If you get an "alarming" phone call, post card or letter that tells you your car warranty is about to expire, and that you need to lay out a sizeable amount of cash to keep that from happening -- well, the chances are very good that you're not going to get what you paid for.
Indeed, an investigation is currently underway in more than 40 states that is looking into alleged unethical business practices of several companies who operate in the "extended warranty sales" business -- companies that are accused of committing consumer fraud, deceptive sales practices and insurance-law violations.
These allegedly-unethical companies prey on unsuspecting consumers by trying to scare them -- by insisting that the consumers need to "act immediately" and buy warranties that are not what they seem, said Bill Smith, a trade practice investigator in the St. Louis office of the Better Business Bureau.
These accused companies are not connected to the carmakers, dealers, or providers of the initial vehicle warranty. And in the vast majority of cases, consumers have found that these extended-warranty companies very rarely pay for claims that buyers have been led to believe would be covered, said Smith. "These companies often seem to be doing everything possible to get out of paying for repairs," he said, adding that, in most cases, the warranties impose such rigid restrictions that it's very difficult to get repairs approved.
The bottom line is that consumers why buy these plans from non-legit companies are often out $2,000 or $3,000 or more, with little recourse except to finally, exasperatingly, call the Better Business Bureau or their state attorney general's office.
The aforementioned investigation is being conducted jointly by the attorney general offices in those 40-plus states, and is being led by Mary Lobdell, the assistant attorney general for the state of Washington."Heartbreaking Stories"
"The stories of some of the folks who have been scammed by these warranty companies are just heartbreaking," said Smith. The majority of these fraudulent activities are being conducted by companies headquartered in the St. Louis area, which is where the industry first started many years ago.
"We've had calls from some people who've have missed important doctor's appointments, because their cars have broken down, and the warranty company refused to cover the repairs," said Smith. "Or, people have lost jobs because they didn't have a car, for the same reason -- the car breaks down and these companies always find some reason to refuse to cover the work."
Lobdell also related a story about how one such company last year managed to sell an extended warranty to an elderly California woman -- one who suffers from mental lapses and memory loss -- on her 2001 Honda, which she rarely drove anymore and only had 34,000 miles on it. "They've even managed to sell these warranties to other elderly people who also suffered from memory loss and who didn't even own cars any more," said Lobdell.
"I honestly don't see how the people at these companies can live with themselves," said Smith with a sigh. "They're making a lot of money off the backs of poor people, or people who just don't have much money, like first-time car owners and the elderly.
In 2008 alone, more than 140,000 consumers contacted their state's Better Business Bureaus to inquire or complain about such companies.
Lobdell said that the multi-state investigation initially focused on five such companies whose names she said she was not currently at liberty to identify. "Presently, we're negotiating on consent judgments with each of the five," she revealed. What that means, said Lobdell, is that "we're negotiating a legal agreement wherein these companies must agree not to engage in these practices that we've determined are unfair, illegal or deceptive. And, these companies are going to be penalized financially for engaging in these practices."
And if these companies break those agreements?
"Then we'll sue them," asserted Lobdell emphatically. And once the investigation into these five companies is completed, "there are many more of these firms that we're going to go after." In addition to this multi-state investigation by the 40-plus attorneys general, several individual states have also filed actions against some of these companies, Lobdell added, including Indiana and Arkansas.Restitution Being Sought
"And we are also vigorously seeking restitution for the people who have been cheated -- we are adamant that these people be compensated for their losses."
The industry is mostly unfettered by regulation. Larry Hecker, executive director of the Automobile Warranty and Service Contract Association -- which represents auto warranty brokers, warranty providers and the firms that provide them with financing -- claims that those firms who engage in fraudulent or deceptive activities only represent a small minority of the firms in the extended-warranty industry.
"We're very concerned about the negative perception the public has about the industry as a whole, based on the actions of these companies that are under investigation," said Hecker, who estimated that there are presently "a couple of hundred" companies who are in the business of selling extended warranties. His association was just formed last fall, so "we're in the process of trying to get a handle on size of the industry and try to find out the number of those who are doing things inappropriately."
The BBS's Smith explained the tactics often employed by these warranty companies that have been accused of improper business practices:
"First it started with robo-calls, warning people in fairly alarming fashion that their warranties were going to expire, or had already expired, and that they must sign up immediately to buy extended warranties," Smith said. The robo-call approach has since waned, due to a legal suit filed by the Federal Trade Commission alleging that such calls were illegal. Since then, however, the robo-call practice has been supplanted by equally alarmist cards and letters from companies "that, if they don't say it straight out, make it appear that they are selling dealer-backed warranties -- they're essentially posing as the dealer or the manufacturer," said Smith.The Old "Act Now" Ruse
And they use the old high-pressure tactic of insisting that the customer must "'act immediately' -- that this offer is only good for the duration of this phone call, and that if you don't buy the extension right now, you're not going to have another chance," Smith detailed. "We've talked to many consumers who felt frightened that if they didn't make the purchase, their warranty was no longer good on their car."
Often, explained Smith, these high-pressure salesmen "are dealing with senior citizens, who in some cases can't process all the information that is being thrown at them, or young people, who were first-time car owners, and didn't understand the particulars of a warranty or extended warranty. One 20-year-old woman panicked, and thought she had to buy it immediately, or she would not be covered."
These companies demand either the entire $2,000 or $3,000 payment up front, or a down payment of $200 or $300 -- before the consumer even gets to see the contract, said Smith. "Obviously, it's never a good idea to enter into a contract and put money down without seeing it, but these companies are successful at convincing the consumers to put the money down and promising to send the contract out later," he added.
Both Lobdell and Smith warn that one way these companies hoodwink consumers is by promising that the warranty being purchased covers the car "from bumper to bumper."
"But that term means something very different in the extended-warranty business than it does to consumers," cautions Smith.
Many people have told the BBB that coverage was not as complete as what had been promised by the salesperson at the time they bought the contract, said Smith. Others have said that their claims have been denied because they did not have computer-generated records of previous maintenance, such as oil changes.
"Some people might have had their oil changed at an independent repair shop with a handwritten receipt, for example, and the warranty companies deems that as insufficient proof of proper maintenance, so they refuse to cover it," explained Smith. "And if your car needs work, and you take it to a repair shop or dealership, the shop often must get prior approval before they can do any work -- approval that is sometimes very difficult to obtain," he added.
"Once the technician at the dealer or repair shop hears that one of these companies is carrying their warranty, they just say, 'Good luck, because we always have a hard time getting them to cover anything.
"Or, we've heard that the warranty company will insist that the transmission first be torn down to diagnose the problem, and the consumer pays $600, then the warranty company refuses to approve the work, so the consumer is out the $600."How To Avoid Being Taken In
Smith offered the following advice on how to avoid being deceived by such companies:
- "If you get something urging you in alarming terms that your warranty has expired, or is about to expire, look at it very warily, because that is the opening 'line' in all of these solicitations."
- "Never give anyone your credit card info or bank info or social security number. We've handled numerous calls from people who didn't recall giving the salesman that information, but somehow they got it from them. So, be vigilant in that respect."
- "Again, anything that says it offers 'bumper to bumper' protection does not mean what the typical person thinks it means, so don't be taken in by that."
- "Ask to see a contract up front that explains the terms of the agreement. Don't pay any money on the promise that they will show you the contract later, because if you do, and you never get to see the contract, it is very hard to cancel, because they will give you the runaround or not return your calls."
- "If you do enter into one of these agreements, and discover that it is fraudulent, contact your state's Better Business Bureau or state attorney general's office. We can contact these companies directly and hold their feet to the fire, and make them do the right thing, but that can take a while, so it's best not to be taken in by these fraudulent offers to begin with.'
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