Pulling Back the Curtain on Automotive Warranties
There are many different types of service contracts and coverage plans, among them “Listed Component Coverage,” so called “Listed Bumper-to-Bumper Coverage,” and “Exclusionary Contract Coverage.” There are also service contracts that are either self- insured, reinsured or directly insured by the provider. It’s not only confusing on paper, but in real-life enactment of the policies, unfortunately often to the policy-holder’s detriment. Educating yourself regarding these differences can save you some cash, and for many people, some potentially costly cynicism as well. Not all warranties are fool’s gold. Like the vehicles they protect, they come in all shapes and sizes, providing their buyers with varying amounts of protection and satisfaction. The key is clearly understanding your options, and then making a choice with same critical eye you used shopping for the vehicle.

Let’s start with listed component coverage. Many online providers and automotive dealers offer these “tiered” coverage plans. Usually there are three tiers of coverage.

Basic Powertrain
The first is basically powertrain coverage; the coverage is for the major components of the engine, transmission/transaxle and differential or final drive. This coverage is very simplistic and I do not recommend it for any vehicle still under the manufacturer’s basic warranty. Several manufacturers do offer extended drivetrain coverage, check your owner’s manual for the complete warranty coverage.

Powertrain Plus
Our second coverage is an extension of the basic powertrain coverage but will add other components. The additional components are usually steering, electrical, air conditioning, cooling system and fuel system parts. The coverage is more expensive than the basic powertrain coverage, but again is limited only to the parts that are listed. If a component is not listed, it is not covered.

“Bumper-to-Bumper” (notice the quotation marks)
What many online service contract providers and automotive dealers proclaim as true “bumper-to-bumper” coverage is really much less. This coverage will pick up seals and gaskets, hi-tech electrical components, more cooling, fuel, brake and air conditioning components, but this is still named component coverage--only the parts listed are covered and nothing more.

Above and beyond all the smoke and mirrors is the exclusionary contract, the only coverage that 5 Star Warranty offers! An exclusionary contract is just the opposite of listed component coverage. Every component on the vehicle is covered except what is specifically excluded. This is the most comprehensive coverage available. Most items that are not covered are normal maintenance items. Click on this link to view the coverage exclusions, taken directly from our contract: www.5starwarranty.com/coverage.cfm

With the complexities and advanced technologies engineered into vehicles today, we believe that this is the only coverage plan that will insure your vehicle is covered properly. Regardless of where you buy the warranty, this is your best bet.

There are three different ways that service contracts are insured. Service contracts (or extended warranties, the term is often used interchangeably) are self-insured, re-insured or directly insured by the provider or by a third party administrator.

The most obvious is self-insured, which means exactly that. The provider of the service contract retains a portion of the sale price of the contract, which is placed in a reserve account or trust account to pay future claims. This is a very risky way of doing business as claims can exceed collected premiums and force a company into financial insolvency.

Reinsurance is often the most deceiving, so we will go into a little more detail about it. Many providers of this coverage state that their plans are fully insured, but this could not be further from the truth.

This is how an RRG (Risk Retention Group) works: a group forms a company and in many cases they are the administrator of the service contracts. Most will have names that sound like an insurance company, but they are not. The easiest way to tell if a Risk Retention Group underwrites a contract is that it will have RRG after its name. The RRG will have their contracts reinsured by an insurance company with a positive AM-Best rating. You may see ”Re-insured by AM-Best A+ Insurance Company” on many websites or in a vendor’s brochure. An RRG is not regulated by the state insurance departments and has very little regulatory oversight at all. If a RRG goes in to bankruptcy, you would think that the re-insurer would cover any losses beyond the financial capacity of the insolvent RRG; unfortunately not. These agreements between the RRG and Re-insurer might pay only 5-10% of claims beyond the scope of the insolvent RRG. The service contract is an agreement between you and the administrator or provider, not the re-insurer. Many of the re-insurers in the service contract business are not even U.S. based companies. As far as RRG’s go, I do not know of any with a positive AM-Best Rating. Caveat Emptor.

Finally, there directly insured service contracts. There are only a handful of these providers on the Internet, in banks, credit unions and auto dealers.

A directly insured service contract is fully insured by an actual insurance company. The insurance company must have an approved filing for the products and services offered in each state they conduct business in. The state’s insurance commission approves the filings. Insurance companies insure a diversified range of products and also invest capital and surplus into diversified portfolios. This is done to protect the client’s investments. All admitted insurance carriers must file quarterly or annual reports with each state, in this case to ensure compliance with the respected state’s guidelines. States also have what is called a “Guarantee Fund.” All insurers remit premiums to this fund, which provides additional protection for policyholders.

Moody’s Investor Services, AM-Best, and Fitch and Standard and Poor’s all rate insurance companies. These rating determine the company’s solvency, financial strength and ability to meet future financial obligations. Many established insurance companies have been in business for over a century. The years of experience equate to a vast knowledge and understanding of the industry. This benefits the consumer by insuring the quality of the products or services offered. A major factor to keep in mind; is that a directly insured service contract is an agreement between you and the insurance company. This is the safest way to ensure that if you have a claim it will be paid.

So in conclusion, I recommend several things. Do your homework. Ask for an actual sample copy of the contract. Also make sure the contract is directly insured, and check with the BBB and Web Assured. Do not be afraid to ask questions. It’s your money, so take the time to make an intelligent decision. Remember, many surprises come well disguised.

I welcome any comments or questions via email or by phone regarding any of the above.
 

Bill Small President & CEO 5 Star Warranty bsmall@5starwarranty.com 1-800-449-3190

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