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Smart Shopper Extended Warranties
2870 messages, Last post on Nov 23, 2009 at 4:56 PM
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Edmunds article: Third-Party Extended Warranty Scams
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Replying to: dampier (Dec 09, 2007 6:29 pm) Tricks & Traps: Contract Sales + Early Claims Experience - Future Claims Annoyance = Maximum Profits Finding an indepedent extended warranty provider for your automobile is as easy as a Google search. You'll be swimming in search results and paid placement ads touting inexpensive, comprehensive, hassle-free service coverage for your out-of-factory-warranty vehicle. A consumer spending time looking at reviews will usually see glowing positive "testimonies" and "independent reports" high up in the search results. Sentences like, "I've been selling cars for 30 years and this is the only warranty I'd buy myself" or "the other warranty companies won't cover what company "x" will" are all over the reviews, with convenient links provided to help you sign up straight away. What many people do not realize is that most online marketing campaigns for auto extended warranty companies pay extremely generous commissions to website owners who post links with a tracking code attached. It may be true that the website owner has no direct interest or involvement in the warranty company itself, but by encouraging you to purchase a plan through a link provided on that site, that website owner stands to earn potentially hundreds if not thousands of dollars in commissions earned for sales they generate each month. In general, if you examine the website address their link is taking you to, if it contains anything beyond the basic URL of the company, chances are there is a tracking code attached allowing the website owner to profit from the transaction. Both 1Source and Warranty Gold heavily relied on this kind of marketing to sell their extended warranties, which got positive reviews from many sites right up until they went bankrupt and stopped paying commissions on sales. Then many of those websites began selling another company's product or went offline altogether. 1Source, which we had considerable experience with in our investigation before they went bankrupt, had all of the angles to work their magic in the marketplace. Like most companies involved in risk exposure, 1Source developed a business plan that examined the potential risk a customer would bring to them and even went as far as to tailor a response to a claim based on the claims history of each client. We tracked this practice over three years of involvement with 1Source on multiple vehicles and noted the responses made by a telephone "adjuster" used by 1Source to approve, deny, or further investigate claims made by customers. 1Source did enjoy some positive reviews on independent websites for clients being exposed to the company's claims procedure for low-value or first claims for service being made. Here's how it worked: A new customer to 1Source who used the service contract for repairs under $200 or for the first time generally received automatic approval for a repair claim. The repair company obtained a credit card number from 1Source to pay the claim and the approved repairs made generally allowed the consumer same-day service. As a customer continued to utilize the benefits of a service contract, the profitability of that customer declined with each subsequent claim. A 1Source adjuster was able to review past claims on their computer screens and were able to assess how much of the cost of the service contract had already been used up in paying for prior claims. As the customer's cumulative repair costs began to near the price paid for the contract, the adjuster would begin to throw wrenches into the process. In several instances, repairs that were instantly approved on underutilized repair contracts required on-site third-party "verification" for those who used their contracts frequently. The fact this process would often take several days to be completed meant your vehicle would be left in the repair shop awaiting the arrival of an adjuster to review the repair. 1Source often offered to help cover the costs of a rental car during the process, but most consumers opted to simply cover the costs of a low to mid-level repair out of pocket in lieu of the inconvience of being without a car for several days. In other instances, adjusters would begin fiercely enforcing a service contract that might cover a specific part that had already completely failed, but rejecting coverage for the cost of a failing, but not yet failed part or replacement that included any other part that wasn't specifically non-functioning. A specific resistor on a circuit board fails to function and 1Source would approve only the cost to replace that resistor, not the inevitable new circuit board that was required to make the repair. Of course 1Source would pay certain contractholders more than the cost of their service contract to cover some major vehicle failure, but the formulas used to calculate risk exposure took into account the fact most consumers faced repair bills that were unlikely to approach this kind of expense during one repair visit. In the end, like Warranty Gold, another online marketed service contract provider, the costs of repair claims reached a level where the company could not continue to operate profitably, and declared bankruptcy. (end of part 3)
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Replying to: dampier (Dec 09, 2007 7:03 pm) The Underwriter Scam You paid for your service contract outright, or financed the cost of it as part of the purchase of your new vehicle. You may not have even used it because your car is still under warranty, or you relied on it when taking your car in for repairs, only to be told your claim would not be honored, and which of your credit cards would you like to use to pay for the repair yourself. Be it a notice of bankruptcy in your mailbox, or finding out that $1500 service contract is worthless when you take your car in for repairs only to be told the repair company won't accept it because the claims number goes unanswered or prior claims go unpaid, you'd better sit down because your money is gone. But then you remember reading that even if a warranty company closed its doors, a third party underwriter would insure that your claims would be covered. But guess what - that's not how the underwriter sees it, and they've decided they're not paying claims. In some cases, an underwriter sets up a virtual office in a U.S. state in order to meet state regulatory obligations, but quietly transfers the majority of its assets to an offshore account in the Cayman Islands, out of reach for regulators, as was the case with National Warranty, which underwrote Warranty Gold. 1Source used PrimeGuard, based in the unlikely state of Hawaii (and no doubt the owner enjoyed all that the islands had to offer). Hawaii may be a tourist paradise, but they don't shirk on their responsibilities to regulate businesses in their state, and one look at PrimeGuard and state regulators shut them down, causing the inevitable collapse of 1Source in the process. In the case of API, which used to regularly thumb its disapproval of the lowly online warranty companies in the warranty industry trade press, there are allegations of conflict of interest between at least one of their major underwriters and the company itself. This was especially ironic, because API used the murky underwriting world of the online warranty vendors as a marketing slam against those companies in advertising they sent to auto dealers touting their stability and reliability. In our investigation, we found a plethora of extended warranty companies under several different names all relying on a small group of underwriting companies. Often, the names of the companies were different but the names of people involved in them surfaced again and again. If one company gets a bad reputation, open another using the same underwriter. Any Weak Link Breaks the Chain What is so frightening for consumers who invest in these high dollar value contracts is just how fragile most of these companies are. Just one break in any weak link will break the chain and lead to inevitable bankruptcy protection. In some cases a company fails because it simply becomes unprofitable and then tries to leave the underwriters holding the bag of outstanding claims. If the underwriter has deep pockets and has spread its risk exposure out broadly, it can handle the financial hit of dealing with several years of claims as contracts run their course. Generally, this means recognized insurance companies who have not established a third party entity to pool its underwriting exposure in such a limited way to not be able to afford to pay claims. Far more common, of course, are underwriting companies that were seemingly established just to underwrite these kinds of extended service contracts. Some have such limited resources that they can never hope to pay the costs of claims. In many cases, it's that fact alone that causes a state regulator to shut them down, which usually also bankrupts the original extended warranty company in the process. In almost every case of extended warranty provider bankruptcies, consumers should never expect to get a refund for an unused service contract. In some cases, repair claims will be paid, but many repair shops will refuse to honor service contracts from these troubled companies because they risk being left holding the bag waiting for a check. In most cases, in the end, consumers will abandon the service contract because the process of using it becomes so cumbersome as to make it useless (or the bankruptcy process drags on for so long that the contract expires in the interim). What is your recourse? As a customer, your recourse varies depending on who sold you the service contract. If you bought it online, chances are you'll be writing off the whole experience and all of the money you spent on it. With more and more of these online-marketed warranty companies going bankrupt, it's strongly advised that you avoid even considering purchasing one, no matter how glowing the underwriter is claimed to be or how stable the provider is. Sending $1000+ on a service contract from one of these companies is like throwing dice in Vegas. And that means -ALL- of them. If your dealer sold you the contract, you may have limited recourse with him or her. At the very least, there is a moral obligation your local dealer has recognized in past instances of independent warranty company failure, particularly in the case of API. The warranty industry trade press is filled with reports of dealers eating the repair costs, if not refunding the now-useless service contracts. The best argument to use is the massive profit margin the dealer earned on the contract in the first place. Anything less than meeting you 50% on a refund should be met with outrage. They didn't complain when they sold you the contract, or when they deposited the generous commission they earned on it. Many dealers will continue to grudgingly honor the repair bills that would normally be covered by API (and in some states are being covered by their underwriters), but you should try and get a written assurance of that fact, because many dealers are now seeing incredible hits on their repair department's bottom line, and may change their mind on this down the road. Do follow the respective bankruptcy websites established by the courts to report on the progress of the bankruptcy impacting you so that if you need to file any paperwork to process your claim, you do so on time. Just don't expect a lot. Warranty Gold's bankruptcy, now more than four years old, is still tied up in bankruptcy court with regards to final disposition of unpaid claims. As an example of the payments people can expect there, the court proposed to divide a claim's dollar amount by the number of months remaining on the term of the contract and then further divide that by a percentage that would allow the limited amount of assets remaining to be exhausted by paying the unsecured creditors (customers). The amounts proposed often meant a $1,000 repair bill would ultimately bring less than $100 in a final settlement. (end of part 4)
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Replying to: dampier (Dec 09, 2007 7:52 pm) So what should I buy? The fact is, most extended warranties turn out to be profitable mostly to the people who sell them. That's because companies either have to limit what is covered, make the price high enough to guarantee solvency, or risk bankruptcy. Most folks who buy extended warranties do so after a car repair sets them back $1,000 or more. If only they had the extended warranty - that would have been covered and you wouldn't have needed to scramble to find a credit card with enough credit left on it to cover the repair. Many car manufacturers with a less than stellar reputation for quality obviously stand to make some serious side money marketing extended warranties to cover repairs that probably would never be necessary on higher quality automobiles. Many car makers routinely offer extended service contracts themselves, often limited in what they do cover and at prices higher than you might expect from a Honda or Toyota. Instead of risking big money on a service contract you may never use (or need to use just once, negating any 100% refund clause), or never get to use, here's a better plan. Your own extended service contract! Gather pricing for today's extended service contracts from car dealers, online sources, and even from banks and credit unions (which often also sell the same flawed contracts that dealers do). Then take the amount charged for a three, four, or five year contract and open a new savings account (do not co-mingle this money in your existing checking or savings account - it's too tempting to use it for other purposes). Either deposit the full amount of the contract or arrange to auto-debit your checking account for each monthly "installment" to be deposited into this online savings account, preferably earning around 4% interest (they are out there). If you opt for the "installment plan" it has to be a process you set up to happen automatically - it's too easy to "forget" paying it otherwise. Now you'll have a set aside account specifically for auto repair costs, typically containing around $1000+, also earning interest. Next time your out of warranty car requires repairs, you get to be your own claims adjuster and decide whether or not this repair would be covered under an extended warranty contract. If you tell yourself yes, you write a check from that account to cover the repair cost. Do not use this account for the things you'd normally pay out of pocket for to handle car maintenance (tires, oil changes, etc.) The chances are good that you'll discover at the end of the "contract," you'll still have money in that account that would have otherwise gone to pay for a villa someone at PrimeGuard probably owned on Maui. You also get to keep the interest as your free gift! Yeah, there's a small chance that some major repair bill may empty that account too, but ask yourself if you were a customer of 1Source, Warranty Gold, or API just how much they are willing to pay for that repair! |
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-But you're absolutely right.  I've always suspected that bit about claims being less likely to be paid the closer a customer got to having his benefit outweigh his purchase price. |
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Replying to: dampier (Dec 09, 2007 6:07 pm) |
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Ultimate Warranty Corp, based in Ohio, has collapsed. They will likely drag their 'insurer' down with them. Surprise, surprise. They are still scrambling to figure their $$, so don't expect to get claims paid anytime soon. Most contracts I've seen have a big VSC in the upper left corner, with Ultimate Warranty Corp. in the fine print. The are 'insured' by Capital Assurance Risk Retention Group, based in South Carolina. see article in the Minneapolis Star Tribune: link title
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Replying to: mitzij (Dec 18, 2007 11:53 am) You would think that any "informed consumer" would not have purchased such a policy from such a company, but we know they sell them all the time  Dennis |
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| There website it still up and running. Acting as though they are a happy little company. I can't file a claim, however. That page is mysteriously 'unavailable at this time'. | |
I like the idea of "self insuring" with a separate account but I am also looking at Warranty Direct and AAAuto. Does anyone have experience with them, esp. WD?
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Replying to: mergen (Dec 21, 2007 1:01 pm) |
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