Even a critic sees value in vehicle service contracts

stranded motorists

A recent kiplinger.com post generally critical of vehicle service contracts (VSC) makes a pretty good case for buying one.

In “The Woes of Extended Warranties” Jessica L. Anderson essentially says to car buyers that if you purchase a luxury car or a brand with a so-so reputation for reliability, it makes pretty good sense to also buy the manufacturer’s extended warranty. Consumer Reports says pretty much the same thing in its 2104 VSC survey report. The major take-away from both the post and the CR report is that sometimes it makes sense to buy a VSC, and sometimes it doesn’t.

No argument here.

Ms. Anderson’s post includes several other statements warranting response. First, she says that:

It’s no surprise that extended warranties for autos rank high on consumer complaint lists. Contracts are riddled with exclusions, making it hard to tell what is covered and under what circumstances. If a covered part is damaged by a noncovered part, you may be on the hook for the whole bill. And if you haven’t followed the maintenance schedule, the warranty could be terminated.

As a general matter, I agree that legal documents tend to be poorly written and difficult to understand. All contracts –especially those intended for consumers – should be written in plain English. It’s time to lose the legalese and fine print and replace them with plain, simple language.  Doing may not be easy – in fact, it’s usually difficult and time consuming – but everyone benefits from it.

On the other hand, I see no unfairness in making a contract holder pay for damage to a covered part caused by one that’s not. This scenario is really no different from damage caused by a collision or other external source. And It’s simply not the type of failure or damage the VSC company promised to pay for.

Similarly, there is no valid reason to think a VSC provider should pay for repairs needed because a car owner fails to properly upkeep the car. The car owner should hold up his end of the deal too. And paying for lack-of-maintenance repairs is simply not part of the bargain a VSC provider makes with the car owner.

Ms. Anderson says that “[p]ayouts over the life of an extended warranty typically fall short of the cost of the warranty,” and points out that according to the CR survey, the median price for a vehicle service contract (VSC) is $1,200 while the median “savings” was $840. Here, “savings” probably refers to the value or cost of repairs covered under the VSC. Using these numbers, VSC’s had a median net cost of $360. So the question becomes:  Do the benefits the car VSC buyer receives – such as convenience, risk management and avoidance, cost-certainty, and peace of mind – add value beyond the savings in repair costs? And if so, how much? In other words, how do you calculate the “savings” to a car owner who does not have worry about paying for coslty unanticipated repairs or search for and locate a repair shop qualified to do the repair? The VSC company takes care of these things in advance. And the VSC provider is also there to assist the car owner if the first repair shop doesn’t perform up to standards or to provide additional assistance, such as when a second shop is needed.

Ms. Anderson’s piece also notes the 2014 CR survey shows that “more than half of extended warranty purchasers never used their policies.” But when you drill down a little deeper, this stat becomes a bit misleading. Like CR, Ms. Anderson posits that if you buy a car with an “average or below-average” reputation for reliability, or you buy a luxury brand, you are far more likely to benefit from purchasing an extended warranty then someone who buys a make known for high reliability. The CR stats more than bear this out. They show significantly higher claims or usage rates for cars in the “average or below-average” category (60% to 71%) as compared to those in the generally reliable category (36% to 38%). Again like CR, Ms. Anderson makes a fairly strong case for buying a VSC if choose to purchase a car with in the “average or below-average” reliability category.

Finally, Ms. Anderson wrties that “[d]espite the poor track record of extended warranties, one in three car buyers takes one home, says the Service Contract Industry Council.” Here, Ms. Anderson paints with too broad a brush. She offers nothing to support for her clear suggestion that all extended warranty programs have a “poor track record.” And the CR survey report says that VSC programs run by manufacturers and reputable third-parties get high marks in customer satisfaction.

So the real message to consumers:  Do your homework, becuase sometimes it makes sense to buy a VSC, and sometimes it doesn’t.

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2 Comments

Filed under Best Practices, Service Contract, Warranty

2 responses to “Even a critic sees value in vehicle service contracts

  1. Savvy Consumer

    Unless the contract pays for claims equal to or greater than 100% of the purchase price, the contract is not a deal for the consumer. How many VSCs pay in claims 100% of the purchase price? What is the loss ratio for VSCs? That is difficult information to find; I suspect because if the industry were to broadcast it (or even leak it) it would be a scandal. The author asks, not entirely rhetorically, what value “risk management and avoidance, cost-certainty, and peace of mind” add to the value of the contract. We should also ask what value is subtracted from the contract for a consumer’s anger and frustration when told their claim isn’t covered, that because they were late on an oil change two years ago they will have to pay the entire cost to replace their engine. Or that their repair, if covered, will be delayed 2 weeks while the administrator/obligor inspects the vehicle.
    These things are marketed to consumers as warranties that cover anything that goes wrong with their cars. The reality is they are filled with exclusions and terms that make it unlikely a consumer will ever have a covered claim. This is an insurance product and should be regulated as such.

  2. Ron Giuntini, Principal, Giuntini & Co., commented via LinkedIn:
    Glad you are pushing-back the pundits who constantly are attacking VSCs. What the VSC industry should work on is keeping the terms and conditions simple for the “average” person to understand; a point well stated in your post. My experience in the T&Cs of long-term Product Support solution contracts (e.g. VSC) is to slug it out with lawyers to employ the KISS principle; something lawyers are not known to embrace. I also have converted the resulting simplified language into a “comic book” that even those individuals not well conversant in English could understand. Lots of work, but big payback in eliminating misunderstands.

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