Monday, May 01, 2006

Did You Want an Extension With That Warranty?


WHEN Russell D. Ollie Sr. bought an extended warranty for his 1999 Volvo, it worked out well for him for a while. He paid far less for the protection than the warranty company paid in repairs. But he also did not gain the full benefit of the plan: the company, Warranty Gold, filed for bankruptcy in 2003, just a year after Mr. Ollie made his purchase.

"It was easy for me to get the repairs completed, and the dealer always got approvals for the charges right away," Mr. Ollie of Sammamish, Wash., said. "I was glad I got my money's worth before they went belly up."

Mr. Ollie spent $2,150 on a seven-year (or 100,000-mile) extended warranty from Warranty Gold, of Austin, Tex., for the Volvo S80 T6, just before his four-year (or 50,000-mile) factory warranty expired. The purchase paid off when Mr. Ollie had to replace the Volvo's valve springs and repair its security system. The parts alone cost $4,000, but both parts and labor were covered by the warranty. Mr. Ollie was so pleased with his savings that he praised Warranty Gold in online forums at Edmunds.com.

But in 2003, when Warranty Gold filed for bankruptcy, it left thousands of car owners like Mr. Ollie without the extended coverage they had purchased. Warranty Gold's bankruptcy occurred when the National Warranty Insurance Risk Retention Group, its backer, was liquidated. Neither company is doing business today.

Buying an extended warranty for a vehicle can be a tough decision for consumers, whether purchasing one for a new or used car. Consumers can buy an extended warranty and never have to use it making them question its value. Or, like Mr. Ollie, they may feel they got their money's worth.

New cars are always sold with a manufacturer's bumper-to-bumper warranty that covers everything except damage by routine wear and tear. These warranties usually range from 3 years (or 36,000 miles) to 5 years (or 60,000 miles). In general, new cars have longer warranties for their powertrains and for corrosion.

Extended warranties fall into two broad categories: those sold and backed by the vehicle's manufacturer and those offered by independent aftermarket companies. Extended warranties backed by the automaker can be purchased only from a factory-franchised dealer, but they typically must be bought before the original bumper-to-bumper warranty expires.

Any vehicle protection plan not backed by the manufacturer is known as an aftermarket warranty; these are sold for both new and used cars. Many used vehicles come with a dealer warranty that may last up to six months; often, the dealer also sells an aftermarket extended warranty. Even if the consumer declines that coverage, he or she can buy a warranty independently through some mechanics, insurance agents and Internet-based companies.

Companies offering extended warranties provide several levels of policies, ranging from major mechanical parts to bumper-to-bumper coverage that is similar, and sometimes even more comprehensive, than a vehicle's original factory warranty. Prices are based on the consumer's choice of coverage, the deductible (usually zero to $200) and the duration (like 5 years or 60,000 miles). Prices typically range from $1,000 to $3,000.

"The biggest misconception about extended warranties is that they are insurance policies," said Daniel Ryan, vice president of A. M. Best, an insurance rating company. "They are actually service contracts that are sometimes backed by an insurer."

This means that if a consumer files a claim for reimbursement, the warranty company may or may not have the money to pay; the warranty companies are not regulated by the federal government. While most states require these companies to be licensed, only a few including California and New York regulate them like an insurance business, monitoring their financial status and requiring them to file rates.

Anyone who has bought a new car from a dealer has probably spent a few moments listening to a salesperson promote additional services, including extra warranties, as the sale closes. Dealers hope that consumers will buy on impulse.

"Buying an extended warranty is a major purchase," said Philip Reed, senior consumer advice editor at Edmunds.com., the auto information Web site. "It's not a decision that should be rushed into."

While Edmunds.com and Consumer Reports generally advise against extended warranties, these may make sense if the buyer plans to keep the vehicle after the factory warranty expires or if the car has high mileage or a poor reliability record.

Useful resources are the online reliability ratings published by Consumer Reports, which cover the current model year as well as the previous seven, and the True Cost to Own feature at Edmunds.com, which projects repair costs. At http://consumercenter.jdpower.com, buyers can see ratings of vehicles based on owner surveys. It is a good idea to check a used vehicle's repair history with a service like CarFax.com, as well.

When Randy Corr of Alamo, Calif., bought a new Chevrolet Corvette in 2001, he knew it might have reliability issues. So he paid $1,250 for a six-year, 60,000-mile extended warranty from General Motors. "I've had two repairs since the factory warranty expired that totaled $3,200 in parts alone, so I'm definitely glad I got it," he said.

Internet-based aftermarket warranty providers usually have lower rates than a warranty sold by dealerships, which add 10 to 30 percent to the cost, said Jan Kelly of Kelly Enterprises, a training firm that works with auto dealers. "By selling an extended warranty, dealers are taking on some of the liability associated with that provider, and opening themselves up to possible issues down the road, and they mark them up as a result," she said.

With aftermarket companies, however, it is sometimes hard to obtain all the information a consumer may desire before buying. One provider, Warranty Direct of Uniondale, N.Y., said it was insured by a company rated "A" by A. M. Best, but it did not identify the company on its Web site.

Another provider, Continental Warranty of Los Angeles, said on its Web site that it was insured by three different companies, but its salespeople said they would not give consumers copies of contracts to review unless deposits had been made.

Warranty companies can have financial problems that leave consumers like Mr. Ollie without the coverage they purchased.

Mr. Reed of Edmunds.com said that buying an extended warranty was a way to purchase "peace of mind."

"Be sure to understand what components your factory warranty covers, and for how long," he said. "And then do some research on reliability to determine what you might pay in repairs. If you don't have peace of mind, then start shopping and research the companies carefully."

By TARA BAUKUS MELLO
Published: May 28, 2006
New York Times