Twin Cities Consumers’ Checkbook: Vehicle service contract plans are bad deals for most drivers

Whether it’s rapper-turned-actor Ice-T or ESPN’s Chris Berman hawking plans from CarShield or robocalls warning that your car’s warranty is about to expire, you’ve likely experienced a sales pitch for a vehicle-service contract, also known as an extended warranty.

Annoyances aside, you’re probably wondering whether these plans are worth the cost. Judging by all the fine print gotchas and the staggering number of consumer complaints these plans generate, Twin Cities Consumers’ Checkbook concludes they’re not.

Checkbook has long advised against purchasing any type of mini-insurance policy, including home warranties, service contracts for electronics, trip-protection plans and others. These plans are highly profitable for the companies that sell and administer them but are usually awful deals for consumers.

Our review of auto-service contracts from dozens of sellers indicates their products are especially lousy buys. These companies commonly use misleading marketing to scare consumers into paying thousands for their products and then, when customers’ vehicles need repairs, go to great lengths to avoid paying for them.

How They Work

Prices for plans vary depending on the breadth of coverage; vehicle make, age, and mileage; and number of years (the longest terms are seven years or 100,000 miles). We found one plan priced at nearly $6,700 and short-term plans for around $2,500. But most of the plans we checked cost around $3,000 to $4,000.

Generally, the more you pay the broader your coverage. With some companies, paying more upfront lowers or eliminates per-repair deductibles, which are usually around $100.

CarShield and many other sellers don’t provide the coverage themselves. Instead, claims are handled by third-party “plan administrators.” If you need a repair, you contact the administrator, and it decides whether to pay for it. Get a repair without first obtaining authorization and you’re likely on your own.

Service contracts marketed by automakers through their dealership franchisees — though generally the subject of fewer complaints — usually require that you use the dealers’ repair shops. Our surveys indicate that, on average, car owners are more satisfied with repairs done by independent shops.

Gotcha! Many Repairs Aren’t Covered

Read the fine print in these contracts, as we did for more than a dozen, and you’ll find so many excluded repairs that you’ll wonder if anything is covered. Common components usually excluded: brake shoes and rotors; clutches; fuel injectors; exhaust systems and catalytic converters; batteries; shocks and struts.

Sometimes you can increase coverage by buying a premium plan, but even then, we found long lists of excluded repairs. You’ll also be on the hook for the cost of diagnosing anything that turns out not to be covered.

Your Repair Is Actually Covered? Well, Get Ready for More Roadblocks

Even if repairs seem covered under contracts, companies still often try to deny claims.

For instance, the plan administrator may conveniently decide the problem existed or was developing before you purchased coverage. Similarly, the administrator might conclude that you failed to take action to avoid or limit damage, such as driving the vehicle after hearing squeaks or rattles or seeing warning lights.

There’s also a good chance the administrator will refuse to pay out if you can’t prove you performed all required oil changes on time or otherwise followed the manufacturer’s maintenance recommendations. Beyond that, plans typically impose a waiting period of 30 days or 1,000 miles after you sign up, during which no repairs are covered.

As if all these aggravations aren’t enough, some plans limit the rate they’ll pay to reimburse your mechanic. And administrators sometimes take weeks or more to decide whether to pay as they send inspectors to assess the problem or wait for a required second opinion.

Denial of valid claims seems to be a much smaller problem for buyers of extended warranties sold by new-car dealerships.

Don’t Buy These Plans

You’ll usually do better paying for repairs yourself. That way, you get to make all the decisions, not a company focused on holding down its own costs.

Twin Cities Consumers’ Checkbook magazine is a nonprofit organization with a mission to help consumers get the best service and lowest prices. You can access Checkbook’s full report on vehicle service contracts, along with of Checkbook’s ratings of local service providers (including auto repair shops) until March 10 at Checkbook.org/StarTribune/Vehicle-Contracts.