Recent vehicle service contract scams prompted the CEO of a large provider of independent auto service contracts to send consumer-friendly advice to U.S. Sen. Charles Schumer, D-N.Y.
Larry Dorfman, CEO of Automobile Protection Corp. in Atlanta, sent guidelines for evaluating extended auto warranties to Schumer, who this year pressed the Federal Trade Commission to investigate companies that aggressively hawk vehicle service contracts over the phone.
The guidelines are aimed at consumers, but some could help dealers choose a vehicle service contract program. Dealers can get stuck paying claims when a program administrator goes out of business and doesn't have proper insurance.
"Dealers can really get taken," Dorfman says. "They need to know who the administrator is, not just the agent selling the program and who insures the program."
Most important, the dealer should make sure the contracts are insured from "day one, dollar one," he says.
Some administrators that failed had insurance that kicked in only after losses reached 120 to 140 percent of the amount held in reserve to pay claims, Dorfman says. Without surplus cash to pay the additional claims, the administrator would go out of business, and the customer would look to the dealer to make good on the contract, he says.
Dorfman also says the insurer should have a minimum of $100 million in assets and a rating of at least "A'' -- which equals excellent -- on the A.M. Best Co. scale that measures the financial condition of insurance companies. Dealers can check ratings on www.ambest.com.
Other red flags that could undermine relationships with customers:
-- A waiting period for coverage to begin. The company collects the premium one to several months before the customer has the right to use the coverage.
-- Excessive deductibles. Mechanical failures generally involve multiple parts and often more than one type of repair in a single visit. Dorfman's policy is that the customer should pay only one deductible per visit.
-- No refunds. Most state laws require a full refund of the unused portion of the contract based on contract terms and mileage, regardless of claims paid, Dorfman says. The administrator should not deduct the amount of claims paid from the refund, and the contract should allow a full refund for a minimum of 30 days, he says.
-- Unreasonable coverage limits. Look for limits to the number of claims, dollars per claim or maximum amount of claims the contract will cover.
"One warranty marketer sold a $1,900 contract with a maximum claim of $1,500 and the total that could be paid out was $3,000," Dorfman says. "There's no conscience out there."
