Considering the degree of technology in today’s automobiles, extended service contracts seem a no-brainer. Repairing those items, especially those little black computer boxes, can be very expensive. And that is precisely why we need to get to the plain truth about these contracts as much as possbile.
Unfortunately, the public has not been thoroughly educated or informed of their rights, let alone the ins, the outs and the financial ramifications if they choose poorly. As each state is different, Michigan, in this regard, is in a unique category.
As a follow-up to my first article about the Service Contract Industry Council (SCIC) (see link at left -Trade group fights deceptive auto warranties), I wanted to better understand Michigan's relation to those marketing extended warranties. So, when offered an interview with Tim Meenan, Executive Director and General Counsel for SCIC by phone, I took it.
It was an impressive thirty minutes with Mr. Meenan (who insisted I call him Tim, but of course I didn't). He definitely spoke legal like an attorney, but held it within my grasp with great examples, and cleared the air regarding extended warranties also known as service contracts, as he did in the past with Fox News and CNBC.
While I'm familiar with most legal jargon from 39 years in the auto industry, this interview certainly raised my bar a bit, because it was more about law and product insurance than auto tech. There was one segment of the discussion that especially caught my ear, though, when Mr. Meenan mentioned the three categories of states. They were as follows:
1) Regulated states with structure that includes licensed sellers;
2) Unregulated states (with unlicensed sellers);
3) States where service contracts are not regulated if provided by auto manufacturers or dealers. [Note: this was edited for clarification after the initial article release]
Meenan indicated that Michigan definitely fits into the third category, which he termed loosely as a hybrid. And in an email clarification, he wrote, "If third parties other than manufacturers or dealers offer a service contract in these states, it is insurance; and no one really offers them that way for the most part."
In this category, the extended service contract is like an OEM auto warranty and often more inclusive, but with a separate charge (like insurance); and where licensed auto sellers at auto dealerships (point of sale) can also act as proposing agents for the true obligor, the underwriter of the extended warranty (service contract), a.k.a. an insurance company or a company large enough to bear the financial obligations. By the way, that was my interpretation of the legalese.
The obligations under the service contract are usually controlled via an insurance entity or a company with at least $100M of net worth. For example, when I purchased tire and road hazard protection from the Good Year Auto Service Center in Warren (12 Mile near Van Dyke) a few years ago, I noticed Good Year provided the extended warranty through Sonsio, the warranty guarantor. I felt comfortable, because of their size and reputation, as it was ultimately tied to AIG.
Point is the underwriter of the contract is already fully regulated by the state, because it is an insurance product and marketed as one. On the other hand, the sales people who proposed the offer to me were not required to be licensed insurance agents as they would be for life or casualty insurance. That's what makes it a hybrid.
Regardless of the category, that clearly means your signing on the dotted line for any automotive service contract is with the insuring entity, not the auto manufacturer, the salesman or the dealership, the place of purchase.
This hybrid category especially implies then that small companies that choose to underwrite any service contracts in Michigan must meet minimum financial standards. That prevents a situation where two people set up a warranty business out of their home, but do not have the financial backing to meet obligations.
Furthermore, the insurance contract itself already falls under the jurisdiction of state laws on the books, and explains why there is no need for further laws to regulate it in Michigan. Despite that fact, should auto purchasers still spend as much time researching their choice of extended warranty as much as they do the choice of their auto dealer? Mr. Meenan noted they should.
Contract Wording vs. Marketing
Asked whether his concern is greater over the wording of the contracts or the marketing, Meenan was quick to reply, “Definitely the marketing.” That’s when he told me about some companies in Missouri who used the warranty behind automotive additives as the basis for selling high-cost service contracts to the public, usually by telemarketing and mail. Missouri is changing its laws to combat that tactic, thanks to SCIC's revision to their Model Act. Meenan then mentioned another name I already knew, U.S. Fidelis which is now bankrupt. Check the name out on the web for all the sad details.
Meenan then reflected on a non-automotive example: Crazy Eddies (Crazy Eddy's?) on the east coast. It appears their extended service contracts became worthless once Crazy Eddies went bankrupt. Now, counter that with the bankruptcy of Circuit City, in which many stores did business in Michigan like Oakland Mall area. All contracts sold through Circuit City in Michigan have been honored, because they were covered by an insurance entity with sufficient reserves. In other words, Circuit City was never legally part of the service covenant.
Finally, amid my SCIC web research for the interview, I uncovered a negative article by Consumers Report about extended service contracts in general for which Meenan responded through CNBC. This was March, 2008, when he wrote the following: "Companies offering extended service contracts typically are required to fulfill their financial responsibility to the consumer in one of three ways: (1) insuring the program through a contractual liability or reimbursement insurance policy, (2) maintaining reserves and placing a deposit on file with the state, or (3) maintaining a minimum net worth of $100M."
I noticed he stayed on message with me, quoting those very same points.
Examiner Final Comments
Right off the bat, I came away from the interview believing in the positive value of SCIC, and all the more in that old Russian proverb - Trust but Verify! That means beware of phone and mail solicitations for extended warranties, whether for a car or a television. And if you ever act impetuously, you generally have 30 days to rescind; while others offer pro-rated refunds after that; that is, if you purchase from a reputable source.
The key here is to be wise at all times. While Ford, GM, Chrysler, Toyota and other OEMs operating in Michigan are the usual point of sale at reputable car dealerships, other companies can attempt to mimic an affiliation. Learn to recognize the difference.
You also do not have to purchase the first extended warranty offered by the dealer either, as if it might be withdrawn if you didn't; that is unlawful. Truth is these contracts can be purchased at any time. However, what you may pass up at the time of auto purchase is the opportunity to include the cost of the extended warranty into your new or used auto’s monthly payments. This I know from experience, which is why you should plan ahead.
For the record, I like the idea that an organization like the SCIC also provides guidelines and advice regarding service contracts for autos, consumer goods and home warranties. It would be prudent, in my opinion, to use their site as a starting point before making any sizable purchase. If your service contract insurer is not a member of SCIC, then ask them why as you back out the door. Visit their website atwww.go-scic.com