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The following is a list of items you need to know about any extended warranty (aka an extended service contract) prior to purchasing it.

These items are valid for extended service contracts on everything from your home, car, or even smaller items like your coffee maker.

Who is insuring the service contract?

Always make sure that the service contract is insured by a reputable insurance company. The easiest way to find out if the insurance company is reputable is to check the AM Best website. AM Best is a company that specializes in rating the strength of insurance companies. Service contracts always come with at least a thirty day period (starting with the date of purchase) where you have the right to cancel the extended service contract for a full refund; this gives you the time you need to research the insurance company.

Make sure the insurance company's name, address and telephone number are listed on the extended service contract. That way if you have a claim problem you can contact the insurer directly to get it resolved. This also protects you if the service contract administrator goes out of business and is not able to adjudicate your claims.

What type of coverage does the extended service contract provide?

There are two types of coverage to compare. The first is "exclusionary" coverage. An agreement that provides exclusionary coverage is one that tells you what is NOT covered as opposed to telling you what is covered. This type of coverage will protect you against breakdowns that you may have never considered. Remember, unless you are an expert in repairing the item that you are purchasing, you may never realize what could go wrong. The other type of coverage is called “stated component” coverage. With stated component coverage the extended service contract will only cover the specific parts that are listed on the agreement. Typically stated component coverage is going to be less expensive than exclusionary coverage because exclusionary coverage will typically cover more items than stated component coverage.

What is the deductible type?

Extended service contracts offer a few deductible options.

• Per Visit: This is a dollar amount that you pay each time the item is in for a repair. It does not matter how many repairs are done. For example if you bring your car in to have the heater and the transmission fixed you would only pay one deductible.
• Per Repair: With this type you would pay a deductible for each component that is being repaired. So if we use the same scenario as above you would pay two deductibles to have the heater and transmission repaired.
• Percentage: With this type of deductible you will pay a percentage of the total repair, typically 50%. So, if the repair(s) cost $1000.00 then you would be responsible for $500.00.

The per visit deductible is the best choice overall and is the most common. We would recommend staying away from any deductible that is based on you paying a percentage of the repair cost. The up front cost for the extended service contract will be less expensive but when you have a repair covered you may end up paying more than you would have if you had a per visit or per repair deductible. Pay now or pay later.

How does the extended service contract define “Breakdown” or “Failure”?

Make sure that any extended service contract that you consider purchasing has a definition of breakdown or failure that reads similar to this: “Failure is defined as the inability of a part to perform the functions for which it was designed, including when it has worn beyond the manufacturer’s tolerances”. The section of the definition you really want to pay attention to is “including when it has worn beyond the manufacturer’s tolerances”. If your extended service contract has a definition similar to what is stated above, then a component that is beginning to fail (“wear & tear”) would be covered even though it is not “broken” yet.  A good example of this would be tie rod ends on a vehicle.  Tie rod ends typically do not break, they wear out over time.

The most important section of any agreement.

So you’re looking at the agreement and it lists the insurance company that you know is reliable and the extended service contract provides exclusionary coverage, you are good to go right? Wrong! The most important section of the agreement is the “What is not covered” section. In this section the administrator can void any coverage listed in the “What is covered” section. So this is the MOST important section to read. One of the big things to look for in an vehicle service contract is a statement about overheating. It will usually read something like this:

“Any breakdown caused by overheating regardless of cause.”

A statement like that provides the service contract administrator the ability to deny a claim that they would of otherwise had to cover.

Information geared towards automobile service contracts.

Make sure the agreement allows you to go to the repair facility of your choice and that the extended service contract company will pay the repair facility by credit card. Some extended service contracts will require you to return to the selling automobile dealership to have any repair work done. This can be a hassle if you do not live close to the dealership or find that you do not care for the dealership’s service department. It may also cause issues if you have a breakdown when you are traveling, since some dealerships that require you to use their service department will have to approve the repair being done at a different repair shop. If you are allowed to take the car to any repair facility then the administrator is the one who will be approving the repair work and paying the claim, therefore not involving the dealership in the process.

Conclusion

Extended service contracts provide a valuable service for those that need coverage from unexpected repair costs.  The thing to remember is an extended service contract is similar to health insurance, you purchase it to give you peace of mind that if something breaks (you get injured) you will not have to pay the full price of correcting the problem.  So if you are one who likes the peace of mind that comes from insurance then a properly written extended service contract can provide you great benefits.  Again, the key here is to ensure you have a properly written service contract.  So follow the advice given above and you will be happy with your extended service contract purchase.  Please post your comments below if you have further questions on extended service contracts.