Warranties, Extended Warranties, And Service Contracts:
Do You Really Know What You Are Getting?
By E. L. Eversman, Esq.
Warranties, extended warranties, and service contracts are terms consumers frequently hear in connection with the purchase of automobiles. While they all have a comforting ring, implying safety and security for buyers, do we really know what we are getting with each of those terms and what we can legitimately expect in their performance?
Revelation
First, regarding the purchase of a new or used vehicle let's understand something up-front: There is no such thing as an "extended warranty". Something is either a warranty or it is not. If it is not a warranty, it is a service contract or an insurance policy. We have been encouraged to call certain additional paid coverage for service or mechanical breakdown "extended warranties", even though they are not warranties as that term is intended in the sale of consumer products. I call them "EW"s because referring to them as "extended warranties" does nothing but further confuse the issue.
Warranty
A warranty is a specific creature in the sale of consumer goods and it can be express or implied. Express warranties are those which are stated directly to the consumer and, for application under certain federal laws, must be in writing. According to the Magnuson-Moss Warranty - Federal Trade Commission Improvement Act, 15 U.S.C. §2301(6), and regulations issued by the Federal Trade Commission (FTC), 16 C.F.R. §701.1(c), to be classified as a "warranty", the promise or undertaking must be provided in writing at the time of purchase, included in the price of the product, and must form part of the basis of the bargain. This is a nice, lawyerly way of saying that there has to be a written promise that the product will work (or will be fixed, replaced, or your money back), that comes with the product for no additional cost, and is part of why you want to buy it.
Implied warranties arise according to state law and relate to assumptions we make about products and the uses for them. For example, if you purchase a boat, you expect it to float. If it doesn't float, is it really a boat? Not really.
Service Contract
Service contracts are different creatures from warranties. A "service contract" is a written agreement to perform maintenance or repair (or both) to a consumer product for a specific amount of time. 15 U.S.C. §2301(8). Under the FTC's regulations, a service contract can meet all of the other conditions of a written warranty, but if it is provided only at additional charge, it cannot be deemed to be a "warranty". 16 C.F.R. §700.11. In other words, if you have to pay for it, the product has no business being marketed as a type of "warranty", extended or otherwise.
Some service contracts are sold by automobile dealerships, and they are agreements between you and the selling dealership for maintenance or repair in the event the car breaks down. That is a true "service contract". However, just because you purchase breakdown coverage at a dealership does not necessarily mean that you purchased a "service contract". In fact, most of the these EW/service contract agreements are actually insurance policies.
An Insurance Policy By Any Other Name Is Still An Insurance Policy
There are many businesses advertising the sale of EWs that have the word warranty actually in the company name, but what they sell is insurance. Warrantybynet.com, for example, discusses its automobile EW in depth, but reading through the site confirms that what the company offers the purchaser is a mechanical breakdown insurance policy. In fact, in its automobile "warranty" Frequently Asked Questions section, the company has this to say:
9. We are able to offer this comprehensive coverage at such an affordable price for several reasons. First, we go directly to the insurance company. We do not offer our plans through automobile dealerships or any other party that would require paying big commissions. * * *
10. It is important to know the insurance company that is behind any plan you own. * * * (Quoted as of May 6, 2003)
Now, there is nothing wrong with selling an insurance policy to cover costs associated with a vehicle's malfunction. What is misleading is calling the product a warranty when it is not one. "Warranty" is a powerful word conjuring concepts of assurance and security - far more than either the idea or word insurance. If that were not the case, these same companies would call themselves what they are, not what they want you to believe they are. But vehiclemechanicalbreakdowninsurancebynet.com just doesn't have the same ring, does it?
Warranties are assurances we almost always associate with the manufacturer or the seller of the products we buy. Using the word "warranty" to describe additionally purchased repair, maintenance, or other coverage for a vehicle inaccurately implies that this coverage is offered through the manufacturer. Calling this same type of coverage an "extended warranty" only increases the likelihood that buyers will mistakenly think this coverage comes from the manufacturer and relates to the original warranty.
Make no mistake; an EW and your original manufacturer's warranty have nothing to do with each other. In the same Frequently Asked Questions section of Warrantybynet.com's website, the company acknowledges that the manufacturer's original warranty and any EW are unrelated.
27. The "original manufacturer's warranty" period is defined as the initial full warranty that is provided for a new vehicle by the manufacturer. This is commonly referred to as the "bumper to bumper" warranty. The "original manufacturer's warranty" does not include any extended warranties purchased, any used car warranties issued by the dealer at the time of purchasing the vehicle, or any manufacturer's powertrain warranty. (Quoted as of May 6, 2003)
Even if your automobile manufacturer sells EWs, it is still not associated with the initial warranty and is either a service agreement or an insurance policy like any other EW. The manufacturer is not extending the warranty it originally offered with the vehicle. It is selling you an entirely different product.
To Buy or Not to Buy
Recognize that any EW offered to you is probably an insurance policy. This is true even if you buy it through the dealership, because dealers earn commissions on each sale they make. They usually earn more money and have fewer risks selling you an insurance policy than selling their own service contracts.
Because you are most likely buying a mechanical breakdown insurance policy labeled as an EW, remember this important fact: Insurance policy premiums are refundable. If you buy an EW and later decide you do not want to continue with it, you can cancel it and obtain a full refund or a pro-rated amount depending on timing or use under the policy. The most important thing to remember regarding consumer vehicle purchases, however, is that no matter what feel-good label may be used, if the coverage is not already included in the price of the vehicle, the coverage is not a warranty.
E. L. Eversman
The information provided in this column is for information purposes only and should not be construed as legal advice. You should always consult an attorney licensed to practice in your Country, State, and/or Territory as laws vary from Country to Country, State to State, and Territory to Territory. The author is delighted to share information but cannot be responsible for damage or adversity encountered by reliance upon that information and urges you to consult with local counsel.
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