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The history of the auto warranty
Most of the important warranties that come with every vehicle expire
at about 36,000 miles or three years from the original "in-service
date". Since a three-year-old vehicle or one with just 36,000 miles is
relatively young in today's market, auto dealers perceived the need to
provide additional warranties beyond the
manufacturer's basic warranty.
Out of this need grew an entire industry. In the beginning, 20 years
ago, any dealer could offer any warranty. Companies were formed
specifically to administer the dealer's own warranties. Also, these same
third party administrators went
out and solicited dealers that heretofore hadn't offered their own
warranty. Marketing and administrating warranties became a thriving and
lucrative business.
When large numbers of dealers and administrators went out of business
due to a downturn in the economy, consumers were left holding worthless
warranties. After some legal maneuvering it became apparent that the
banks that financed the cars were forced to honor the dealer's
warranties. The law, known as the "holder in due course", provided the
impetus for lenders to demand that dealers get their warranties insured
if they wanted vehicle financing. In this way, if the dealer or the
administrator failed to honor the warranty agreement, consumers would be
protected by an insurance company.
This began a period of real problems for the entire industry. Insurers
wanted to know exactly what risks they were covering and very few
dealers or administrators could adequately demonstrate this. Thus ensued
turmoil where insurance companies eager for huge premiums jumped into
the warranty business. These same companies no more than five years
later were very quick to get out. What appeared to be a cash cow often
turned out to be a monstrous liability. Many companies lost hundreds of
millions of dollars.
Simultaneously, because of the many lawsuits and the public outrage, the
various state insurance department's got involved and began developing
laws specific to auto warranties. Today, most states have regulations
with respect to the insuring agreements behind vehicle warranties and
even to the form and language of the warranty itself.
Many states require the following statement: "If Administrator fails to
pay an authorized claim within 60 days after proof of loss has been
filed, You are entitled to make a direct claim against the insurer at
(insurer's address)." This is a very important clause for you, the
consumer. It lets you know who is ultimately protecting your investment
and how to get in touch with them.
Today, there is a lot of statistical evidence to substantiate proper
rates and premiums. There are numerous quality insurance companies
committed to the industry. Some of these companies even specialize in
warranties.
Insurance companies can be researched by going to
A.M. Best Company.
The saying "You Get What You Pay For" has never been truer today. With
years of statistics, industry experts now have a very good idea of how
much is required to adequately meet claims demands. So do your homework
on a warranty company that offers you rates that sound too good to be
true. That's when you need to make sure the program is backed by a
really solid insurance company.
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