The number of Utah companies selling extended warranties and service contracts, particularly for automobiles, has proliferated in recent years - and so have problems associated with these contracts.
Often, these companies are not required to have any capital or reserves on hand to protect the consumer in case of insolvency, says M. Gale Lemmon, staff counsel for the Utah State Insurance Department. If one of these "non-insurer insurers" goes out of business, the consumer may be left with a long-term contract for service that no one has to honor. The consumer can be out big bucks.Probably the case that received the most attention was when Wagstaffs recently filed for bankruptcy. "Other dealers did end up absorbing a lot of those contracts and honoring them," said Brent W. Webster, market conduct examiner for the Insurance Department, "although there was no legal obligation for them to do so."
This was not an isolated incident. According to a market survey compiled by Webster, 33 Utah companies offer extended auto warranties. Since March of this year, six have become insolvent. "For those six, there is no one to stand behind them and see that service is rendered or consumers reimbursed." And, he says, there is a "high likelihood" there will be other problems in the future.
"Consumers spend anywhere from $300 to $900 to get extended protection, and when there's a breakdown, nothing's there," Webster says.
But that's not to say you should avoid all extended warranties and service contracts, he says. Or to say that all companies that offer them don't have reserves to back them up. Many of the service contracts offered by auto manufacturers offer excellent protection, he says.
But the way Utah law stands, there are loopholes that allow companies to get exemptions from regulations of the insurance code, and then the state has no jurisdiction in enforcing consumer protection provisions and ensuring they have adequate reserves on hand.
"All we can do is require that these companies meet certain criteria to be considered insurers or that they get an exemption," said Lemmon. If they get an exemption, they are beyond our - or anyone else's - reach. There is no regulation, no oversight. Unless they break the law, no other agency has jurisdiction, either."
If they don't establish an exemption, they are considered unauthorized insurers. So far, few companies have established exemptions. And if they don't, they may be subject to cease and desist orders that will curtail their operation in the state. The department anticipates sending out a large number of these orders in the next months.
It is a problem that Lemmon and Webster would like to see addressed by the Legislature. In the meantime, they say, "all we can do is advise consumers to use caution, to be sure they know exactly what they are getting."
Here are some of the things they suggest you look for before purchasing a service contract for your car:
1. Ask if the company offering the contract is an authorized insurer. If you are told it has an exemption, be wary. "An exemption doesn't necessarily mean the company doesn't have adequate reserves," says Webster. "But it could."
2. If the company is not considered an insurer, is the contract backed by insurance? This may not give you total protection, but it is helpful to know that if the dealer or administrator defaults, an insurance company will step in to pay the claims.
3. Ask how long the company has been in business. "Longevity is not a guarantee, says Lemmon, "but it helps."
4. If you have concerns, check with the State Insurance Department. It can tell you about complaints that have been received or problems that have developed.
5. Be sure to read the contract cover-to-cover and understand what the coverage is. Some contracts only cover the drive train, for example, and won't cover other problems. Many contracts require prior approval before any work is done. If your car breaks down away from home, emergency repairs may not be covered.
Not all contracts are the same or cover the same things. So insist on getting a copy of the policy before you buy.
6. If you decide to purchase a contract, negotiate. The price is not generally set in stone. "Car dealers like to push these contracts, because they can increase the profit that they make on the sale of the automobile and they have a fairly large negotiable margin to work with," said Webster.
Consumer Electronics Products: Q & A
Consumer electronics products have become more sophisticated and more complicated. And this is an area where service contracts are frequently offered. Before you sign up for one, here are some of the most-asked questions and answers from the Electronic Industries Association:
Q. How does a service contract differ from a warranty?
A. Essentially, a warranty is not bought separately; it comes with the product you purchase.
Q. Are there different kinds of service contracts?
A. Yes, there can be many different kinds. For example, a service contract may require you to pay a certain amount for repair service. Or it may require you to pay for labor, parts or transportation charges.
Q. Are you saying that a service contract may not pay for repair service when I need it?
A. It may not pay for everything. For example:
- It may pay for labor only or parts only.
- It may not pay for every part.
- It may limit the number of repairs.
- It may require a certain amount for each service call.
- It may not pay for in-home service.
Q. What are some pros and cons of service contracts?
A. Service contracts may help you pay for expensive repairs and routine maintenance. On the other hand, be sure the service you receive is given by technicians who are trained to service your product brand and who will use appropriate replacement parts.
Q. How can I make sure the service contract I buy with a new product does not duplicate the warranty or overlap it?
A. Read the warranty to find out how long the warranty lasts and what it covers. For example, if the TV you select has a lengthy picture tube warranty, you wight want to buy a service contract that does not cover the picture tube, or you might do without a service contract.
Q. My VCR needs maintenance service to keep the heads clean. Can a service contract help pay the cost?
A. Yes, some service contracts do cover routine maintenance.
Q. What should I think about when buying a service contract?
A. Discuss this with the retailer when you buy the product. Your new electronic product warranty may cover most repair costs - sometimes for 90 days, sometimes for a year or more.
Q. So how can I decide about whether to buy a service contract?
A. Read the warranty, read the service contract and compare. Weigh the cost of the service contract against maintenance and repair bills you may face later.
Q. Who sells service contracts?
A. The retailer who offers you a service contract may be selling it for the dealer, the manufacturer or a separate service company. Ask the salesman for time to study the contract. Also ask if the retailer sells more than one kind of service contract. If so, compare them.
Q. How can I find out if the manufacturer of my product brand offers a service contract?
A. To find out about the availability of a manufacturer's service contract, contact a retailer who sells the product or contact the manufacturer. Some manufacturers have 800 numbers.
Q. How can I find out about thereputation of a service contract company?
A. Ask the Better Business Bureau or your local consumer protection office if they have had any complaints against the service company.
Q. What happens if my service contract company goes out of business?
A. Unfortunately, there is little you can do if this happens. The best way to protect yourself is to make sure before purchase that the company is reputable and has insurance so you can get a refund.
Q. I have a bad service contract. What can I do?
A. You cannot change the terms or conditions of a service contract you have already purchased. Always read a contract before you sign it.
Q. What if the salesperson has no written contract for me to look at.
A. If you cannot first read the contract, do not buy it. Make sure all the blank lines are completed.
Q. Can a service contract be renewed?
A. Some service contracts cannot be renewed and say so. Because your product is more likely to need service as it gets older, renewability is important. Ask about the cost of renewal; it can often be higher.
Q. What should I ask before buying a service contract?
A. Before buying a contract, ask yourself or your dealer these questions:
- Who is offering the contract - the dealer, the manufacturer or an independent third party?
- Where will the product be serviced? In my home? In a repair shop? In a manufacturer's service center?
- Does the contract begin when my product warranty ends so I do not pay twice for the same coverage?
- What is the length of the service contract coverage?
- What exactly will I get in repairs and maintenance for the money I'll pay?
- Is the contract valid if I move?
- Is the service contract transferable if I sell this product?
- How much time do I have to decide if I want to buy the service contract?