Knowing how to read an auto warranty contract, or vehicle service agreement, will give you the knowledge to tell a quality coverage policy from a poor policy. Knowing the difference will avoid partially paid repairs or repairs that are not paid at all.
Every warranty company uses a different style of contract or coverage agreement but they all contain the same information and are generally in the same format and use the same categories.
The Declarations Page
The Declarations page will state the contract holders information, the vehicle covered, the length of coverage, any optional coverages purchased, any deductible you must pay, the contract or policy number, and the date the contract was purchased. This is usually the first page of your coverage agreement.
The Definitions section will list the main terms used in the contract and give a description of each. For example, it may tell you the definition for what a Covered Part or Mechanical Breakdown means or what a Lubricated Part means.
The Warranty Company’s Obligations
This section will explain what the company will pay for and how they calculate how much they will pay.
Generally this will be “We will pay you or the repair facility for the repair or replacement of a covered part including the labor to complete the repair. Labor will be calculated using a nationally recognized labor guide. Replacement parts will not exceed the manufacturer’s suggested retail price.”
The section will also state how much the policy will pay out. This is known as the limit of liability. Typically it would either be “all benefits paid during the term of this coverage shall not exceed the actual cash value of your vehicle”. Instead of the cash value, some policies may state the amount, for example “all benefits paid shall not exceed $10,000”.
This will list your obligations to keep the policy in force and your responsibilities when filing a claim. It will always state that you must perform routine maintenance and document that you did.
For a claim to be paid, it will also state that you or your repair facility must obtain authorization from the claims department before proceeding with any repair and you are required to authorize any teardown or diagnostics time needed to determine the cause of the failure.
This section will list all of the parts that are covered under the contract. If a part is not listed it is not covered.
In the case of a bumper to bumper policy, it will only list the parts that are not covered and state “all parts are covered with the exception of…”.
This section will list any optional coverages available. For example, enhanced electrical coverage or navigation system coverage. Not all warranties have options and usually it’s because these components are already covered under the policy.
Note that if the Declarations Page doesn't state you selected these options, you are not covered for them. Also, in some cases you may not qualify for some of the options because of the type of vehicle or the mileage.
The Exclusions section will list the circumstances when a part will not be covered. These typically include breakdowns caused by rust or corrosion, contaminated fuels, lubricants or fluids, modifications to your vehicle, off-roading or racing, collision, fire, theft or acts of nature.
This section will list any additional benefits included with the policy. This would be roadside assistance, towing or car rental. You will also find how to qualify for the benefit and the amount of money the policy will pay for the service. Additionally, how to use the service such as special 800 number to call for roadside assistance.
How to File a Claim
Here you will find instructions on how to file a claim. Almost all companies follow the same procedure:
1) Take your vehicle to an authorized repair facility
2) Have the repair facility determine the cause of failure and the parts and labor required to repair it
3) Have the repair facility call the claims department for authorization to proceed with the repair
This may also include instructions on emergency repairs when the claims department is unavailable.
This will explain how to cancel your coverage policy. Generally you have to send a letter in writing stating you are canceling the policy along with a certified or notarized mileage statement and return the coverage policy itself.
This section will also explain how a refund will be calculated. Usually it is pro-rated based on how much of the policy you had used, less any claims paid and less a cancellation fee. Cancellation fees are generally $50 to $75 dollars.
This will be the Instructions on how to transfer the policy to a new owner should you sell your car. There is usually a small fee of $50 or $75 to transfer the coverage.
This will list the insurance company backing the policy and instructions for filing a claim with the insurance provider should a claim not be paid by the warranty company.
Special State Disclosures
These are legal notices required by some states. For example, “This contract is subject to the rules administered by the department of insurance”. This section will also list any modifications to the contract terms that are required by your state.
What to Pay Special Attention To
Labor Caps. A labor cap is a limit on how much the policy will payout for hourly labor rates. It may be in the Warranty Company’s Obligations section or buried somewhere else in the contract. You don’t want to be surprised when your dealer charges $110 per hour and the policy only pays a maximum of $75 per hour. Some companies may offer an enhanced labor option. For a small fee such as $50 they will completely remove the labor cap from the policy and pay the repair shop’s full hourly rate. Always take this option if available.
Special Maintenance. Look for any special maintenance requirements above and beyond the manufacturer’s recommended maintenance, such as you must change the oil and filter every six months or 5,000 miles or you must have your vehicle serviced within 60 days of purchasing the warranty. These will usually be in the Your Obligations section.
One important note is if your manufacturer recommends changing the oil every 10,000 miles and the warranty requires it be done every 5,000 miles you are going to be spending a lot of additional money for unnecessary oil changes over the life of the policy. You may want to look for another policy.
Limit of Liability. The limit of liability will state how much the policy will pay in repairs. Do not purchase a policy where the limit of liability is broken out by component such as “$3,000 for engine repairs, $2,500 for transmission repairs, $800 in electrical repairs”. These are generally not very good values.
How Claims are Paid. Never purchase a policy that requires you to pay upfront for repairs and then you are reimbursed by the warranty company. All of the major companies will pay the repair shop directly.
Authorizing Teardowns or Diagnostic Time. Make sure you do not have to pay for these. The good policies pay for a teardown or diagnostic time if the breakdown is covered under the policy.
Insurance. Never buy a warranty that is not direct insured. Direct insured means there is an independent third party insurance company backing the warranty. Look out for policies backed by Risk Retention Groups (RRGs). This is a group of warranty companies that insure themselves.
Especially do not purchase a warranty from an uninsured company. Either the policy will not list an insurer or will state something to the effect of “backed by the good faith and credit of the warranty company”.
Additional Resources: Choosing the Right Extended Warranty, What Auto Warranties Do Not Cover