CONSUMERS : Extended Service Requires Study
Beware, consumers: If you’re considering buying an extended service contract for your vehicle, be sure the company offering that policy to cover its parts and repairs, over and above normal factory warranties, has a long, solid track record.
A little homework on service contracts--which cost $400 to $1,200 depending on the kind of vehicle, its age, mileage and the length of the policy--can save motorists headaches, experts say.
For the most part, dealers offer two kinds of extended service contracts, those administered through independent companies and those from the auto manufacturers.
With the independents’ contracts, motorists often get added benefits, besides coverage for mechanical breakdowns and parts. For example, such packages might cover fees for towing and rentals or even hotel costs if you’re on vacation and your vehicle needs extensive repairs.
Manufacturers, on the other hand, are more conservative about what they cover in service contracts. But the chief benefit they offer is that motorists need not worry about a major business like General Motors, Ford or Chrysler going under.
That is not to say that there are problems, necessarily, with all independents, who do more than $3.5 billion in annual sales nationwide. But since 1988, 15 such firms have gone out of business, leaving their insurers, vehicle dealers and consumers to sort out who will pay for parts and repairs that the companies’ extended service contracts were supposed to cover.
Consumers can protect themselves, in advance, by investigating how long a firm has been in business and what insurer underwrites its claims, experts say.
In most states, service contracts, although underwritten by insurers, legally are considered deals between consumers and auto dealers. That means that if consumers run afoul of an independent, their state’s insurance department usually can’t help much; the contracts are not considered an insurance policy.
In California, for example, “The Department of Insurance will qualify that the insurance company backing the policy has reserves to handle them and is licensed in California, but they don’t (vouch for) the product,” said Joe Remoaldo, a consultant who evaluates service contracts for dealers and consumers. “So, the dealer is hoodwinked into believing he’s protected by insurance and he’s not in some cases. And the consumer has nowhere to go, except to have it decided in court. There should be better regulation.”
(Although the problem is not legally within its jurisdiction, the California insurance department, because of the volume of complaints it has received, is trying to assist consumers by mediating consumer-insurer disputes, a spokesman said.)
David Wilson, owner of Toyota of Orange, called his experience with independents “a nightmare.” When he bought his Orange County dealership in 1983, it did business, he said, with an independent that folded in 1985. He had further complaints about three other independents, which he claimed harassed customers who had policies with them or failed to reimburse him for repair work. The firms, he said, later went out of business, too.
Wilson said his dealership lost $1 million on repairs for which it was never reimbursed. “That’s really terrible,” he said, “but no customer ever lost any money.”
He now offers customers only factory-sponsored extended service contracts. (Toyota began offering the agreements in 1987.)
“If consumers do business with a reputable dealer and a reputable manufacturer, I don’t think they’ll have any problem,” Wilson said.
Jim Wilson, the owner of Casa de Cadillac in Sherman Oaks who deals only with General Motors-sponsored service contracts, agreed, saying: “If you buy (an agreement) backed up by the manufacturer, you’re going to be OK. Some independents may be OK, but the manufacturers are more solid.
“The service contract business is really complex,” Wilson added. “But they’re not as important as they used to be when manufacturers offered warranties of 12 months or 12,000 miles. Now they’re offering tremendous warranties, five years or 50,000. I don’t think, with those kinds of factory warranties, you need a extended service contract unless you drive a tremendous amount of miles or keep a car a long time.”
That some dealers prefer manufacturer contracts over independents is no small matter. Consider that they actually lose money on such agreements because manufacturers pay them flat factory rates on repairs, not the consumer price they receive from independents and consumers. If, for example, a mechanic spends two hours replacing a car’s master cylinder, a manufacturer pays a dealer for only 1.2 hours; independents and consumers, in contrast, pay the regular rate, about $30 to $32 an hour, for the full two hours.
Independents do have their defenders. Said Remoaldo: “I believe the independent . . . provides a valuable and needed product. Unfortunately, they are going through a down cycle now due to the pressure from the manufacturers’ programs and the influx of unethical individuals. The latter could be controlled if only the government regulatory agencies take greater interest.”
Bud Barish, of Barish Chrysler on La Brea Avenue, observed: “There are still a number of very, very good independent companies that are solid and still doing business. But there were plenty with a bad reputation. Either they were self-insured and went broke or the insurance company backing them sustained too many losses and decided to get out of the business.”
Barish, a dealer for 41 years, switched service contracts to Chrysler exclusively. “We still have some of those (independent) contracts, and they’re hard to deal with,” he said. “Some of the companies are being very technical on what it is they’ll pay for.”
The manufacturers’ entry into the service contract business in the mid-’80s, posed “a challenge to the independents, no question about that,” said Julie Fosgate Heggli, senior vice president of marketing for General Warranty Corp. The Harbor City firm is one of the nation’s largest administrators of vehicle service contracts. “But it’s like any other product; it’s probably healthier all around to have tough competition. We just have to be creative and come up with something better than (manufacturers) do.”
Heggli said General Warranty, in business since 1981, was the first in the industry to offer towing and rental benefits. Besides normal service coverages on mechanicals and parts, she said, it also is “offering things that are secondary concerns to drivers.” Coverages that include trip interruption, added coverage for meals and lodging, a one-year membership to the AMOCO auto club.
“A year ago,” she added, “we started a Smart Buyer Club that gives special discounts on an oil change at the dealer where you purchased your car, hotel discounts, that kind of thing.”
VEHICLE SERVICE CONTRACT TIPS
It’s vital to read the policies to see what is and what is not covered. For example, a water pump may be covered but “overheating” may not be; you can pay a lot if a failed pump damages your engine but your contract covers only the part and not the rest.
* If you’re unsure about a contract, get a copy of the actual agreement and take it home to study. This can be tougher when buying used car contracts; such agreements must be purchased at time of sale.
* Make sure the contract can be canceled if you change your mind; California law requires a cancellation clause. If done within 30 days, you’ll probably get a full refund. Some companies charge a cancellation fee.
* Be certain the name of the insurance firm that underwrites the program is included (state law mandates this), and ask about its industry rating; dealers should know. If there is no carrier named, chances are the contract is unprotected by insurance or is self-insured.
* Inquire about deductibles. No-deductible options usually cost more. A fixed deductible is better than one calling for you to pay a percentage of repairs.
* Find out how to make claims and where repairs can be made. Some firms require you to pay, then wait for reimbursement. Some contracts cover repairs only at the dealer where you bought your car; others, manufacturer-backed agreements mostly, allow repairs at dealers nationwide. Some contracts limit the number of claims.
* Check whether your service contract can be transferred upon sale of the vehicle.
* Investigate if the contract will not cover “pre-existing conditions.” Be wary of this clause, especially with used vehicles. Most failures on used vehicles occur in the first 90 days after sale; most occur in the first 30 days. Why buy a contract to cover problems that normally would be a dealership’s after-sale obligation?
* If you buy a service contract, don’t hesitate to call the listed administrator to ask questions. Do this in the first 30 days.
Source: Remoaldo Report, Dealer Services Consultants, La Palma
