Consumer Reports - How to Buy Extended Warranties:

Step One: Read the contract. Research the terms and conditions of the service contract while you compare the prices and features of the products themselves. Then use your common sense and Google to decide if the extended warranty offer is a deal worth adding, or if you should shop elsewhere. A freelance reporter recently called, asking your editor for advice on when to buy and when not to buy an extended warranty. What should a consumer look out for, what should they avoid, and what should be in an extended warranty offer? Oh no, not another one of those articles. They usually end up slamming the entire concept, trashing the whole industry, and advising consumers to avoid extended warranties altogether, except in some very narrow instances. Well, it's not that easy. It's a bit like asking who needs earthquake insurance, or who needs hurricane insurance. Last week, many people might have given a very different answer than they'd give now. The statistics tell you one thing, but real life tells you otherwise. The real simple advice was this: ask to read the contract. That advice, however, turned out to be too simple. Her editor was looking for an article on how to spot scams and rip-offs. Her editor wanted a list of good and bad extended warranty underwriters, administrators, and selling agents. Her editor wanted a black and white picture of an industry filled with gray areas. Reading Contracts Before Signing Them? The reporter asked, incredulously, "You don't mean to tell me you expect shoppers to ask the cashier at Target to let them read the contract, do you?" Well, no. By then it's far too late to begin your research on extended warranties. Consumers should have read the terms and conditions of the service contract long before they leave home. They should read it while they're still researching the product's price and features. In other words, if a consumer should happen upon this week's newsletter before they go shopping, they're doing a good job. If they Google it after their product breaks, while they're wondering where they put the contract they never read that contained the phone numbers they thought they'd never need, then they can stop reading here. It's too late. The reporter was incredulous. Best Buy is going to email me a copy of the contract? Will the guy who answers the phone at Wal-Mart even understand what I'm asking to see? Why wouldn't they? In fact, Sears Roebuck has a nifty automated system that sends copies of user manuals, warranties and service contracts in reply to emails containing just a model number. Federal Warranty Law In fact, there's actually a U.S. federal law called the Magnuson-Moss Warranty Act that requires retailers to keep copies of all warranties handy for pre-sale inspection by customers. Though that's not also required for service contracts, it's a common courtesy to allow customers to read a contract before asking them to sign it. So why read a contract? Isn't it filled with fancy judicial phrases, fine print and big words that mean little outside the legal profession? Well, yes. But it contains a few items that will quickly help a consumer decide whether or not this particular extended warranty is worth purchasing. First, it will establish whether or not there is an insurance underwriter involved. Second, it will establish what company will administer and process the claim. And third, it will outline the process and policies themselves. Let's take a look at each of these in turn. The reporter asked how a consumer is supposed to evaluate one underwriter versus another. That's not really necessary. Basically, it's more a question of whether or not there is an underwriter. If there is, the underwriter is probably rated A- or better by the insurance industry's leading ratings agency, A.M. Best. That's denoted as an "Excellent" rating by the company, as is a plain A, while an A+ or the elusive A++ are designated as "Superior." Comparing Underwriters? So how is an A- different from a plain A or an A+? It really doesn't matter to the average consumer. The more relevant question is whether there is or isn't an underwriter involved. If there is, chances are that it's a good one. If there isn't, chances are that the seller doesn't have a clue about extended warranty financing. When Warranty Week calculated the A.M. Best financial strength ratings of the underwriters involved in the vehicle service contract industry (newsletter of September 9, 2010), we found that 80% of the contracts were backed by an underwriter with an A- or better. Only 14.4% had a B++ or lower, but most of those were underwritten by insurance agencies linked to Ford, General Motors, Toyota, and other OEMs who at the time were pretty down on their luck. And the vast majority of them had a B++, which A.M. Best classifies as "Good." In other words, 94% of the vehicle service contracts were backed by carriers rated "Good" or better. And what we're saying is that "Good" is good enough; and is certainly better than "None." Ironically, at the time some of those OEM insurance companies still had a B++ rating (they've been upgraded since) they were still majority owned by the U.S. Department of the Treasury following the auto bailouts of 2009. Essentially, this meant that A.M. Best was assigning lower grades to wards of the state than they were to private companies. And the state can collect taxes and print money -- two things private insurance companies merely wish they could do. Lagging Indicators But we're not here to defend A.M. Best ratings. In fact, they're always reactive, in that they can tell you where an underwriter's been but not where they're going. And they're not even very good at reacting quickly to the news. For instance, back in June 2003, the National Warranty Insurance Risk Retention Group was at the center of one of the most spectacular flame-outs in extended warranty history, when it was placed into bankruptcy proceedings in the Cayman Islands. As late as February 2003, however, A.M. Best had NWIG rated an A-. Until late May, it had a B++ rating. And then, on June 10, six days after NWIG went into liquidation, A.M. Best downgraded NWIG to a C- (Weak). Administrators who relied on NWIG for their underwriting were taken by surprise. Some had to declare bankruptcy themselves. And these were experienced administrators -- seasoned professionals in their field. If they didn't see it coming, then how can an average consumer be expected to evaluate the goodness or the weakness of a given administrator's underwriter literally years before they're likely to make a claim? Fortunately, there aren't many NWIGs. So what we're suggesting is that since 8 out of 10 vehicle service contracts have an "Excellent" underwriter, and 1 out of ten are merely "Good," turning the complex ratings research into a simple yes/no question (Is there an underwriter?) will turn out to be good enough 9 out of 10 times. The Benefits of Insurance But why is an underwriter so important? To answer that, we need look no further than the home electronics industry, where in 1989 the chain known as Crazy Eddie filed for bankruptcy, taking all of its service contracts with it to the bottom. There was no underwriter. Crazy Eddie sold them. Crazy Eddie administered them. And when the money ran out, they were worthless. Compare and contrast that to the collapse of Circuit City Stores in 2008-2009. After the company declared bankruptcy and shut its stores, consumers who bought its extended warranties were directed to contact the underwriter, Assurant Solutions, which has continued to arrange for repairs and to pay claims until all the remaining extended warranties expire. That's not a unique case. Assurant Solutions (a longtime sponsor of Warranty Week) also had to step in for CompUSA Inc. when they shut their doors. Other underwriters have also had to step in when their administrators or retailers collapsed. It doesn't make much news, because by and large the underwriters always do the right thing: they step in and clean up the mess. It's when there's no underwriter that consumers find they are on their own, should there be a bankruptcy. That's when it's time to call your local attorney general's office or your city or state's department of consumer affairs, to find out how to get your name onto a list of unsecured creditors that will be dealt with by the bankruptcy court. It can take years, but eventually at least a partial refund is likely. Who Is the Administrator? The second reason for asking to read the contract is to find out what company is contracted to process the claim and to decide whether to repair or replace the covered product. And again, this information in and of itself isn't very useful to a consumer. But it could prove to be quite valuable if they're near a web browser. Not only can they look to see what a company says about itself on its website, but they can also Google the name to see what others say about the administrator. Granted, every administrator is going to have a great-looking website. And every administrator is going to have at least a few disgruntled customers who are adept at posting reviews. So it's never going to come down to a simple yes/no answer. It will always be a matter of weighing the good against the bad reviews. Even in the case of bad reviews, consumers can look to see how the administrator responded. You can't please everyone. But you can at least try. You can make an attempt to put things right -- to ask the consumer for more details or for another chance to impress them. Or you can ignore your online reputation altogether, hoping that most consumers will never bother to Google your name because they won't know it until after they've taken home a copy of the contract they signed without first reading it because you pressured them into signing it quickly. That business plan may have worked in the past. It might still work now. But increasingly in the future, consumers will research not only the brand name, price and features of the product, but also the reputation of the sellers and servicers. It will all be one Google page away. And given Google's plans to acquire Motorola Mobility, shopping assistants will likely all soon be in an app for a hand-held smartphone that can help a consumer do their research right in your store, right while you're talking to them about the benefits of your extended warranties. Consumer Reports Says No Almost every advice column they read will be telling them not to buy extended warranties. One of the most notorious was published by Consumer Reports towards the end of 2006, which was augmented by an advertising campaign that placed the following full-page ad in newspapers such as USA Today: