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The State of California - State and Consumer Services Agency

LEGAL AFFAIRS
400 R Street, Suite 3090
Sacramento, CA 95814-6200

Legal Guide K-2

SHOULD YOU BUY A SERVICE CONTRACT?

September 1993

You have just decided to purchase a new television set -- or car -- or washing machine -- or VCR - and now the salesperson wants to know if you want to buy a SERVICE CONTRACT.

This legal guide will help you decide whether to purchase a service contract at the time you purchase the product. Since you have 30 days (and perhaps more) to cancel your purchase of a service contract on a motor vehicle, home appliance or home electronic product, this guide also will help you decide whether to exercise your 30-day (or longer) right of cancellation.

What Is a Service Contract?

A service contract is a contract to perform services related to the maintenance or repair (or both) of a consumer product.

Increasingly, service contracts are offered for sale with the purchase of many kinds of products, both new and used. They are sometimes offered by the retail seller, but may be offered instead by the manufacturer or some other company. They oftentimes are offered by mail after you have completed your purchase.

Service contracts are sold under many names -- "extended warranty," "maintenance agreement," "protection plan" or "service contract." Sometimes service contracts are sold to extend the manufacturer's warranty, or are sold in place of a manufacturer's warranty. They are like a warranty, except that you pay extra for the protection, and the repairs may be performed by some other company.

Service contracts sometimes may be sold as additional (and sometimes overlapping) protection while the written warranty is in effect, or as protection when the manufacturer doesn't provide a written warranty, or as protection after the warranty period ends.

A service contract is defined by federal law as a contract in writing to perform, over a fixed period of time or for a specified duration, services relating to the maintenance or repair (or both) of a consumer product. (1)

Service Contracts-To Buy or Not To Buy

To many consumers, buying a service contract is like buying "peace of mind" from repair cost hassles. However, some service contracts provide protection that is available free under warranties, or they may cover the period while the product is new and perhaps least likely to break down. Other service contracts actually may provide very little protection at all, either because of the exclusions from coverage or because the company that is obligated to perform the services doesn't carry out its promises.

Yet products do break down and need to be repaired, and when they do, repair costs can be substantial. If the needed repairs are not covered by the manufacturer's or dealer's warranty, a service contract may offer real and important protection. Yet some studies indicate that the cost of a service contract may be much more than the repairs probably would have cost. For example, a Massachusetts Institute of Technology study concludes that the cost of a service contract for a television is 10 times greater than the average cost of repairs, and that the cost of a refrigerator service contract is almost 16 times greater than the average repair costs.

Nevertheless, there are some good reasons why you may want to buy a broadly-protective service contract that is backed by a reputable company:

• SECURITY. Buying a service contract is like buying an insurance policy that provides protection against future repair costs. Some people feel more comfortable knowing that the repair costs will be taken care of, even if they pay a comparatively high fee to obtain the protection.
• HIGH RATE OF REPAIR. Some people find that they often end up with unusually high repair bills for the products they buy. If you have high repair bills because products that you buy break down frequently, a service contract may be a good idea. However, you also may want to examine the kind or quality of the products you buy and how you use them.

Create Your Own Service Contract

As an alternative to buying a service contract, you could deposit the money you would have spent on a service contract into a bank. In a bank, the money will draw interest and can be withdrawn to pay for repairs as needed. If repairs are not needed, you have created a savings account.

Service Contract Disclosures

You should always read, examine and understand any service contract before buying one. The law requires the seller to allow you to inspect the contract, or a descriptive brochure, before you commit yourself to purchase it.

The law also regulates the contents of service contracts. The law states that a service contract must list its terms and conditions in simple and readily understood language. (2)

The law also provides a benchmark for service contracts on home appliances and home electronic products. The service contract must include a statement that, except as otherwise expressly provided in the contract, the contract obligates the service contractor to provide to the buyer of the product all of the services and functional parts that may be necessary to maintain proper operation of the product under normal operation and services for the duration of the contract and without additional charge. While the service contract also can include conditions, limitations and exclusions, those are legally ineffective unless they are spelled out in the contract in simple and readily understood language which is displayed as conspicuously as the benchmark language in the preceding sentence.

The service contract also must contain a description of your cancellation rights (at least 30 days and possibly longer), and a great deal of other important information. (3) If your service contract covers a home appliance or home electronic product, it must include a statement of the service contractor's general obligation together with any exceptions.

Therefore, before purchasing a service contract, or deciding not to cancel a contract you've purchased, it's important that you know your rights under the contract and understand what you are buying. Remember that there is no such thing as a "standard service contract;" the benefits and protections you receive depend entirely on the language in the service contract. Like most things in this world, there are both good service contracts and bad ones, and there are many whose price is unfairly high and then whose price is probably reasonable. Here is what you should look for:

1. What the service contract covers.

• How does the contract describe the product?
• What components are included and what are excluded?

2. When the contract term begins and ends.

• Does it begin on the date of purchase, or some other date?
• Does it end after an elapsed period of time, or mileage, or some other measure?

3. Is the protection limited to the first buyer or lessee, or can you transfer the service contract?

• Are there limits on transfer or assignment?
• How will these limits affect you or your ability to sell the product?
• Is there a transfer fee?
• How are transfers made?

4. What are the conditions, limitations and exclusions?

• Who decides if the repairs are covered?
• Are manufacturing defects covered?
• Are breakdowns due to normal wear and tear covered?
• How is the cause of the product's failure determined?

5. What does the service contract give you that the warranty does not?

• Are you buying protection already provided by the manufacturer's or seller's warranty?
• Compare the service contract with the warranty to see if the added coverage is worth the additional expense.

6. What is the total cost of the service contract?

• How much does the service contract cost?
• What other costs will you have (transportation, shipping, labor)?
• Is the full charge for each repair paid, or only part of the charge?
• Do you have to pay a set fee (a "deductible") each time you have product repaired?
• Is there a maximum dollar amount for all repairs covered by the contract?

7. Where must the product be serviced?

• How do you get service?
• Must you return the product to the selling dealer? This may not be what you want if the dealer has not been able to repair the product previously, or if you live far from the dealer.
• What happens if you need to have the product serviced while you are away from home?
• Do you have to get permission for repairs in advance?
• Is there a cancellation fee?
• How are refunds calculated?

8. Who is legally responsible for the contract?

• Where is the firm located? (Often the company's name on the contract means that it is merely the "administrator" of the contract.)
• What must you do to keep the agreement in force? Is regular maintenance required? Do you have to keep a record of the maintenance of the product?

9. Can you purchase the service contract later? If so, take the time to think about it.

Appliances

Appliance service contracts are offered by manufacturers, retailers, repair shops or independent firms. Sometimes an appliance service contract is referred to as a "maintenance agreement" or an "extended warranty."

Some appliance service contracts have an increasing "premium" or fee each time you renew it. So as the value of the appliance decreases through depreciation, use, and old age, you pay more for the service contract to cover potential breakdowns should the item even need to be repaired. At some point, the cost of the service contract may be more than the product is worth. At this point, you should replace the appliance if it needs expensive repairs, rather than buy another service contract.

Before purchasing an appliance service contract, read it carefully. Identify what is included, what is excluded, and what your obligations will be to keep the contract in force. Also, find out:

• Where the appliance will be serviced.
• Who is responsible for transporting or paying shipping costs of the appliance to and from the repair shop, or the travel time of the repair person.
• Who is responsible for appliance installation and any re-installation costs.
• Whether consequential damages, such as the food ruined in a broken freezer, are covered by the contract.

Automobile Service Contract

When purchasing a motor vehicle, there are many separate but important decisions that will occupy your mind -- the sticker price, the purchase price, the options, your trade-in, the downpayment, and the financing.

There also is a space on the purchase contract for the price of an extended service agreement (or a service contract). If checked off, the price of the services contract is added to the price of the vehicle.

Sometimes the dealer seems to be as much interested in selling a service contract as he or she is in selling a car -- evidence that the dealer will earn an extra commission for selling a service contract.

Before you buy a service contract, the dealer must let you look at the contract itself. If you purchase the service contract, the dealer must give you either a copy of the contract, or a brochure that describes in specific detail the terms, conditions, and exclusions in the service contract. If you receive a brochure instead of a service contract, the dealer must give you a copy of the service contract within 60 days from the date of its purchase.

When you buy an automobile service contract, the law permits you to change your mind and cancel the contract. You may even receive a full refund of what you paid for the contract if:

1. You give a written cancellation notice to the person specified in the contract, and
2. You have made no repair claims against the service contract, and
3. You cancel within 60 days after you receive your copy of the contract if it is a new car, or within 30 days if it is a used car without manufacturer warranties.

Even if you do not meet these three conditions, you may still obtain a partial refund. If you make a repair claim against the service contract before you cancel during these 60-day or 30-day time periods, your "fund is based either on elapsed time or mileage (as stated in the contract). If you cancel the contract after the 60-day or 30-day time period, again the partial refund will be based on either elapsed time or mileage.

The company that issued the contract also may charge you a $25 cancellation fee, regardless of whether you have made a claim against the contract.

If you have financed the service contract along with the purchase of your vehicle, the company that issued the service contract may make its refund check payable to you only, or to your lender only, or to both you and your lender together.

Before Buying an Automobile Service Contract

1. Read the service contract carefully. Take it home and read it (even though you have a right to cancel the contract later). You usually do not have to buy the service contract the same day that you buy the car; after all, you do have the manufacturer's warranty.
2. If possible, shop around for a service contract. A service contract on the same car can vary greatly in price and coverage from dealer to dealer. The more expensive service contracts do not necessarily cover more parts or failures. Sometimes the price of the service contract can be negotiated. Also, your lender may offer a comparable service contract at a cheaper price.
3. Know the coverage limitations. A service contract generally covers fewer components and defects than does the manufacturer's warranty. Often an automobile service contract may not cover muffler, exhaust pipe, catalytic converter, hoses, plugs, light bulbs, engine fluids, shock absorbers, springs, equipment not installed by the factory, exterior damage, paint, tires, tuneups, scheduled maintenance, brake shoes and disks, and damage arising from an accident or to upholstery.
4. Some automobile manufacturers offer new car buyers the option of purchasing a five-year/50,000 mile service contract that starts the day the car is purchased. If the automobile already comes with a one-year/12,000 mile warranty, the buyer really is being offered the chance to purchase a four-year/38,000 mile service contract. During the overlapping period, the service contract usually excludes anything that the manufacturer's warranty already covers, but it may include some items that the warranty does not cover (for example, a rental car allowance under specified circumstances).
5. Compare the deductible and other coverage limitations. Some contracts impose a $25 - $100 payment for every repair, others have an overall coverage limit per repair (for example, $2,000 to fix an engine), and others limit the total amount of repairs for the term of the contract (for example, $6,000 for the five years of the contract).
6. Identify where repairs must be made. Some contracts require you to take the vehicle to any authorized dealer, and others require that you return the car to the selling dealer. If the selling dealer is a long way from your home or office, a requirement to take the vehicle to the selling dealer may be inconvenient.
7. Some contracts require you to pay for the repairs and then file a claim for reimbursement, while others will pay the repair shop directly. If your service contract requires you to pay for repairs out of your own pocket and then file a claim, be aware that the process often is time consuming, and you must have enough money to cover the repairs and wait for reimbursement.
8. Decide whether the price is fair. If you are not convinced that it's a reasonable price, then it's probably not.

Keep records of all maintenance and repairs from the date you purchase the vehicle. That's because you may be required to prove that the vehicle was properly serviced and maintained. Such record keeping also identifies what parts have been replaced while you owned the vehicle.

Endnotes

1. 15 USC Sec. 2301 (8) and Cal. Civil Code section 1791(1).
2. 15 USC Sec. 2306(B); Cal. Civ. Code Sec. 1794A.
3. Cal. Civil Code Sec. 1794.4.

Prepared by:

Richard A. Elbrecht
Supervising Attorney
Virginia J. Taylor
Staff Counsel
Legal Services Unit

NOTICE: We attempt to make our legal guides accurate as of the date of publication, but they are only guidelines and not definitive statements of the law. Questions about the law's application to particular cases should be directed to a specialist.

Department of Consumer Affairs
400 R Street, Suite 3090
Sacramento, CA 95814-6200

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