Thursday, March 09, 2006

Extended Warranty Scams

I love my car.
Let me be more precise. I absolutely LOVE my car. It is the modern version of the car I have wanted since I was a kid. I have always loved Jaguars, and the E-Type Jaguar was the sports car of choice back then. Now Jaguar has the XK8 and it is even sexier, faster, more luxurious – and much more reliable than the older ones from the 60’s and 70’s and 80’s. Mine is a 1998 XK8 convertible in platinum silver, with chrome wheels, black soft top, and tan leather interior. The dash is all real burled walnut from door to door and top to bottom. It’s just a beautiful car to own and drive and in every respect. Looks, performance, luxury, handling, quality, and reliability.

But this is not a new car. In fact, as of this year, it is now 8 years old. Even though the mileage is only 76K, still, some aging has to be expected.
When the bumper-to-bumper warranty ran out a couple years ago, I decided to buy an extended warranty to continue coverage for another 4 years and up to 118K miles. In the 4 years I’ve owned it, I haven’t had to do any repairs, really. I replaced the tires when they were worn out, and a battery, when it had reached the end of it’s life, and the dealer replaced the throttlebody under warranty recall. That’s about it.

However, last week it started having trouble starting. I thought this was probably a fuel injector problem and checked my extended warranty, made sure it was covered, called them to get authorization to get it fixed, then took it to the dealer, Millennium Motor Cars in Plano. Later that day, I got a call from the dealer and they said that the starting trouble was because an engine mount had broken, which allowed the engine to shift, which broke the mass air sensor and the boot for it. Also, they noticed that the cam gaskets were leaking oil and that would cause the ignition coils to be replaced unless I fixed that right away. Also, they said that the lower control arms were cracked open and needed replacing before that got to be an expensive repair. The total was about $3,000.

They called the extended warranty company who promptly said they do not cover ANY of those things. I was flabbergasted. I know the warranty doesn’t cover normal wear and tear items like brakes, tires, batteries, windshield wipers, etc. But it’s supposed to cover all the mechanical and electrical aspects of the car besides those. Well, I got out my policy and read the fine print. Nope, it was true. Amazingly, these things were NOT covered. I showed the policy to the dealer service manager. He read it and commented that they had been very clever and had only covered things that would probably never fail. He said, “All the things likely to fail are excluded. Like all these after-market warrantees, this is worthless to you. A complete waste of money. These are all ripoffs. In fact, if they ever somehow miraculously get stuck having to supply a part, you’ll find in the fine print that they are allowed to use used parts, so they get one from the junkyard sent over to install. You’re better off just canceling it and getting whatever money you can back for this.”

Disappointed, and feeling cheated, I told him thanks for telling me, but do not do the work on my car. I don’t want to pay $3,000 for repairs right at the moment.
So they charged me $400 anyway just to take my car back because they did the diagnosis to tell what was wrong with it, and they did do an oil change. The oil change was $100, and it was about $300 just to tell me what was wrong with it.

I then took it to my friendly local car mechanic, Brian Tyson, and Brian’s Auto Repair. He is the most honest car repair guy I’ve ever met. I’ve had him fix both my vans for years, but this was the first time I ever brought the Jag to him. He said he’s look at it, and let me know.

Brian called me later and said, “The engine mount does need to be replaced, but the mass airflow sensor is fine, and I can fix the boot with just a larger washer. And there is no oil leaks from the cam gaskets, or anywhere else, and the lower control arms are fine. He fixed the car for me and the total bill for parts and labor was $233. Less than 1/10th the $3000 the dealer wanted to steal from me.

My God, what a ripoff! The dealer AND the extended warranty company. I will never go back to that dealer again, and I will certainly cancel my useless extended warranty and get back half the $2600 I paid for it. I hate being cheated and lied to!

But this is not unusual for either dealers or extended warranty companies.

Extended warranties are almost always a bad deal. I thought I had an exception because of the high cost of maintaining a Jag. I felt that if I even had one repair in the next 4 years of coverage then it would have paid for itself. But I was fooling myself. I know better – it doesn’t work like that.

The fact is that these warranty companies would go broke if they paid out more than they brought in from premiums. So they have run the statistical probabilities of repair on the covered items, and the best, most expert actuaries they could find determined that the covered items would NOT need to be paid out, and so they offer the warranty tailored specifically to steer around the items that will fail and cover the other ones. And they word the contract to make sure they are protected.
They are working from a position of knowledge and statistical experience. You are not. You are working from a position of ignorance and hope. You are going to lose.
They have all the advantages. They know every thing you don’t. They are willing to take a bet that those things will not fail in that time. You are betting they will. They win almost every time – that’s why they are still in business. Otherwise, they would not be.

When I bought this house 2 years ago it was brand new and all the appliances were also brand new – but only warranteed for 1 year. So 1 year after I had moved in, I received notices from the manufacturer that I was supposed to now buy extended warranties on the dishwasher and the fridge, and the microwave, and the oven, and the stovetop. And it was about $100 for each item for a 1 year extension. I thought this was ridiculous. These large appliances should last 15 or 20 years – maybe longer. At this rate, in 5 years, I will have paid enough on the dishwasher to have bought another one.
Again, the extended warranty company is making a huge profit by preying upon people’s fears that it will fail, but meanwhile they charge a rate that guarantees they make enough to cover the replacement cost 3 times over. Then when they feel they are getting close to having to replace it, the refuse to renew the warranty. They only offer it when they know they will not have to pay out. That IS how insurance works, of course. That is the only way they can make a profit.

But there are exceptions. When I bought my iPOD and my daughter’s iPOD I paid the extra $65 each for the Applecare warranty. But I replaced my iPOD twice, and my daughter’s was replaced 5 times in less than 1 year. She has the 20 gig model and that seems to be a problematic model. So it’s paid off in this case – but most of the time extended warrantees are a bad idea to buy. Ever wonder why they always push the extended warranty whenever you buy ANYTHING at Best Buy or CompUSA? Because it’s the biggest profit item for them. Since they know you won’t be able to really collect on your claim, it’s pure profit for them.


At 7/22/2006 11:25 PM, Blogger Tam said...

Great article! I really appreciate all the thought you put into this and the great stories you have told here. I too have had experiences both ways with extended warranties. I have said yes to some and no to others. It always felt like I was gambling in Vegas as to whether it was worth it or not. And in most cases yep, it was a gamble.

The one thing that has panned out to be a good investment for me, and I kid you not, is the extended car warranty. I have had probably a dozen different cars in the last 20 years and only one of them didn't give me serious problems. Not sure what that says about the mechanics that I had check out the cars I bought, but MAN I wish that I had those extended car warranties on them.

Now I am not talking about the ones the Dealers offer, nor am I talking about the 'certified cars' crap that the Dealers try to sale you too at a high mark up. Those I have found personally, were not worth it. But what you can do is find an outside car warranty that is less money, covers way more, and you can sleep at night. But it takes you doing your homework do find those and most people find that a very overwhelming task. For me, it was worth it and if I am not buying new, I will find one that I do think is worth the price tag, and NOT from the Dealer. Just too much of my own experience.

As far as the other items, I do agree with you, and they are a huge money maker for most companies these days.

Thanks again for the great article here!

At 7/23/2006 6:55 AM, Blogger Val Serrie said...

As someone selling used car extended warranties, I can easily imagine that you would take umbrage at some of the things I have said here, but you didn't. You remained polite and non-confrontational. Good for you, and thank you.
However, my experiences and logic have told me that car warranties can only make money for the warranty company if they can collect the premiums without having to pay out claims.
Therefore they must be engineered to either only cover parts which do not fail, or else charge a high enough premium to still make money even after paying out on claims. Since that second approach would make them less competitive in the marketplace, I have to assume it is the first.
I think the Service Manager at the dealership was probably right and most of the after-market warranties probably are not a good deal for the consumer.
That is whether it is bought through a dealer or separately. I imagine the dealer adds a significant markup to it so it's even less of a deal.
The original manufacturer's warranty, however, may be different, since there is a different incentive there. They are trying to sell a car.
Kia offers a 10 year warranty. That tells me that they are pretty sure that that car is not going to have any major problems for at least 10 years. Otherwise, repairs would erode their profitability on the car too much.

If that is not the case, then they are foolish and this will cost them a huge penalty and possibly put them out of business.

The same basic insurance principle applies. Only offer insurance when you think your risk is low. And offer it to people who think the risk is high. And back up your assessment of the low risk by doing actuarial studies on failure rates, etc. They can't afford to simply guess. They have to know for sure.
The consumer is the one who is guessing because they don't have access to the actuarial tables and the results of the statistical analysis.
So if the warranty provider has all the knowledge and the consumer has none, but just an emotional feeling, guess who is going to come out ahead?


At 8/09/2006 9:29 AM, Blogger Here to Help - Information You Need said...

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if you get a drawn-out extended warranty for your car, you'll sleep better knowing that should anything go wrong it can be repaired. Not to mention that you will have the repair shop that you need and the company you drafted your contract with will pay for the cost. Due to normal and more taxing driving, it is undeniable that automotive parts will erode, damage will be caused from the heat, and components that once worked will no longer be in working order. A complete car warranty will keep you from panicking if something happens to your vehicle, plus, you're able to think about other things than if you have the cash to have your vehicle in the shop.

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At 2/24/2008 7:45 PM, Anonymous Mike said...


Having years of experience with extended warranties, there is no such thing as an all inclusive warranty, especially when you are out of factory warranty, and getting up there with mileage, but you have to know what is included and what isn't before you make purchase.

Few know the insiders information on industry, and how can you trust a car salesperson? Most don't, so who do you trust, trust yourself, become a FREE distributor with a top Warranties-For-Less wholesale discount direct distributor and learn everything you need to know about extended warranties, then sell yourself a warranty and save $500. to $1,000. and know what you are purchasing, inside and out, every detail, all the small print, this is the way to purchase an extended warranty, trust no one except yourself.

At 6/05/2010 8:25 PM, Anonymous Eva S. said...

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At 10/01/2010 12:39 AM, Blogger Doli said...

Thanks for your guide. I got my car Windshield replaced from Bulls eye.

At 10/15/2011 6:32 PM, Blogger highvision said...

Geez, notice how you post about your poor experiences with "extended car warranty", and service contracts. Suddenly there are several follow up posts that lead into advertisement links for auto service contracts... Plus their English is poorly written ramblings. With run on sentences, and no capitalized 'I's.

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During the Asian financial crisis, Kia declared bankruptcy in 1997; in 1998 Hyundai Motor Company acquired 51% of the company outbidding Ford Motor Company which had owned an interest in Kia Motors since 1986. After subsequent divestments, Hyundai Motor Company owns less than 50% of the company.
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