Excerpts From the California Insurance Department Of Insurance Guide to Automobile Service Contracts, Extended Warranties, and Other Repair Agreements

Many people try to protect themselves from costly car repairs by purchasing some kind of mechanical breakdown repair agreement, such as a service contract. This brochure provides information on buying a good auto repair agreement at a fair price.

Types of Repair Agreements

Repair agreements go by many names: auto service contracts, vehicle service contracts, extended service contracts, extended warranties, vehicles service agreements, mechanical breakdown insurance, and others. What a specific company chooses to call the agreement is not as important as what kind of obligor the company is, and what the agreement actually says.

Mechanical Breakdown Insurance (MBI)
When you buy a service contract, you may think you are buying an insurance policy because insurance policies are very similar to service contracts, but you are not. What is the difference? With an insurance policy the obligor is an insurance company. With a service contract, the obligor is either a dealer or a VSCP. A few insurance companies sell what is called "mechanical breakdown insurance," or "MBI."

The Price
The price of a contract covering car repairs depends mainly on what kind of car you buy, how many miles are on the car’s odometer when you buy it, the kind of repairs that the contract covers or does not cover, and the amount of years or miles the contract covers before it expires.

When car dealers sell service contracts on behalf of a VSCP, the dealers have to send a certain amount of money to the VSCP for each contract sold. However, car dealers are allowed by law to charge you as much as you are willing to pay. Some dealers may charge customers up to twice as much for service contracts as they have to send to the service contract company.

The Duration
All repair agreements expire after a certain length of time or number of miles. The duration typically ranges from one year/twelve thousand miles to ten  years/one-hundred thousand miles.

What Is Covered
Repair agreements come with different levels of coverage. For example, a low-level contract might only cover the engine and transmission. A medium level contract might cover the engine, transmission, and other major parts such as the suspension, brakes, air conditioner and steering. The highest level coverage includes every mechanical part of the car except the parts listed as excluded. Some people only want to have coverage for the most expensive repairs, like repairs to the engine or transmission. Other people are willing to pay more to have coverage on parts that are less expensive to repair, like water pumps. It is common for service contracts and MBI also to pay for towing and rental car costs that you incur while your vehicle is being repaired. (Product warranties may not legally offer towing or rental car reimbursement.)

When considering the purchase of a repair agreement, you need to read the whole contract or policy to learn which parts are covered under the contract language. Some of the parts excluded from coverage may be the parts that most commonly break, such as belts and hoses. Any part not listed in the contract is not covered, even if the dealer tells you otherwise. You should consider calling the obligor if there is any question about what is covered.

What Is Not Covered
All repair agreements have a section called "what is not covered" or "exclusions." Before you buy a repair agreement, READ THIS SECTION SLOWLY AND CAREFULLY! You may find that parts listed as covered may not be covered when the breakdown occurs in certain ways. For example, repair agreements often won't pay for a breakdown caused by:

• Failure to service the car as recommended by the manufacturer
• Overheating
• Insufficient or improper coolants
• Insufficient or improper lubricants
• Insufficient or improper servicing
• Alterations to the vehicle
• Towing excessive weight
• Towing without a manufacturer installed or a manufacturer authorized and dealer installed tow package
• Contamination to any fluid
• Damage of a non-covered part caused by the failure of a covered part
• Damage to a covered part caused by a non-covered part
• Damage that existed prior to the effective date of the contract
• Negligence or abuse

Some service contract, product warranty, and MBI companies have used these exclusions to deny claims without any evidence that the excluded event actually happened. For example, the service contract company might improperly deny a claim by saying that an engine broke because the owner failed to maintain proper lubrication. Without tearing down the engine, the obligor company has no proof that the engine was not properly maintained and lubricated.

Sometimes an auto part covered under a repair agreement is damaged due to the breakdown of a non-covered part. For example, many service contracts exclude coverage for hoses. If an engine is damaged due to a sudden loss of coolant through a punctured hose, many repair agreements will not cover the engine damage because the primary cause of the problem (a punctured hose in this case) is not covered.

Never continue to drive a car once a dashboard warning light comes on. Continuing to drive a car with the warning light on is an example of what is called "continued operations." Continued operations will almost always result in a repair claim being denied because driving your car without proper fluid, negligence or abuse, and/or overheating are usually excluded.

Also, repair agreements may not cover the following:

• Seals and gaskets (though coverage may be available as an option at a higher price).
• Adjustments, alignments (except when required in connection with the repair or replacement of a covered part), the machining of brake rotors and drums, shop supplies, and unauthorized diagnostic time.
• Any repair for correcting the engine compression or correcting oil consumption. Valve grinding, burnt valves, and/or worn rings are not covered.
• Mechanical breakdowns covered by a manufacturer's warranty, manufacturer's recall, or factory bulletins.
• Vehicles used to transport people or haul goods for profit, unless commercial use coverage has been selected and paid for.

"Wear and Tear" vs. "Mechanical Breakdown"
Some service contracts exclude repairs needed due to "wear and tear." However, a large number of car repairs are needed because a part wears out from a long period of use or improper maintenance, not because it was poorly built.

Some people believe that if a part was poorly manufactured, it will break within the first few years. Most automaker’s regular new car warranties, the type of warranties that are given to you for free when you buy a new car, last at least 3 years or 36,000 miles, and sometimes longer. Any breakdown covered by an automaker’s regular new car warranty will not be covered by a service contract.

The more miles on a car when a repair becomes necessary, the more likely it is that the repair will be needed because a part wore out, rather than because the part broke due to poor manufacturing. Again, some service contracts do not cover parts that wear out.

Most service contracts and policies define "mechanical breakdown" as a defect in parts and workmanship as supplied by the manufacturer, or a defect that makes the part unable to perform the function for which it was designed. Service contracts that exclude wear and tear will not cover repairs needed because a part’s performance has gradually deteriorated because of normal wear and tear, unless a mechanical breakdown has occurred.

Before buying a service contract, you should carefully review what is covered and not covered to see whether wear and tear claims are excluded from coverage. If they are, you might want to consider buying a service contract that does not exclude wear and tear claims. That way, if it is not clear whether a repair is needed due to a manufacturing defect or simple wear and tear, it is more likely that the service contract company will pay for the repair.  It is a mistake to assume that a repair agreement will cover every repair your car may need.

Routine Maintenance Required
When a covered part breaks down and you cannot prove that the car has been properly maintained, a repair agreement will not pay for the repair. Service contract companies may even deny your claim if the lack of maintenance has nothing to do with the part that broke. Therefore, you must perform all routine maintenance that is specified in the repair agreement and owner’s manual and must keep proof that the work was completed. Before you perform your own maintenance, check your repair agreement to see if it is allowed. If you perform the maintenance yourself, keep the receipts for the auto products you purchased and a record of the maintenance that you performed. A list of auto maintenance products could include such items as oil, filters, spark plugs, brake pads, belts, tires, and hardware. When you record your own maintenance, create a log that indicates the date, current mileage, and the type of service performed.

Part of owning a car is making sure that the maintenance service is done on a regular basis. Major damage to the engine can result from overheating due to lack of coolant or oil. Since repair agreements will not cover engine damage due to lack of routine maintenance or overheating, you should regularly check your engine for proper oil and coolant levels in order to protect yourself and ensure the long use of your auto. Also, any possible source of leakage from worn radiators, hoses, and seals should be repaired or replaced on a regular basis.

Obtain and Read a Copy of the Actual Service Contract Before You Buy!
Sometimes, high-pressure sales techniques may be employed to convince you to buy a service contract. Do not allow the dealer to rush you into buying a service contract. There are a few steps you should take to ensure you are buying a service contract that complies with the law and gives you the type of coverage you want.

1. Get a copy of the actual contract and take as much time as you need to read it before you buy. You will pay hundreds or thousands of dollars for a service contract. All you get in exchange is a piece of paper. You need to know what the paper says, and you can not necessarily rely on what the dealer tells you it says or what a service contract company brochure indicates.
2. If you decide to buy the contract, do so only if you can take the actual contract (including your name, car information, duration, type of coverage, optional coverages, and especially the name and address of the backup insurer on the contract) with you when you leave the dealership.
3. After you get home with your new service contract, read it again, paying special attention to the exclusions. If you decide you don't want the service contract after all, you can cancel within 30 or 60 days and get a full or partial refund.

Used Car Service Contracts

Some used vehicles you buy may not have been properly maintained by the prior owner(s). Maintenance is very important in preventing major repairs. A used car you buy may run fine when you buy it, but the risk of expensive future repairs may be high.

Many used cars need repairs not because they were poorly built, but simply because parts wear out from long use or lack of proper maintenance. The more miles on a car when a repair becomes necessary, the more likely it is that the repair will be needed because the part wore out, rather than because the part broke due to bad manufacturing. As discussed earlier, some service contracts, especially used car service contracts, do not cover repairs caused by a part simply wearing out; they may only promise to cover parts that break because they were not manufactured properly. However, while some service contracts exclude wear and tear repairs, others do not. If you are going to buy a used car service contract, be sure to buy one that does not exclude repairs that are needed because of wear and tear. That way, the claim administrator may approve payment for the repair if it is unclear whether the repair is needed due to wear and tear or a manufacturing defect.

Generally, the higher the mileage on a used car, the fewer the number of parts that will be covered, and/or the broader the exclusions will be. In addition to buying a used car service contract that doesn’t exclude wear and tear coverage, look for one that covers seals and gaskets, computers and sensors.

A final reminder, if you are thinking about buying a used car, have it inspected by a reliable repair facility that is separate from the car dealer selling the car (unless the dealer is a franchisee of a manufacturer, and is selling the car "certified" with at least a one year service contract free of charge.) Buying a service contract is no substitute for a good, independent inspection before buying. Also, have the inspection mechanic review the coverages and exclusions of any used car service contract you are considering buying, and have the mechanic explain what is covered (wear and tear is a must) and what is not covered that might break.

Product Warranties

Some dealers, usually small used car dealers, sell product warranties. These dealers may tell customers that the product warranties are service contracts. However, product warranties, though they may be less expensive, may not protect you as well as service contracts or MBIs.

Product warranties generally cover many fewer parts than a service contract or MBI policy. This is because a product warranty (unlike service contracts) is only allowed by law to cover parts that are in direct contact with the product or parts that are mechanically connected to those parts. For example, a maker of oil may warrant that if you use its oil the engine will not break, and if the engine does break, the maker of the oil will pay for the repair. However, the maker of the oil is not allowed to warrant that the car stereo won’t break, since a car stereo is not in direct contact with oil, and is not mechanically connected to a part in contact with oil. If you are thinking of buying a lubricant, additive, fluid or treatment because of the warranty that comes with it, it is important for you to understand the parts that will or will not be covered by the warranty.

A product warranty may not be sold for a separate price. Instead, the product maker must provide the warranty free of charge.

Product warranties usually limit how much you can recover for parts that need repairs. For example, a product warranty may only pay a maximum of $3,000 for repair claims during the entire term of a product warranty. Service contracts and mechanical breakdown insurance policies also have limits, but those limits are typically higher.

Some Final Reminders About Automobile Repair Agreements

• Obtain a sample of the agreement and read it carefully before deciding to purchase.
• Understand what the contract covers and does not cover. Read the "what is not covered" or "exclusions" section very carefully.
• Compare service contracts with mechanical breakdown insurance for cost and coverage.
• Perform all routine maintenance required by the service contract and owner’s manual. Keep a maintenance log and save receipts on all work performed.