To Buy, Or Not To Buy ... A Service Contract
An “extended warranty” may not offer the full coverage you’re
hoping for. Here’s how to read between the lines
By Caroline Ajootian
uring boat-buying season each spring, consumers call the
BoatU.S. Consumer Protection Bureau asking whether
they should purchase extended warranties or service
contracts for the new boats and engines they’re contemplating
buying. They want to know if the promise of protection is really
worth the thousands of dollars these policies cost. The answer is
unequivocal: yes and no. Yes, if consumers fully understand policy
terms. No, if consumers believe the policies mean no cash outlay,
no hassle, and no limit in terms of covered breakdowns.
WHAT YOU NEED TO KNOW: An extended service contract is
an insurance policy that pays for repairs if the breakdown, failure, or failed component is specified as covered in the policy.
Problems excluded from or not specified by the policy are not
covered. No surprises there, this is no different from auto, marine,
homeowners, or health insurance. However, what makes marine
service contracts confusing to consumers is that they’re often
marketed as “extended warranties,” implying that the boat or
engine manufacturer will go above and beyond if problems occur,
even if the original warranty has expired. And, although policies
often bear the name of the manufacturer — Mercury Product
Protection, Volvo Penta Extended Protection Program, Brunswick
Product Protection, for example — the actual service contract
policies are usually underwritten by independent companies.
obligations help consumers in a big way
if a product is defective or if the manufacturer doesn’t live up to its obligations.
Take, for example, a marine engine that
breaks down due to a faulty water pump.
If the engine is under the factory warranty, the manufacturer will replace the pump
and cover damages caused by overheating.
Say the manufacturer got a bad batch of
pumps and the replacement fails for the
same reason — or even a third failure occurs
— a reputable manufacturer will take care
of it, along with the attendant damage.
Suppose, however, that the first water-pump failure occurs after the factory warranty has expired and only the extended
service contract is in effect. Water pumps
usually are covered components, so the
contract will handle repairs. But, damage due to overheating, regardless of
cause, may be excluded from the policy. The manufacturer
is unlikely to step in; the failure didn’t occur on its watch.
Service contract companies are obligated only to provide the
services described in their contracts. Many contracts have maximum payout limits for the total number of claims against the contract or even for repeat failures of the same component. Limits are
often based on the value of the covered product, in this case, the
marine engine. Service-contract underwriters can cancel contracts
when paid claims exceed the value of the engine. On the other
hand, warranty law allows manufacturers to make a “reasonable
number” of repair attempts before they’re obligated to provide a
replacement or refund. Before you buy a service contract, ask to
see the actual contract, not the sales literature. Service contracts
fall under some states’ insurance regulations. However, not all
view them as such, so consumers may have little recourse if claims
aren’t handled equitably or if the underwriting company folds.
DOLLARS AND SENSE: Cost is another matter that separates
service contracts from manufacturers’ warranties. The factory guarantee that comes with your boat or engine doesn’t cost anything
and is considered part of the “basis of the bargain” when a product
is sold. Service contracts are a great “profit center” for dealers.
Some contract plans administered by independent companies give
retailers the latitude to mark up contracts 100 percent and more
over the actual cost they pay to the service-contract company.
That’s profit earned just by getting you to sign on the dotted line!
Consumers get a better deal on service contracts that bear the
name of a manufacturer.
OVERLAPPING COVERAGE: Don’t be pressured into buying an
extended-service contract the same day you purchase a new boat or