The following article is based on "Consumer Services: Automobile Service Contracts" by the California Department of Insurance
An automobile service contract is a written agreement between a car dealer and you, the car purchaser. Dealers may offer you a service contract for an extra charge when they sell you a car. In a service contract the dealer promises to repair or pay for the repair of certain automobile problems. The promise only covers the parts specifically listed on the written agreement, and lasts for a limited number of months or miles (e.g., 3 years or 36,000 miles, whichever comes first). The exact number of months or miles is specified in the service contract.
Automobile service contracts are similar to the extended warranties offered by car manufacturers through their dealers. However, under a manufacturer's extended warranty, the manufacturer, not the dealer, promises to repair your car.
Service contracts and manufacturer's extended warranties are not insurance, but they do resemble a type of insurance called "Mechanical Breakdown Insurance,"or "MBI". An MBI policy pays you the amount it costs to repair certain mechanical breakdowns to your car.
Unlike manufacturer's extended warranties or automobile service contracts, the promise is made by an insurance company and not by the car's manufacturer or dealer. Also, the promise is to pay you money, not to actually repair your car. This document deals mainly with automobile service contracts, rather than manufacturer's extended warranties or MBI. Before purchasing an extended warranty or service contract, explore the cost and coverage available with an MBI policy.
What's Covered by What
Dealers usually sell several different types of service contracts, which vary in the parts they cover. Most service contracts cover parts of the engine and transmission. Some also cover parts of the steering, suspension, brakes and other car systems. Most pay for towing and for a rental car while your vehicle is being fixed. When considering the purchase of a service contract, the only way to learn which parts are covered is to read the actual contract. By law, the dealer must give you the actual contract to read prior to your purchase of the contract (California Civil Code Section 1794.41.) Usually the dealer will type your name on the actual service contract and give it to you to keep at the time of purchase, then it must provide you with a sample of the contract or brochure. The sample or brochure must describe the contract's terms, conditions, and exclusions, and also your cancellation and refund rights. (These cancellation and refund rights are explained later in this article.) Any part not listed on the contract and brochure is not covered, even if the dealer says it is.
Many new car repairs and adjustments are covered by the warranty that comes automatically with new cars. These regular warranties are included in the price of your new car.
New car warranties vary in their length of coverage, and also in the parts they cover. Most regular new car warranties cover the major parts of your car for at least one year. If one of these parts breaks down during the term of the regular warranty, and you have a service contract, the regular warranty, not the service contract, will pay for its repair.
Seriously defective new cars that in the first year or 12,000 miles undergo four or more repairs to correct the same problem, or are in the shop for more than 30 days for any number of repair problems, may be covered by what is known as the new car lemon law. For more information about the new car lemon law contact the Department of Consumer Affairs at (800) 952-5210.