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.