Vehicle service contract: the thing sold at the desk is not a warranty

Start with the distinction, because everything else follows from it and almost nobody at the point of sale draws it for you.

16 CFR 700.11 separates a written warranty from a service contract. The defining feature of a written warranty is that it is conveyed at the time of sale of the product and the consumer gives no consideration beyond the purchase price in order to benefit from it. Paying extra is consideration beyond the purchase price. That is the whole test, and it is why the product offered at the finance desk generally is not a warranty.

The same section adds a third category. Some agreements meet the statutory definitions but are sold and regulated by states as contracts of insurance, and the FTC gives automobile breakdown insurance policies as its own example. Because of the McCarran-Ferguson Act, 15 U.S.C. 1011 and following, federal law is not construed to invalidate, impair or supersede state law enacted to regulate the business of insurance.

The Magnuson-Moss disclosure machinery — the rules about what a document must say, and about being allowed to read it first — is written for written warranties. That is the point buyers most often get backwards. The heavily regulated instrument is the free one that came with the car. The one you are being asked to pay for sits outside a good deal of it.

This is not a reason to avoid service contracts, and this page is not telling you to. It is a reason to stop assuming that because a federal statute governs vehicle warranties, the thing being sold to you is covered by the same protections. Establish which instrument it is, then read it on its own terms.

Here is the rule that most changes what you can do in the moment, and it is almost never invoked.

16 CFR 702.3 places a duty on the seller. The seller of a consumer product with a written warranty must make a text of the warranty readily available for examination by the prospective buyer, by one of two routes: displaying it in close proximity to the warranted product, or furnishing it on request prior to sale while placing signs, reasonably calculated to draw a prospective buyer's attention, in prominent locations advising that warranties are available on request.

The warrantor has matching duties under 702.3(b) to supply sellers with the materials needed to comply — by including a copy with every product, by a tag, sign, sticker, label or decal carrying the full text, by printing it on the display packaging, or by a notice, sign or poster disclosing the text.

Both of the disclosure rules on this page open with the same qualifier: they apply to consumer products actually costing the consumer more than $15.00.

On a car that qualifier is obviously satisfied, which is exactly why it is worth pointing out. The figure is a floor written for consumer products generally, not a limit that could conceivably exclude a vehicle. If anyone suggests these rules are for small purchases, the threshold says the opposite: everything above fifteen dollars is inside them.

16 CFR 701.3 requires a warrantor to disclose, clearly and conspicuously, in a single document and in simple and readily understood language, a defined list. Read it as the checklist for judging any coverage document you are handed, including one the rule does not technically reach.

• Who the warranty is extended to, where it is limited to the original purchaser rather than every owner during the term
• A clear description of the products, parts, characteristics or components covered — and where needed for clarity, excluded
• What the warrantor will do about a defect, malfunction or failure, including what it will and will not pay for
• When the term starts, if that is not the purchase date, and how long it runs
• A step-by-step explanation of the procedure to obtain performance, with the warrantor's name, mailing address, or a free telephone number
• Whether an informal dispute settlement mechanism under Part 703 applies
• Any limitation on the duration of implied warranties, disclosed on the face of the warranty

The single-document requirement is worth dwelling on. A coverage document that sends you to a website for the exclusions, and to a different leaflet for the claim procedure, is not doing what 701.3 asks of a written warranty. When you are comparing a factory warranty against a paid contract, ask for each of those seven items in the paperwork itself.

If the coverage routes disputes through an informal settlement mechanism, Part 703 governs how that mechanism must work — and it starts by requiring the warrantor to tell you about it prominently rather than in the small print.

Under 16 CFR 703.2(b), the warrantor must disclose clearly and conspicuously on the face of the written warranty: that the mechanism is available; the name and address of the mechanism, or its name and a telephone number consumers may use free of charge; any requirement that the consumer use the mechanism before exercising rights or seeking remedies created by Title I of the Act, together with the disclosure that pursuing rights and remedies not created by Title I does not require resort to the mechanism; and where further information about it can be found.

Section 703.2(a) also prohibits a warrantor from incorporating a mechanism that fails to comply with the requirements in 703.3 through 703.8. The mechanism is not simply whatever the company decides to run.

This is the provision worth carrying out of this page, because it converts an open-ended obligation into a deadline.

Under 16 CFR 703.5(d), where a dispute has not been settled the mechanism must, as expeditiously as possible but at least within 40 days of notification, render a fair decision based on the information gathered.

And 703.5(i) closes the loop. A requirement that a consumer resort to the mechanism before commencing an action under section 110(d) of the Act, 15 U.S.C. 2310(d), is satisfied 40 days after notification of the dispute to the mechanism, or when the mechanism completes all of its duties under paragraph (d), whichever occurs sooner.

It is worth being exact about what the provision does and does not do. It caps a precondition; it does not decide anything, award anything, or say the mechanism was wrong. All it establishes is that a clause requiring you to go through the process first stops being an obstacle once the clock has run.

There is a related timing duty in 703.5(h): where performance has been promised, the mechanism must ascertain from the consumer, within 10 working days of the date for performance, whether performance actually occurred.

If a mechanism is going to stand between you and a court, the obvious question is who staffs it and whose money runs it. Part 703 answers both, and the answers are more demanding than most people assume.

16 CFR 703.3(a) requires the mechanism to be funded and competently staffed at a level sufficient to ensure fair and expeditious resolution of all disputes, and — the part worth knowing before you are told otherwise — it shall not charge consumers any fee for use of the mechanism.

Section 703.3(b) then addresses the conflict everybody suspects. The warrantor and the sponsor must take all steps necessary to ensure the mechanism, its members and its staff are sufficiently insulated from them, so that decisions and staff performance are not influenced by either. The rule names a minimum: committing funds in advance, basing personnel decisions solely on merit, and not assigning conflicting warrantor or sponsor duties to mechanism staff.

Two-thirds is a real threshold rather than a gesture, and the definition is broad: direct involvement in the manufacture, distribution, sale or service of any product, not merely this one. Owning shares bought on the open market as an investment does not count, and the rule says so explicitly.

Part 703 also imposes recordkeeping that a determined consumer can use, and the openness provision is unusually broad.

Section 703.6(d) requires the mechanism to maintain an index showing all disputes delayed beyond 40 days, and 703.6(e) requires semi-annual statistics broken into defined categories — including disputes decided adverse to the consumer, disputes where the warrantor was found to have failed to comply, and separately counted decisions delayed beyond 40 days.

Under 703.8, the statistics compiled under 703.6(e) must be available to any person for inspection. So the performance record of a mechanism is not confidential by default. If a coverage document names one, the numbers describing how that mechanism actually behaves are a category of information the rules contemplate you being able to look at.

The offer is usually made under time pressure at the end of a long day. This sequence is short enough to run anyway.

1. 1Ask which instrument it isA warranty included in the price, a service contract you are paying for, or an insurance product regulated by the state. The answer determines which of the rules above reach it.
2. 2Ask for the full document, not the brochureFor a written warranty the seller has a pre-sale duty to make the text available. For a service contract, ask anyway and read the exclusions before the coverage summary.
3. 3Run 701.3's list against whatever you are handedCoverage, exclusions, what the provider will do, when it starts and ends, the claim procedure, the dispute mechanism, and any limit on implied warranties.
4. 4Find the dispute clause and note the mechanism's nameIf it requires you to use a mechanism first, that requirement is capped at 40 days from your notification where Part 703 applies.
5. 5Check what the factory still covers before paying for moreCoverage you already have is the cheapest kind. Establish what remains on the vehicle before agreeing to buy a second layer of it.

Three limits, stated rather than glossed.

This is not legal advice, and it does not tell you whether any particular contract is worth its price. That turns on the vehicle, the terms, the deductible, the exclusions and your own tolerance for risk, none of which a page can assess for you.

Nor does it tell you which rules bind a specific service contract. The disclosure rules quoted here are written for written warranties; a paid contract may be governed instead by your state's law, and where it is regulated as insurance, state insurance law governs it. What the federal text gives you is a reliable checklist and a vocabulary, which is most of what is missing at the desk.

Our own free check returns the factory build, the specifications and any open safety recall on a VIN. It cannot read a contract. It is useful here for the step people skip: establishing what the vehicle actually is, and what is still open on it, before agreeing to pay for coverage against future faults. The factory coverage check is the companion to this page.