April 2008

Consumers Look to Safeguard Motor Vehicle Purchases

Uncertain economic times, longer term loans and costly vehicle repairs necessitate added protection.

Source: Service Contract Industry Council

American consumers intent on protecting and adding value to their motor vehicle purchases during the new model year and Presidents' Day sales periods are considering service contracts to help manage unexpected and costly repairs on their new or used cars, vans, trucks and SUVs.

A typical service contract covers essential yet costly-to-repair systems not covered by the manufacturer's powertrain warranty, such as air conditioning, power windows, and electronic systems, including the vehicle's navigation system.

Jason Christiano of Tampa, Florida believes strongly in the financial benefits and peace of mind that comes with the purchase of an automobile service contract:

"Recently, I picked up my vehicle from a dealership repair facility where the bill to replace a torque converter was $1,722. My service contract provider paid the invoice with no challenges. The amount of that one repair exceeded the cost of the vehicle warranty," Christiano said. "Last year, when we sold a vehicle, the company promptly refunded the unused portion of the warranty cost."

"Auto loan terms can run as long as seven years now and in uncertain economic times consumers keep their cars longer and, when buying, often choose to purchase a used vehicle," said Steve Brooks, CEO of the Phoenix American Companies and President of the Service Contract Industry Council (SCIC). "A typical manufacturer's warranty generally runs three years or 36,000 miles. Subsequently, it can cost roughly $4,000 to replace a vehicle's integrated computer unit, for instance.

"It is important for consumers to protect themselves from the high cost of repair, especially after the manufacturer's warranty ends," Brooks said.

Approximately 5 million motor vehicle contracts are sold annually. Additional benefits can include emergency repairs/service, towing and loaner cars, and discounted maintenance plans. Motor vehicle service contracts can enhance resale value and are typically transferable to a new owner.

"To further protect consumers, a majority of states require licensure of service contract providers. Consumers who want to purchase service contracts online should confirm with their state's insurance department that the provider is licensed in the consumer's state, if applicable in that state," said Timothy Meenan, SCIC executive director. "Terms and costs vary, and consumers should read the provisions of a contract carefully to understand their coverage and responsibilities."

Service Contracts: Common Questions & Answers

? Why do buyers of new motor vehicles need a service contract when the manufacturer provides a warranty?
Motor vehicle service contracts pick up where a manufacturer's warranty leaves off. They provide coverage for components and systems not covered during the warranty's duration and when the warranty ends.

In uncertain economic times many consumers keep their cars longer and take out longer-term loans (5, 6 and 7 year loans are now available) to finance their purchase. A typical manufacturer's limited warranty generally runs for 3 years or 36,000 miles. After this it can cost roughly $4,000 to replace a vehicle's integrated computer unit or repair the air conditioner. In addition, manufacturer's warranties are based upon defects in material and workmanship and do not cover normal wear-and-tear.

Most service contracts cover normal wear-and-tear and may fill in coverage gaps in the manufacturer's warranty for up to 7 years and/or 100,000 miles, depending on the terms of the contract.

? Why should a consumer buy a service contract if a car comes with longer- term protection, such as a powertrain warranty?
A powertrain warranty generally covers parts of the engine and transmission for five years and/or 100,000 miles. However, there are over 10,000 components on a vehicle and the powertrain components compose only a fraction of these parts. A powertrain warranty does not cover steering, electrical, suspension, air conditioning, heating, fuel systems, brakes, and convenience packages such as a navigation system.

? Why do buyers of used motor vehicles need a service contract?
Buyers of used motor vehicles need the protections offered by service contracts for essentially the same reason that new cars buyers do - to cover repairs not included in a manufacturers limited warranty and to continue protection after the warranty runs out.

? What are the consumer's responsibilities?
Consumers should thoroughly read and understand the terms of their motor vehicle service contract. Many service contracts require a consumer to adhere to all the manufacturer's recommendations for routine maintenance, such as oil and spark plug changes. Failure to do so could void the contract.

It is important for the consumer to keep detailed records, including receipts, to prove that the vehicle was properly maintained. Consumer should securely file any signed contract(s) and store documents in a safe location where they can be retrieved easily as needed.

? Who sells motor vehicle service contracts?
More than five million automobile service contracts are sold annually, many by dealers at the time of sale and financing. When a consumer sells his/her vehicle, the service contract can be transferred to the new owner, sometimes with a small ($25) transfer fee.

? How are claims handled? Who is authorized to do repairs under a service contract?
When a vehicle covered by a service contract needs to be repaired or serviced, a consumer may be able to choose among several service dealers or authorized repair centers. In some cases, the consumer must return the vehicle to the selling dealer for service.

? Are consumers legally "protected" when they buy a service contract?
Approximately 37 states have enacted specific laws governing motor vehicle service contracts. In these states, companies offering service contracts typically are required to fulfill their financial responsibility to the consumer in one of the following ways: (1) insuring the program through a contractual liability or reimbursement insurance policy, (2) maintaining reserves and placing a deposit on file with the state, or (3) maintaining a minimum net worth of $100M.

Many service contracts are backed by A+ rated insurers, who provide additional financial solvency on long-term contracts. Consumers can typically find the name and contact information of any insurer backing their particular program on their service contract.

As with most laws, there may be exemptions from certain requirements. It is important for consumers to research the company offering the service contract as well as any insurer backing it.

In many states, service contracts come with a "Free Look," usually 30 days. If a consumer believes they acted impetuously or changes their mind for any reason, they can return the contract for a full refund during this period. Service contracts also can be cancelled mid-term, with consumers receiving a pro-rata refund. Some contracts may include a nominal administrative charge if the consumer cancelled mid-term.

This information is provided by the Service Contract Industry Council (SCIC), a national trade association that works with lawmakers nationwide to develop fair and uniform regulation to protect consumers and the industry.

Additional consumer tips and information about service contracts are available on the SCIC's Web site: www.go-scic.com.