Making Sense of Vehicle Warranties

Choosing the right warranty to match your personal needs can be tricky. There are three different levels of coverage to consider when shopping for a warranty:

“Luxury” Coverage: Typically includes comprehensive bumper-to-bumper coverage for component wear-and-tear as well as failures; specifies coverage of such luxury items as navigation systems, DVD entertainment systems and telephone interfaces.

Exclusionary Coverage: Often called bumper-to-bumper coverage, blanketing all components except for those specifically excluded.

Component Coverage: Intermediate policies covering only systems and components specifically named in the contracts.

An extended warranty on a low-cost Scion xB will cost less than one for a more-expensive model from Jaguar or Mercedes-Benz.

Naturally you pay more for a higher level of coverage. Downs illustrates that powertrain coverage for a typical, American-made sedan runs about $800 when the auto is new. Full coverage for the same car can range as high as $1,400 he says.

What’s more, rates vary among vehicles. “A consumer driving a Honda Civic or a Toyota Corolla is going to pay a lower cost than somebody driving a Mercedes or a Jaguar or any other type of a luxury vehicle,” states Downs. “A higher-priced vehicle has more features in it,” especially big-ticket features like navigation systems and DVD players that can be costly to repair. In addition, he says, “labor rates to repair a Mercedes versus a Honda or a Toyota are more expensive.” 

After selecting a level of coverage, the next task is to pick a specific contract, which also involves selecting an issuer. One easy approach is to accept a plan promoted by your dealer, folding its cost into your vehicle’s overall purchase price. Dealerships may sell service contracts provided by their own franchiser, such as the GM Protection Plan administered by General Motors, or they may offer contracts from independent issuers. Whichever the case, observers warn that dealers typically sell plans at marked-up prices that amount to additional profit for the dealer, but added cost for you. You’re likely to save money if you identify independent issuers on the internet and deal with them directly.

Whatever their sources, contracts will contain differences. “You need to look at how it’s written: the terms and conditions, the definitions, the exclusions, all are very important,” says Downs. “You can find a lot of hidden gotchas if you actually look at the contract before you buy it. My first and foremost advice to any consumer is to read the contract before you buy it. If somebody won’t let you see it, you probably should run away.” 

As with manufacturer’s warranties, exclusions say a lot. “There can be huge difference in what companies exclude in contracts,” warns Downs.

Next, examine a contract’s definition of coverage, he advises. Coverage can range from repairs due to mechanical breakdown alone, to repairs required by accumulating wear and tear. “In a typical mechanical breakdown contract, things like the gradual reduction in operating performance are not covered. That’s a big loophole,” he said.  “A wear-and-tear plan will give you a broader level of coverage.”

For example, seeping engine seals that leave oil spots on your garage floor may not be covered in a breakdown contract. Correcting engine-cylinder compression or oil consumption may not be covered. “Those are the kind of problems you’re going to find in a vehicle approaching eight years in age,” says Downs. 

A third area of concern is coverage limitations, which cap the amount an issuer pays for particular problems. “A straight mechanical breakdown plan often has limits on certain repairs, typically expensive repairs,” Downs contends. “For example, certain companies limit the cost of transmission repair to $4,000 over the life of the contract.”

In addition to examining the contracts themselves, it’s wise to check the business histories of their issuers. “There have been a lot of companies that that have popped up on the internet that don’t have good consumer records,” says Downs. “If somebody does their due diligence, it will be pretty easy to find that out.”

While examining a company’s longevity, look at an issuer’s insurance backing, Downs suggests. Contract issuers typically carry insurance backing that assures the issuer can cover its obligations. Downs points to the National Association of Insurance Commissioners as a resource. At the organization’s website, NAIC.org, you can assess the insurance company identified as backer in a service contract.

Published on 12/02/05