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Auto

Service

Contracts

Buying a car? You also may be encouraged to buy an auto service contract to

help protect against unexpected, costly

repairs. While it may sound like a good

idea, dont buy in until you understand

both the terms of the contract and who is

responsible for providing the coverage.

The Auto Service Contract

A service contract is a promise to perform

(or pay for) certain repairs or services.

Sometimes called an extended warranty,

a service contract is not a warranty as

defined by federal law. A service contract

may be arranged at any time and always

costs extra; a warranty comes with a new

car and is included in the original price.

The separate and additional cost

distinguishes a service contract from a

warranty.

The Terms

Before deciding whether to buy an auto

service contract, ask these questions:

Does the service contract duplicate any

warranty coverage?

Compare service contracts with the

manufacturers warranty before you buy.

New cars come with a manufacturers

warranty, which usually offers coverage

for at least one year or 12,000 miles,

whichever comes first. Even used cars

may come with some type of coverage (see

pages 6-7).

You may decide to buy a demonstrator modela car that has never been sold

to a retail customer but has been driven for

purposes other than test drives. If so, ask

when warranty coverage begins and ends.

Does it date from when you purchase the

car or when the dealer first put the car

into service?

Who backs the service contract?

Ask who performs or pays for repairs

under the terms of the service contract. It

may be the manufacturer, the dealer, or an

independent company.

Many service contracts sold by dealers

are handled by independent companies

called administrators. Administrators act

as claims adjusters, authorizing the payment of claims to any dealers under the

contract. If you have a dispute over

whether a claim should be paid, 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 contracts terms and/or your states

laws.

Learn about the reputation of the

dealer and the administrator. Ask for

references and check them out. 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.

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

Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer & Business Education

(202) FTC-HELP www.ftc.gov

May 1997

Automobiles

Facts

for Consumers
345

insurance to cover future claims. Some

independent companies are insured against

a sudden rush of claims.

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.

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), coverage, and length of

contract. The upfront cost can range from

several hundred dollars to more than

$1,000.

In addition to the initial charge, you

may need to pay a deductible each time

your car is serviced or repaired. Under

some service contracts, you pay one charge

per visit for repairsno matter how many.

Other contracts require a deductible for

each unrelated repair.

You also may need to pay transfer or

cancellation fees if you sell your car or 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. Indeed, common repairs for parts

like brakes and clutches generally are not

included in service contracts. If an item

isnt listed, assume its not covered.

Watch out for absolute exclusions that

deny coverage for any reason. For example:

n If a covered part is damaged by a noncovered component, the claim may be

denied.

n 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 tear-down and reassembling of the engine.

You may not have full protection even

for parts that are covered in the contract.

Some companies use a depreciation

factor in calculating coverage: the company may pay only partial repair or

replacement costs if they consider your

cars 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 selling dealer for service.

That 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 youre 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

specific geographical areas.

Find out if you need prior authorization from the contract provider for any

repair work or towing services. Be sure to

ask:

n how long it takes to get authorization.

n whether you can get authorization

outside of normal business hours.

n whether the company has a toll-free

number for authorization. Test the

toll-free number before you buy the

contract to see if you can get through

easily.

You may have to pay for covered

repairs and then wait for the service

company to reimburse you. If the auto

service contract doesnt specify how long

reimbursement usually takes, ask. Find

out who settles claims in case you 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 the manufacturers recommendations for routine maintenance, such as

oil and spark plug changes. Failure to do

so could void the contract. To prove you

have maintained the car properly, keep

detailed records, including receipts.

Find out if the contract prohibits you

from 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.
678

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,

whether theres a fee, or if a shorter contract is available.

Other Tips

If youre 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 trouble

canceling their service contract after discovering the lender didnt require one.

If you decide to buy a service contract

through a car dealershipand the contract

is backed by an administrator and/or a

third partymake sure the dealer forwards your payment and gives you written confirmation. Some consumers have

discovered too late that the dealer 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 wasnt

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:

n maintain an adequate financial reserve

to pay claims.

n base their contract fees on expected

claims. Some service providers have

been known to make huge profits

because the cost of their contracts far

exceeds the cost of repairs or services

they provide.

n seek approval from the state insurance

office for premiums or contract fees.

Complaints

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.

If you need help resolving a dispute,

contact the Better Business Bureau, the

state attorney general, or the consumer

protection office in your area. Also,

contact law schools in your area and ask if

they have dispute resolution programs.

You also can contact the FTC. Contact

the Consumer Response Center by phone:

202-FTC-HELP (382-4357), TDD: 202-326-

2502; by mail: Consumer Response Center,

Federal Trade Commission, Washington,

DC 20580; or by e-mail: use the complaint

form at www.ftc.gov. 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

The FTC publishes a number of brochures

on buying and leasing cars. For a complete list, contact: Best Sellers, Consumer

Response Center, Federal Trade Commission, Washington, DC 20580; 202-FTCHELP. You also can access FTC consumer

publications at www.ftc.gov on the

Internet.

Used Cars: Warranty Protection

When shopping for a used car, look for a Buyers Guide sticker posted on the cars 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

only, or as is.

n Warranty. If the manufacturers 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

manufacturers fee, the coverage is considered a warranty.

n 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 doesnt 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 dealers advice that it

is suitable for a certain use, like hauling a trailer. Used cars usually are covered by implied warranties under state law.

n 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. In addition, some states have used car lemon laws under

which a consumer can receive a refund or replacement if the vehicle is seriously defective. To find out

about your state laws, check with your local or state consumer protection office or attorney general.