To Buy, Or Not To Buy… A Service Contract

By Caroline Ajootian

An "extended warranty" may not offer the full coverage you're hoping for. Here's how to read between the lines.

During boat-buying season each spring, consumers call the BoatUS Consumer Protection Bureau asking whether they should purchase extended warranties or service contracts for the new boats and engines they're contemplating. They want to know if the promise of protection is really worth the thousands of dollars these policies cost. The answer is unequivocal: yes and no. Yes, if consumers fully understand policy terms. No, if consumers believe the policies mean no cash outlay, no hassle, and no limit in terms of covered breakdowns.

What You Need To Know

An extended service contract is an insurance policy that pays for repairs if the breakdown, failure, or failed component is specified as covered in the policy. Problems excluded from or not specified by the policy are not covered. No surprises there, this is no different from auto, marine, homeowners, or health insurance. However, what makes marine service contracts confusing to consumers is that they're often marketed as "extended warranties," implying that the boat or engine manufacturer will go above and beyond if problems occur, even if the original warranty has expired. And, although policies often bear the name of the manufacturer — Mercury Product Protection, Volvo Penta Extended Protection Program, Brunswick Product Protection, for example — the actual service contract policies are usually underwritten by independent companies.

Service contracts, regardless of what they're called, aren't warranties. A warranty is a guarantee, usually in writing, by a seller or manufacturer, stating that it will stand behind its product in a specific way for a specific period of time. Although companies are not required to warrant their products, federal warranty law creates specific legal obligations when warranties exist. These obligations help consumers in a big way if a product is defective or if the manufacturer doesn't live up to its obligations.

Take, for example, a marine engine that breaks down due to a faulty water pump. If the engine is under the factory warranty, the manufacturer will replace the pump and cover damages caused by overheating. Say the manufacturer got a bad batch of pumps and the replacement fails for the same reason — or even a third failure occurs — a reputable manufacturer will take care of it, along with the attendant damage.

Suppose, however, that the first water-pump failure occurs after the factory warranty has expired and only the extended service contract is in effect. Water pumps usually are covered components, so the contract will handle repairs. But, damage due to overheating, regardless of cause, may be excluded from the policy. The manufacturer is unlikely to step in, even in the case of a pump that's known to be faulty, as the failure didn't occur on its watch.

Service-contract companies are obligated only to provide the services described in their contracts. Many contracts have maximum pay-out limits for the total number of claims against the contract or even for repeat failures of the same component. Limits are often based on the value of the covered product, in this case, the marine engine. Service-contract underwriters can cancel contracts when paid claims exceed the value of the engine. On the other hand, warranty law allows manufacturers to make a "reasonable number" of repair attempts before they're obligated to provide a replacement or refund. Before you buy a service contract, ask to see the actual contract, not the sales literature. The exclusions sections are often a lot longer than the "Items Covered" sections. Also, service contracts will not cover engine breakdowns resulting from shoddy workmanship, even by its authorized service centers.

Finally, as service contracts are essentially insurance policies, they fall under insurance regulations in many states. However, not all states view them as such, so consumers may have little recourse if claims aren't handled equitably or if the company underwriting the contract folds.

Dollars And Sense

Cost is another matter that separates service contracts from manufacturers' warranties. The factory guarantee that comes with your boat or engine doesn't cost anything and is considered part of the "basis of the bargain" when a product is sold. Service contracts are a great "profit center" for dealers. Some contract plans administered by independent companies give retailers the latitude to mark up contracts 100 percent and more over the actual cost they pay to the service-contract company. That's profit earned just by getting you to sign on the dotted line! Consumers get a better deal on service contracts that bear the name of a manufacturer – Volvo or Evinrude, for example – because these usually limit the dealer mark-up amount.

Overlapping Coverage

Don't be pressured into buying an extended-service contract the same day you purchase a new boat or engine. As long as the factory warranty is in effect, the service contract will take a back seat to service from the manufacturer. Thus, if the service contract is for five years and the warranty lasts for two, you're actually getting only three years of service contract protection.

Contracts offered by Mercury and Volvo begin after the manufacturer's warranty runs out. However, the contracts offered by the independent companies begin as soon as they receive your premium. Thus, you end up paying for coverage for the period when the manufacturer is responsible for handling breakdowns. Many independent contract companies offer a nine-month to one-year window for signing on, so find out what the window is and wait as long as possible before buying. Don't wait too long. After the window is closed, then you'll pay considerably more.

Service contracts go into effect only when the contract company actually receives your premium, not when you pay the dealer for the contract. Roughly 25 percent of all the service contract complaints received by BoatUS involve the dealer "forgetting" to send in the premium. This of course doesn't come to light until the consumer needs the coverage.

Out-Of-Pocket Costs

Having a service contract won't protect you from out-of-pocket expenses. All contract companies charge a nominal deductible, usually $25. Sometimes, it's just one deductible per incident, sometimes a deductible is charged per item that needs to be repaired. Plus, the service contract may pay to repair only the broken engine part, for example, but may not pay to remove the engine from the boat to facilitate repairs. Again, here's where it's helpful to review the actual terms of the contract before signing on.

Authorized Repairs

All contract companies require pre-authorization before work begins. Fair enough. Some companies go further, requiring that work be done only by their own network of shops. This isn't a problem with the service contracts offered by major manufacturers, like Mercury Marine, Evinrude, and Volvo-Penta, but the independent companies have no dealer network to tap into. Third-party contracts sold by dealers may require that all work be done by the selling dealer, which isn't much help if you're cruising far from your homeport, if you buy long distance or if the dealer is incapable of making the repair.

An Asset

Find out if your service contract can be transferred to a subsequent owner. This can be a real plus when you want to sell. Some companies charge a fee for the transfer. Contract costs are prorated. The original buyer gets a refund of the unused portion of the contract, the new buyer pays for the remaining share.

Check Out Time

Review the contract company's policy in issuing refunds if you decide to cancel the policy early. Some companies apply the "rule of 78s," which is a complicated formula that ends up costing consumers big bucks. A more equitable policy is to base refunds on the unused portion of the contract.

Final Considerations

Most defects in new boats and engines show up within the warranty period, so spending money up front on a service contract may not make sense. Consumers also need to look into the reliability history of their vessels and engines. Some models with higher-than-average problems might necessitate an extended warranty. The BoatUS Consumer Protection Database contains thousands of first-hand reports about boats and engines. This invaluable online resource, created by consumers for consumers, is available only to BoatUS members at my.boatus.com/consumer/database.aspx.

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