How to Read an Extended Warranty Contract

There are as many variations in warranty contracts as there are car models to choose from. Here are some of the important areas one needs to look at before choosing a warranty vendor.

Administrator: The Administrator is the company who is responsible for paying claims. This company is often not the company selling you the warranty. It is important to check into the Administrator's background and financial history. Check their Better Business Bureau record and run searches on Yahoo.com to see what consumers are saying about them. Ask them how long they have been in business. Find out if they sell coverage only on the Internet or also provide coverages to car dealers, banks, credit unions and manufacturers. Many consumer oriented web sites recommend purchasing directly from the Administrator.

Failure / Mechanical Breakdown: These terms will define what types of claims a warranty will cover. Better plans will cover wear-and-tear failures. Look for contracts that use the term Failure and define it as covering parts that break as well as those that wear out.

Lesser coverages will only cover mechanical breakdowns. You will often find clauses such as, "the gradual reduction in operating performance is not covered" in these types of contracts. While their cost will often be lower, so too is the coverage they offer.

What is Wear and Tear coverage?: Wear and tear protection is the highest level of coverage one can purchase. It is a much broader level of coverage than the mechanical breakdown only plans offered elsewhere. Many extended warranties define "mechanical breakdown" as a defect in parts and workmanship as supplied by the manufacturer, or a defect that makes the part unable to perform the function for which it was designed. Often, they will state that the gradual reduction in operating performance (wear-and-tear) is not covered. Service contracts that exclude wear and tear will not cover repairs needed because a part's performance has gradually deteriorated because of normal wear and tear, unless a mechanical breakdown has occurred.

The more miles on a car when a repair becomes necessary, the more likely it is that the repair will be needed because a part wore out, rather than because the part broke due to poor manufacturing. Before buying an extended warranty, you should carefully review what is covered and not covered to see whether wear and tear claims are excluded from coverage. That way, if it is not clear whether a repair is needed due to a manufacturing defect or simple wear and tear, it is more likely that the service contract company will pay for the repair. It is a mistake to assume that a repair agreement will cover every repair your car may need.

Where Can Repairs be Made? How Are Claims Paid?: Better extended warranties will allow you to choose the dealer or repair facility that performs repairs on your car. Some warranties will require that you only use the dealer where the coverage was purchased or locations that participate in their program. Many extended warranties will pay your dealer or repair facility for repairs over the phone via their corporate credit card while others will require that you pay for repairs and wait to be reimbursed.

What is Not Covered?: All extended warranties will have a list of Exclusions or things that are not covered under the warranty contract. Many of the exclusions are standard across warranty agreements but there are some that one should be aware of. Many common breakdowns can be hidden in the exclusions section of a warranty contract.

Here are some common exclusions you should be on the look out for:

• Damage caused by overheating

• You must maintain your vehicle according to the severe requirements of your manufacturer (that can double your maintenance costs)

• Burned/worn valves/guides, valve grinding, worn rings and burned pistons are not covered. (These are classic wear and tear failures)

• Any covered part that has not failed. This includes seepage of seals and gaskets.

• The gradual reduction in operating performance is not covered.

It is recommended that you read a warranty contract prior to purchasing your coverage. Don't accept a brochure as it will only provide general information. Reputable companies will provide you with copies of the contract to review prior to purchasing. Many of them will publish their contracts on their web sites.