Saturday, November 01, 2003

Sorting Out Service Obligations

Service agreements – factory warranties – mechanical breakdown policies. Administrator, dealer or manufacturer obligor. Does it really matter to end users which kind of policy they’re buying or who guarantees it? You bet it does. And an F&I manager needs to know the difference in order to provide the best coverage for each customer and make the sale.

The Magnuson-Moss Act of 1975 defined a service contract as an agreement between a customer and the obligor to cover certain items for a specified amount of time or mileage. The service contract is sold after the vehicle purchase and is always “cost extra”. It is this separate cost that primarily sets the service contract apart from the factory warranty which is limited in scope and considered part of the basis for the bargain, or sales price, of the vehicle. Most automobile manufacturers deploy factory representatives to market their proprietary service agreements to dealerships.

A service contract obligor is typically determined by the dealer's arrangement with the service provider and can be any one of the following.

(1) Administrator Obligor. In this instance, the master obligor is the service contract administrator. The service policy describes this arrangement in the first few opening lines: This contract is between the customer and ___________ (Administrator) to cover the listed coverage for the specified time. , Repairs are usually approved at any licensed mechanic shop. Claims are paid by check or credit card to the repair facility.

(2) Dealer Obligor. Applies when the master obligor is the dealership. The policy contract will read: This is a contract between the customer and the selling dealer. The contingent liability for performance lies solely on the dealership. Although the plan administrator will answer the 800 number and facilitate claims, if they go out of business the dealership is responsible for completing the obligation to the customer. These claims are also paid via check or credit card to a licensed repair facility.

(3) Manufacturer Obligor. Establishes the Original Equipment Manufacturer (OEM) as the master obligor. The contract specifies: This is a contract between the customer and ___________manufacturer to cover ___________ for the specified amount of time or mileage whichever terminates first. The policy usually provides for genuine factory parts, and payment is made through a balance forward account statement to factory-authorized service facilities.

Administered by an insurance company, a mechanical breakdown policy covers specified mechanical parts of a vehicle. Credit unions, insurance companies, and certain lending institutions that have no service facilities sell mechanical breakdown policies. The insurance company assumes full responsibility for performance. Anyone who sells this policy must have a physical damage insurance license and receive compensation based on a percentage of the premium, as they do with any type of insurance.

Service agreements are often confused with mechanical breakdown insurance, yet the difference in performance is fairly simple.

Service agreements make direct payments for repairs to the garage on behalf of the customer, while many mechanical breakdown insurance policies are paid by reimbursement and the person processing the claim may or may not know about the particular vehicle under coverage.

Service agreements usually have a deductible, applied on a per visit basis. The deductible for a mechanical breakdown policy may be applied to each component.

Both service contracts and mechanical breakdown policies typically have “betterment” clauses, which customers seldom review prior to purchase unless an F&I Manager brings it to their attention. It is important for customers to understand that the purpose of insurance is to “make whole” rather than to “make better”. And it is in everyone’s best interest for customers to know that they may be responsible for the money difference in that distinction.

When providing service agreements to high-risk credit customers, lenders usually want the best coverage available and prefer that the policy period match the loan term. Eliminating repair expenses can be a huge step in putting these customers on the road to a better credit rating.

Service agreements generate customer loyalty and build customer retention. Every customer should have the opportunity to purchase this valuable protection. In those rare instances when a customer declines coverage, the dealership should have a signed waiver on file.

World of Special Finance, Nov/Dec 2003, p. 38