Vehicle service contracts: Are they worth it?

September 19, 2011 8:00:07 PM PDT
It's a question we're asked almost every time we make a big purchase, "Would you like to buy an extended warranty?"

The issue came up when a San Jose man asked 7 On Your Side for help getting a refund on a policy he had cancelled. The law is clear on how to get out of a contract and what the consumer has coming.

John Mulea purchased a 2008 Infiniti 4-door sedan at a parking lot sale sponsored by Alliance Credit Union in San Jose. He also purchased three additional protection plans for theft, paint and gap protection for an additional $4,300.

"The bottom line is very simple," explains Consumer Action's Joe Ridout. "The most careful study of vehicle service contracts was done by Consumers Union. These service contracts are very lucrative for people who sell them, but a terrible value for consumers."

Consumers Union concluded for every dollar consumers spend on these contracts, they get back 70 cents in benefits. Gene O'Neal of the Better Business Bureau puts it a different way.

"You're buying a service contract and you really got to get into that contract and see what it covers because there are a lot of exclusions," says O'Neal. "There's a lot of hoops you may have to jump through."

A survey of 660 complainants to the Better Business Bureau found nearly $400,000 in claims were denied and only $27,000 paid out. The Missouri attorney general called the reasons for many of the denials questionable and even frivolous. On top of that, there can be high deductibles.

"You may have deductibles that kick in on multiple levels," says O'Neal. "So you may be paying the deductible for taking the vehicle in one time and paying two or three deductibles."

Under California law, you are entitled to a refund if you cancel within 30 days of purchasing a service contract. After 30 days you're entitled to a prorated refund. You can put in your refund request with the seller or administrator. If that fails, contact the insurance company directly.

"If the insurance company fails to resolve the matter, then you should contact the California Department of Insurance, which would regulate the insurer," says Ridout.

Mulea purchased both the car and the service contracts from Autowest Honda in Roseville. He had concerns about the price he paid for the service contracts and cancelled in less than 30 days. When he didn't receive his refund after two months, he called 7 On Your Side and we were able to help get him the last $1,300 of his $4,300 refund.

Autowest Honda in Roseville declined to comment for this story and Alliance Credit Union said it had nothing to do with the service contracts.

One added note, Consumer Action suggests that instead of buying a service contract, put that money into an account for emergency repairs.

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