Automobile Service Contracts, part 2

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Things to Look Out For

In general, service contracts only cover repairs needed as a result of a "mechanical breakdown." A mechanical breakdown is a total failure of a part to perform its function due to a manufacturing defect. Service contracts cannot cover part failures that are due to normal wear and tear. The fact is that some automobile repairs are needed because of normal wear and tear, not mechanical breakdowns. Such repairs would not be covered by a service contract, even if the part was listed as a covered part.

Even if a covered part breaks down, the service contract will not pay for the repair unless the car owner can prove that the car has been properly maintained. Therefore, you must have all routine maintenance done that is specified in the service contract, and must keep receipts for this work. If you perform this routine maintenance yourself, keep receipts for products you buy and note on the receipts what the products were (e.g. oil, oil filter, etc.).

There are many other exclusions on all service contracts. These exclusions should be read carefully before and after purchase of a service contract.

Service contracts can only be sold legally by the dealer who sells or leases you a car. Generally, dealers make money from selling a service contract. The verbal representations and descriptions a dealer may make could leave you with a misunderstanding about what a service contract covers. Before buying a service contract, read it slowly and thoroughly. Better yet, obtain a sample of the contract and take it home to read. Do not be rushed into agreeing to buy a service contract.

Dealers can charge consumers as much as they want for service contracts. Consumers generally are unaware of service contract prices and may pay much more than needed to obtain the coverage they desire. You can compare prices by obtaining quotes for Mechanical Breakdown Insurance policies (MBI policies) from insurance agents or from Provident. Compare the prices, coverage, duration, and exclusions of the MBI policies and the service contract. You may prefer having an MBI policy if you want to have protection from an insurance company rather than a car dealer.

While buying a used car, some consumers are told that a service contract will pay for any repair the car needs. However, used cars are likely to have many parts which have wear and tear damage on them when the car is sold. If these parts deteriorate to the point where the car doesn't work properly, the service contract may not pay for the repair because of the wear and tear exclusion. The dealer or administrator may say that the problem is one of wear and tear, rather than a mechanical breakdown.

Canceling the Contract

Before 1986 some service contracts permitted consumers to cancel the contract. Others did not. Many consumers have complained that they had difficulty getting their money refunded after canceling their contracts.

All service contracts sold after January 1, 1986, are cancelable (California Civil Code Section 1794.41). The dealer must provide you with a written explanation of your cancellation and refund rights at the time you purchase the service contract. These cancellation rights are:

  1. You are entitled to a full refund of the service contract purchase price, if:
    • you cancel within 60 days after receiving the contract, or 30 days if your car is used and came without a manufacturer's warranty, and
    • our cancellation is in writing and is given to the person specified in the contract (i.e. the dealer or administrator), and
    • you have not filed a claim with the dealer or administrator.
  2. You are entitled to a partial refund (based on elapsed time or mileage, as specified in the contract) if you cancel within the 60 or 30 days, but have filed a claim.
  3. You are entitled to a partial refund (based on elapsed time or mileage) if you cancel after either 60 or 30 days, regardless of whether you have filed a claim. For this type of cancellation the dealer may also keep up to an extra $25.

If you do not receive a refund within 60 days after canceling, write to the insurance company named on the contract.