract is backed by an administrator and/or a third party--make sure the dealer forwards your payment and gives you written confirmation. Some consumers have discovered too late that the dealership failed to forward their payment, leaving them with no coverage months after they signed a contract. Contact your local or state consumer protection office if you have reason to believe that your contract was not put into effect as agreed.

In some states, service contract providers are subject to insurance regulations. Find out if this is true in your state. Insurance regulations generally require companies to:

Complaints: How to Handle Them

To report contract problems with a service provider, contact your local and state consumer protection agencies, including the state insurance commissioner and state attorney general.

You also can contact the FTC. Write: Correspondence Branch, Federal Trade Commission, Washington, DC 20580. Although the FTC generally does not intervene in individual disputes, the information you provide may indicate a pattern of possible law violations requiring action by the Commission.

More Information: From the FTC

The FTC offers other free car publications: Car Ads: Low Interest Loans and Other Offers; Buying a Used Car; Car Financing Scams; New Car Buying Guide; Warranties; and A Consumer Guide to Vehicle Leasing. Write: Public Reference, Federal Trade Commission, Washington, DC 20580. You also can write to that address for the Best Sellers brochure, which lists all the FTC's consumer publications.


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