Preface | User's Guide | Table of Contents

Consumers are often given the opportunity to purchase a "service contract" or "extended warranty" when buying a major appliance (such as a refrigerator) or a motor vehicle (new or used). While these types of "durable goods" typically come with manufacturers' warranties, the warranties may not be "full" warranties (refer to the section on Warranties for more information). A service contract or extended warranty may cover parts and labor not included in the manufacturer's warranty and may even extend the manufacturer's warranty for a longer period of time. Buying a service contract or extended warranty is an optional purchase. Whether or not you buy the service contract or an extended warranty depends on how reliable you believe the item you have purchased will be.

Some consumers purchase this extra warranty protection to discover that the service insurance acquired was less than represented. This problem sometimes arises when the retailer of the merchandise sells the service contract or extended warranty but the actual performance under the warranty is provided by some other company. New Hampshire law provides consumers some level of assurance regarding the scope of coverage of so-called "third party" extended warranties.

Example: Chuck buys a new ArcticAire refrigerator with a 1-year parts and labor manufacturer's warranty from Kumongos, a local appliance store. The salesperson at Kumongos persuades Chuck to buy a 3-year extended warranty for $250. The extended warranty contract is issued by Soongon Co. of Kansas. Two years later, Chuck is dismayed to learn that his refrigerator needs a new compressor. He is even more unhappy when he discovers that the manufacturer's warranty is expired, Kumongos has closed its doors and Soongon Co. has filed for bankruptcy.

The Law

RSA 407-A governs service contracts or extended warranty agreements. A service contract or an extended warranty can be set up either as a "contract of insurance" or a "non-insurance" warranty.

The New Hampshire statute requires that an extended warranty agreement which is a so-called "contract of insurance" be offered only by a licensed insurance agent. This type of contract is further subject to a broad range of regulations and bonding requirements through the New Hampshire Insurance Department.

A "contract of insurance" operates very much like a regular insurance policy, such as a car insurance policy, which spreads a particular risk of loss among a pool of people. The pool would consist of all those insured by the issuer who pay into the pool to cover those who have losses. Therefore, if 30 people buy the same extended warranty from a single issuer, the issuer should pool money from those 30 people into a trust. This trust would pay any individual who suffered a loss. In theory, individual claims (losses) would never exceed the total of the pooled funds. If this does happen, the insurance company is liable for the excess (insurance companies are usually required to either post a bond or otherwise satisfy the Insurance Department that they can meet any anticipated obligations of this kind). This "sharing of risk" approach, together with state review of the financial status of insurance companies, is intended to ensure that money is available to pay consumers' claims under the "contract of insurance" type of service contract or extended warranty.

Some extended warranty agreements, however, are not insurance contracts. Under New Hampshire law, dealers and manufacturers may issue "non-insurance" extended warranties through agents. The issuing company absorbs all the money paid by consumers for their contracts and no payment pool is ever created, so that the "risk of loss" is not shared by anyone other than the issuing company. RSA 407-A recognizes that this type of contract poses a greater risk to consumers. The primary risk is that issuing company will either go out of business or be unable to pay claims for some other reason. For this reason, the New Hampshire statute requires dealers who issue any warranty agreement that does not qualify as "insurance" through a shared loss pool to post a $50,000 bond with the New Hampshire Insurance Department before any service contracts or extended warranties can be offered or sold in New Hampshire.

If the issuer of a "non-insurance" warranty contract breaks any promises that it has made in the extended service contract, the consumer may sue for damages, costs and attorney's fees and may call upon the New Hampshire Attorney General to bring legal proceedings for the bond to be used to pay the damages. Unfortunately, where there are many consumer claims against a single bond, there may not be enough money from the bond to pay off all the claims.

In addition to licensing and bonding requirements, RSA 407-A requires that any person or company issuing an extended service contract must file a copy with the New Hampshire Insurance Department. The department can rule that any term in an extended warranty or service contract, whether or not it qualifies as "insurance," or is "unjust, misleading or deceptive."

When an issuer of an extended warranty contract fails to pay on a contract, you should first check the contract to see if there are any "deductibles" (i.e., an amount you pay before the insurance coverage begins). If the issuer will not pay for a claim, address your problem first to the issuer's customer service department. Explain the situation to the customer service representative, providing the name, address, and telephone number of the dealer or any other person who sold you the warranty. (For tips on presenting your case effectively, refer to Remedies: Effective Negotiation)

Should You Buy An Extended Warranty For Your New Or Used Car?

When you purchase a car, especially a used car, the dealer may ask if you wish to purchase an extended warranty. Before you decide whether to do so, you should get as much information as you can about the warranty itself. Here are some things you should know about extended warranties in general.

1. What is routinely called an "extended warranty" is not really a warranty, but is what is properly referred to as a "service contract." The difference is technical, but it is also important. A warranty has two parts:
   1. A statement by the seller or the manufacturer that the car is free from defects in materials or workmanship.
   2. A statement that in the event such a defect should become evident within a defined period of time, the manufacturer will repair the defective part for free.
2. A service contract is not a warranty at all. No service contract makes any statement relating to the condition of the car, and no service contract makes any mention of defective parts. It is simply an insurance policy that is meant to pay the repair bills when your car breaks. That is why a service contract is also sometimes referred to as "breakdown insurance."
3. Like all insurance policies, service contracts have conditions attached. Typically, your health insurance company requires you to go through certain steps before it will pay for your trip to the doctor and it may not cover all visits to the doctor's office. Similarly, your service contract may require you to go through specific steps before the company will pay for the repairs to your car, and it may not cover everything that goes wrong with your car.

You should not buy a service contract without reading it carefully!

Some expensive parts may not be covered by the contract, or there may be "escape clauses" which allow the service contract company to avoid paying for an expensive repair.

Contracts which require you to prove that you have kept up with an unusually rigorous maintenance schedule before it will pay for the repairs should be avoided.

Another common "escape clause" is one which covers "internally lubricated parts," but only so long as all seals, gaskets, etc., remain intact. This way, if a $4.00 transmission seal leaks oil and you do not see it and fix it before the transmission is damaged, the service contract company may not pay for your $1500 (or more) transmission repair.

Example: Betsy has just bought a 2005 Porcine Excellante SUV. Tina, the salesperson, tells Betsy that she really needs to get the service contract to protect herself. Betsy reads the service contract that Tina gives her and discovers that the service contract requires her to:

• Get her oil changed at the dealership every 3,000 miles or the coverage is void
• Prove in advance of any covered repairs that she has kept up the required maintenance schedule.

She also discovers that replacement of damaged or defective seals and/or gaskets is not covered. Finally, the contract will cost her $2400 per year. Betsy declines to buy the service contract.

Price is another big factor to consider. Weigh the cost of the service contract against the likelihood you may have to pay for an expensive repair. Service contracts frequently cost as much as $1500. Before you pay that much money for an insurance policy for your car, you should think long and hard about how much you are likely to have to pay for repairs on the car. If your car costs $7000 or so, and the service contract raises the price to $9500, this may not be the best use of your money. Also remember, the dealer is making money on the service contact, i.e., the dealer's cost will always be well below what you are being charged for the contract.

A service contract is an insurance policy, therefore, you should think about it the same way you would any other insurance policy.

• The dealer or service contract company is betting that your car will not break (or at least that any part covered by the policy will not break) and you are betting that it will.

Be wary of any dealer telling you that you have to buy the service contract in order to get financing. If the dealer tells you this, be sure to look the service contract over with especially great care. Whether you buy a service contract or not is purely up to you!

A good service contract can be an excellent investment. A poor one is nothing more than a waste of your money.

Points To Remember

• Check with the New Hampshire Insurance Department to find out:
  • Whether the contract is "insurance" or not
  • Whether the issuer of an insurance contract is licensed to sell insurance in New Hampshire
  • Whether the issuer of a non-insurance contract has filed a bond
  • Whether there are any outstanding claims against the bond
• In most cases, the type of contract you are purchasing is not a matter of major concern, provided that the issuer has complied with the New Hampshire Insurance Department's bonding and registration requirements.
• Before you purchase an extended warranty or service contract, read the terms carefully so that you will know exactly what is and what is not covered. This is particularly true for automobile extended warranty and service contracts where the systems or conditions excluded from coverage may be the systems or conditions, such as brakes or transmission, that are most likely to experience problems as your car ages.
• Consider carefully whether you really need the extended service. You may end up paying a fair amount of money for "repair insurance" that you don't need and won't use. Many brand name durable goods, such as stoves, refrigerators, and washing machines, provide years of trouble-free service. If a particular unit is defective, problems usually arise soon after the purchase and will be covered by the manufacturer's warranty.

Where To Go If You Have A Problem

Contact the New Hampshire Insurance Department for information about the issuers of extended warranties and service contracts.

NH Insurance Department
21 South Fruit Street, Suite 14
Concord, NH 03301
603-271-2261

Contact the New Hampshire Consumer Protection & Antitrust Bureau.

NH Consumer Protection & Antitrust Bureau
Department of Justice
33 Capitol Street
Concord, NH 03301-6397
603-271-3641

The Federal Trade Commission has several free pamphlets on service contracts.

Federal Trade Commission
Public Reference Section
600 Pennsylvania Avenue, NW, Room 130
Washington, DC 20580
1-877-FTC-HELP or 1-877-382-4357 (toll-free)
TDD: 1-202-326-2502