Who backs the service contract?
Find out who performs or pays for repairs under the terms of the service contract. It may be the manufacturer, the dealer, or an independent company. Many service contracts are handled by companies called administrators, that authorize the payment of claims to any dealers under the contract. If you have a dispute over whether a claim should be paid, deal with the administrator. If the administrator goes out of business, the dealership still may be obligated to perform under the contract. The reverse also may be true: If the dealer goes out of business, the administrator may be required to fulfill the terms of the contract. Whether you have any legal remedies depends on your contract's terms and/or your state's laws.
Find out if the auto service contract is underwritten by an insurance company. It’s required in some states. If the contract is backed by an insurance company, contact your state insurance commission to ask about the solvency of the company and whether any complaints are on file.
Insurance regulations generally require companies to:
- maintain an adequate financial reserve to pay claims.
- base their contract fees on expected claims. Some service contract providers have been known to make huge profits because the cost of their contracts far exceeds the cost of repairs or services they provide.
- seek approval from the state insurance office for premiums or contract fees.
Check out the dealer and the administrator with your local or state consumer protection office or local automobile dealers association to see if any complaints are on file against the company. You also can search online for complaints.
If you decide to buy a service contract through a dealership — and the contract is backed by an administrator or a third party — make sure the dealer forwards your payment and you get written confirmation. Some people discovered too late that the dealer failed to forward their payment, leaving them with no coverage months after they signed a contract. Contact your local or state consumer protection office if you have reason to believe that your contract wasn't put into effect as agreed.
