There is a lot of confusion in the marketplace between a “warranty”, an “extended warranty” and a “service contract”. Much of the confusion is created by the sales practices of automobile dealerships in order to make sales of service contracts and increase their revenue on these aftermarket products. Service contracts are one of the most profitable items dealerships sell.

A service contract is not a warranty under the lemon law in California also known as the Song-Beverly Consumer warranty Act. Warranties are issued by product manufacturers and accompany the sale of a product at no charge to the buyer. In the case of automobiles, warranties are offered to promote confidence in buyers, who are making an expensive buying decision, to have trust in the integrity and reliability of a vehicle and to reduce the fear of having to pay repair costs. Terms and conditions of warranties are fairly standard although length and mileage limitations can vary significantly.

A service contract is a very different animal. Service contracts come in two varieties: one issued by manufacturers such as Ford’s Extended Service Protection plans and others issued by companies very similar the insurance companies such as Warranty Direct and First Extended Warranty. While a service contract is a promise to repair a vehicle for a given period of time, coverages under service contracts are very different than under warranties. Warranties cover defects in materials and workmanship which are under the control of the manufacturer and are typically “bumper to bumper”.

Service contracts, on the other hand, typically cover a list of parts and components, not the entire vehicle. If the failure is to a part not covered, the repair is not paid for by the insurance company referred to as an “administrator” (actually a claims adjuster). Not only do service contracts exclude all parts not listed as covered, but service contracts contain a long list of standard exclusions such as “Any failure of a covered part which is caused by the failure of a non-covered part is excluded from coverage.” Who makes this determination? Not a lawyer, but rather the claims adjuster for the insurance company. Is the consumer in a position or even have the right to make this determination? No.

It is not unusual for a service contract to have 20 or 30 paragraphs of exclusions buried in their long and very complicated paperwork. In a typical car deal does the consumer have the time, energy and ability to read through these contracts and understand how they work? Of course not. The consumer is told about the service contract by a finance department representative.

At an automobile dealership, finance departments are the people that the buyer meets to sign documentation after the deal for the car is reached in the sales department. Most buyers relax at that point thinking the worst of the sale process is over. The real dealer profit in the sale, however, has only just begun. The car buyer is now going to meet another specialist is making the dealership money off the deal.

The finance department representatives sell service contracts, often represented as “extended warranties” (which they are not), financing, as well has a list of other items such as car alarms, theft protection packages such as Lojack, paint and fabric protection packages, and even insurance policies such as “gap insurance.” These commissioned salespersons are highly trained sales experts paid according to how many of and how much they charge the buyer for these aftermarket products. A finance department representative who does not sell the buyer any of these products is only paid a nominal amount for handling the paperwork and perhaps an amount based on the financing of the vehicle.

So in order to sell a service contract, the finance representative does not show the buyer the contract and go over coverages and exclusions. Rather, the representative makes a sales pitch calling the service contract an “extended warranty” that covers the vehicle “bumper to bumper” for a much longer period of time and mileage than the manufacturer’s warranty, and refers to it as the best protection in the business. The buyer asks how much and the representative quotes a price. The buyer thinking how much he or she has just paid for an expensive automobile thinks that a warranty eliminating added repair costs from the monthly budget is worth it.

What is left out of the sales pitch is the contract that it is being signed with all its limitations and exclusions, the fact that a service actually is an insurance policy, how claims work under the policy, and the amount the buyer’s monthly payment increases as a result of the purchase (which comes last after the buyer is committed to the deal and all the paperwork has been printed and ready to sign.) By the time buyers get to end and are signing documents, most think it is too late.

Is it a good deal? Think about it. Can the insurance company sell these the insurance policies if the repair claims equal or exceed the cost of the contracts? Of course not. And remember if the buyer pays $1,300 for the service contract the insurance company only receives a fraction of that amount from the dealership. The rest is dealership profit.

The insurance company knows that on average a buyer who pays $1,300 for a service contract will only receive $250 of repair work. That makes the issuing the service contract possible.

How about catastrophic costs, a new engine or transmission for example? While certain parts of the engine or transmission may be covered, many are not. Who makes the decision to pay for the new engine or transmission? A claims adjuster who is called an “administrator.” What is the adjuster’s job? To limit the cost of claims. What does the adjuster do in the case of an expensive repair? Sends out a specialist to look at the vehicle which can take weeks or months. What is the specialist’s job? To find an exclusion in the long complicated contract, which the buyer never read and sometimes never even received a copy, to deny coverage. In the unlikely event this process results in a covered repair, what type of engine or transmission is going to be used to repair the vehicle? Look at the contract: Used parts.

Many wary consumers do not buy service contracts as a matter of personal policy when it comes to televisions, cell phones, major appliances, etcetera. This why the insurance companies and aggressive car dealerships try to trick buyers into thinking service contracts are “extended warranties” and work the same as manufacturer warranties. They are not. Buyer Beware!

Law & Kolakowski is a firm of experienced lemon law lawyers handling claims under California’s lemon law. We review automobile sales files on a daily basis and can answer questions regarding car deals and handle claims free of charge to the consumer. If you have a question about your rights under the lemon law in California contact us for a free consultation.