Should You Buy An Extended-Service Contract?
By Charles Fort
It used to be that deciding whether or not to buy an extended-service contract on your engine (erroneously called extended warranties by some) was pretty easy. Until recently, our answer to the question was simple: Don't. Service contracts of old were more profit centers for dealers than benefits for buyers, and navigating the exclusions and other confusing small print was downright scary. But manufacturer-backed service contracts have raised the bar; the question now deserves a second look. Here are some facts to help you decide if buying one makes sense for you.
Fact 1. Extended "warranties" you have to buy aren't really warranties, they're service contracts.
A warranty is a promise by the manufacturer that their product will be free of defects for a period of time. Warranties, by law, are included in the purchase price. A true warranty offers broad coverage and has the weight of state and federal warranty laws behind it. Problems with your new boat or engine, aside from wear and tear, accident, or abuse, will be covered under a manufacturer's warranty. Service contracts, on the other hand, are really insurance policies generally underwritten by third parties, not manufacturers, and are regulated as such in most states. They are simply an agreement to pay for repairs only if the breakdown is covered, and they must be purchased at additional cost. Service contracts are often marketed as "extended warranties," implying that the boat or engine manufacturer will cover repairs after the original warranty has expired, just as they would if it were covered under the original factory warranty. Usually, they don't. But manufacturer-backed service contracts from companies such as Yamaha and Mercury Marine are beginning to perform much the same way as warranties, though they still fall outside of state and federal warranty law.
Yamaha's Extended Service (YES) program is underwritten by an insurance company, but because it's managed directly through Yamaha, it acts more like a true warranty and, for most people, it feels similar. Mercury Marine's Product Protection program uses no outside underwriting, allowing the company to tailor their service contracts to more closely mimic their factory warranty.
Fact 2. Service contracts have limitations that true warranties don't.
Over the years, BoatUS Consumer Protection has received numerous complaints where an owner purchased a service contract only to find that consequential damage wasn't covered. Here's an example: A BoatUS member bought a new 30-foot boat with a third-party extended service contract. Six months later the boat suffered a major problem when an alternator suddenly began overcharging and blew out the electronic control unit (ECU) on one of the engines. The boat was still under warranty, so the manufacturer replaced the alternator and the ECU at no charge. Five months after the new-boat warranty expired, the other alternator suffered the same problem and damaged the other engine's computer. The service contract covered the broken alternator ($650), but didn't cover consequential damage (when one part causes another to be damaged), and wouldn't pay for the damaged ECU ($1,300), leaving the owner to pay the difference.
Manufacturer-backed service contracts are usually different. According to John Potzauf, Yamaha's warranty manager, their program covers consequential damage, the same as it would during the factory warranty period. Amy Wiesener, Mercury Marine's warranty manager, also says consequential damage isn't excluded.
Another limitation: Most service contracts have maximum payouts for claims or even for repeat failures of the same component. Limits are often based on the value of the covered product, in this case, the engine. Third-party service contract underwriters can and do cancel contracts when paid claims exceed the current value of the engine. Here again, manufacturer-backed programs have advantages because most provide coverage up to the list price of your engine when you bought it. Before you buy a service contract, don't just look at the sales literature; ask to see the actual contract. Pay particular attention to the "Exclusions Section" — often a lot longer than the "Items Covered" section. Some manufacturer-backed service contracts offer more than one level of coverage. You can save money buying the cheaper level, but there will be more exclusions, such as no coverage of electrical items, including the expensive ECU.
Fact 3. Having a service contract won't protect you from out-of-pocket expenses.
Service contracts usually come with deductibles, like health-care insurance policies, often between $25 and $50 per incident. Sometimes, it's just one deductible per incident; sometimes a deductible is charged per item that needs to be repaired. As mentioned above, service contracts often don't cover consequential damage so even if your engine breaks down, repairs may not be completely covered.
Many contracts don't pay to remove the engine from the boat or have the boat hauled if it's required for repairs, so there may be additional expenses for that. Some manufacturer-backed programs only pay for haul-outs if you buy the higher level of coverage, and even then it's usually limited to a couple of hundred dollars, though they often don't have deductibles. Also, wear and tear isn't covered by any policy and sometimes that definition is a little squishy, resulting in denied coverage. Check the contract details to find out how the company handles deductibles and consequential damage.
Fact 4. Most service contracts aren't backed up by manufacturers.
Third-party insurance companies usually write the contracts, and manufacturers and dealers typically won't step in to help if there's a problem. On the other hand, factory-backed programs have agreements with their dealers. The factory (rather than an insurance company that may also provide service contracts on refrigerators and cell phones) is ultimately responsible, so you should expect better service when there's a problem. Ask the dealer if an offered contract is managed by the manufacturer or a service contract company. Those managed by manufacturers typically provide significantly better coverage, and if there's a problem, you can speak directly to the manufacturer. Keep in mind you don't have to buy the service contract sold by the dealer. You can shop around for others and compare prices and service.
Fact 5. You may be paying for coverage you don't need.
If you buy a third-party service contract when you buy a new boat, it won't apply during the manufacturer's warranty. That means that if you buy a three-year contract on a boat with a one-year warranty, the contract may only cover the last two years. If you decide to buy a contract, find one that will begin after the manufacturer's warranty expires. Don't be pressured into buying an extended service contract the same day you purchase a new boat or engine. Many independent and manufacturer-backed contracts 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.
Fact 6. Several complaints received by BoatUS Consumer Protection over the years involve the dealer "forgetting" to send in the premium.
Unfortunately, this doesn't come to light until there's a breakdown and the service contract refuses to pay on a claim. Make sure you get verification that the contract premium was received. Check with the company 20 days after buying a contract to make sure all the paperwork was completed.
Fact 7. Service contracts are moneymakers for dealers.
Some contract plans administered by independent companies allow retailers to mark up contracts 100 percent and more over the actual cost they pay to the service contract company. That's pure profit earned just by getting you to sign on the dotted line. Consumers usually get a better deal on service contracts that bear the name of a manufacturer because these usually limit the dealer markup amount. Don't forget, though, that service contract prices are a negotiable part of the sale. Some companies, like Yamaha, allow you to buy a contract directly through them, bypassing the dealer.
Fact 8. Independent service contracts require preauthorization before starting repairs.
While that's fair, some companies may require you to use their network of shops, just like health-care PPOs, and there may not be a facility in your area. Manufacturer-backed service contracts usually perform more like warranties — simply bring in your engine for service and the dealer takes care of all the paperwork and billing. While you're limited to using only a manufacturer's dealer for repairs, it's usually not a problem because they have a vast network of competent repair shops. Beware of contracts that require you to use the selling dealer for repair work. It won't be very useful if you're away from home or if the dealer can't handle the repairs.
Fact 9. Most service contracts are transferable, for a fee.
A new owner may need to pay a prorated amount of the contract. In that case, the seller may get a refund of the same amount, which can be used as part of the negotiations. But beware, not all contracts are transferable. Manufacturer-backed programs are usually pretty straightforward and charge a small flat fee, but also require an inspection from a dealership for the new owner to qualify. Find out the details before you buy the contract, not when you sell your boat.
Fact 10. You may be able to cancel the contract within 30 days of purchasing of buying a boat.
Typically, you'll pay a prorated amount plus a fee. Review the company's contract to see how it works.
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. If you decide to buy, manufacturer-backed service contracts typically provide better coverage and more accountability, though they may cost more. Consumers also need to look into the reliability history of their vessels and engines. Some models with higher-than-average problems might benefit from a service contract. The BoatUS Consumer Protection Database contains thousands of firsthand 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
— Published: December 2013
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