All contracts have legal terms and provisions that you should be familiar with to make sure you know what exactly you’re buying or not buying. Let’s go through those briefly so you can keep them in mind next time you buy a repair agreement.
As we discussed in the previous article, there are four types of obligors (VSCPs, dealers, product warranty companies, and insurance companies). It’s important to buy a contract from a financially stable obligor. If your obligor goes out of business, you’ll be stuck because there won’t be anyone to pay for your repair claims. You also want to check their reputation. You want your obligor to be willing and prompt in paying for claims. Licensed VSCPs and insurance companies are legally required to treat people fairly and promptly while product warranty companies are not.
What you’re probably most concerned about when it comes to your service contract is the price. These are usually set according to the kind of car you buy, the mileage, the repairs covered, and the length or mileage it will cover. Car dealers that sell VSCPs on behalf of independent companies are required to send a certain amount back to that company for each contract. To make money themselves, they raise the price above that bottom line. By law, they can charge you as much as you are willing to pay, even doubling the cost. But you can negotiate. Insurance companies, on the other hand, are not allowed to inflate profits by regulations of the Department of Insurance. The best thing to do is to look at MBIs before going to the car dealer so you have a price in mind. But don’t forget to compare coverage and exclusions alongside the prices.
Each repair agreement comes with a different level of coverage. Low-level contracts often cover the bare minimum, usually the engine, transmission and nothing else. Medium-level contracts often cover the engine and transmission plus other major parts such as suspension, brakes, air conditioning, and steering. The high-level contracts will usually cover all mechanical parts with a few exceptions listed in the contract. Also many VSCPs and insurance companies will cover towing and rental car costs, while product warranties legally cannot. Don’t hesitate to call the obligor with any questions. You want to know what is included and excluded.
When you read over your contract, make sure you understand the exclusions. These are things that your repair agreement will not cover. For example, many contracts will not cover the following things:
· Failure to service the car as recommended
· Overheating
· Insufficient or improper coolants, lubricants, or servicing
· Alterations to the vehicle
· Towing excessive weight or without manufacturer installed/authorized tow package
· Contamination to any fluid
· Damage of a non-covered part by failure to a covered part
· Damage to a covered part by failure of a non-covered part
· Damage that existed prior to the contract
· Negligence or abuse
· Seals and gaskets
· Repair for correcting engine compression and oil consumption
· Valve grinding, burnt valves, and/or worn rings
· Vehicles used to transport people or goods for profit
· Adjustments, alignments, machining of brake rotors and drums, shop supplies, and unauthorized diagnostic time
Some of these are covered in high-level contracts or in special contracts (ex. commercial use coverage), but you need to make sure you know what isn’t covered in your case so read your contract carefully and slowly.
All cars have normal “wear and tear” due to usage, and companies will not cover these repairs. There is a difference between damage due to factory defects and a part wearing out. Each contract will define “mechanical breakdown” differently, but in general it is a defect in parts and workmanship as supplied by the manufacturer or that makes the part unable to perform its designated function. Carefully review this when going over exclusions.
As mentioned in the exclusions, service contracts will deny claims for negligence. This means that routine maintenance is a must. Even if the damage is a result of being poorly built, service contract companies may deny you because of the lack of maintenance. Before you do the maintenance yourself though, make sure that your repair agreement allows it. Hold onto all receipts as a record of maintenance and include the date, current mileage and type of service performed.
You also want to keep an eye on the duration of the contract. Most agreements have a mileage and time length as the expiration. They typically range from 1 year/12,000 miles to 10 years/100,000 miles. It will always end with whichever comes first, so keep an eye on the year and mileage to be aware of when you can make a claim.
Read over all of these parts to the repair agreement before purchase because these can all come up in the future if you ever need to make a claim. You want to know what you’re buying and what you’re not buying.