The State of California - State and Consumer Services Agency

LEGAL AFFAIRS
400 R Street, Suite 3090
Sacramento, CA 95814-6200

Legal Guide K-2

SHOULD YOU BUY A SERVICE CONTRACT?

September 1993

You have just decided to purchase a new television set -- or car -- or washing machine -- or VCR - and now the salesperson wants to know if you want to buy a SERVICE CONTRACT.

This legal guide will help you decide whether to purchase a service contract at the time you purchase the product. Since you have 30 days (and perhaps more) to cancel your purchase of a service contract on a motor vehicle, home appliance or home electronic product, this guide also will help you decide whether to exercise your 30-day (or longer) right of cancellation.

What Is a Service Contract?

A service contract is a contract to perform services related to the maintenance or repair (or both) of a consumer product.

Increasingly, service contracts are offered for sale with the purchase of many kinds of products, both new and used. They are sometimes offered by the retail seller, but may be offered instead by the manufacturer or some other company. They oftentimes are offered by mail after you have completed your purchase.

Service contracts are sold under many names -- "extended warranty," "maintenance agreement," "protection plan" or "service contract." Sometimes service contracts are sold to extend the manufacturer's warranty, or are sold in place of a manufacturer's warranty. They are like a warranty, except that you pay extra for the protection, and the repairs may be performed by some other company.

Service contracts sometimes may be sold as additional (and sometimes overlapping) protection while the written warranty is in effect, or as protection when the manufacturer doesn't provide a written warranty, or as protection after the warranty period ends.

A service contract is defined by federal law as a contract in writing to perform, over a fixed period of time or for a specified duration, services relating to the maintenance or repair (or both) of a consumer product. (1)

Service Contracts-To Buy or Not To Buy

To many consumers, buying a service contract is like buying "peace of mind" from repair cost hassles. However, some service contracts provide protection that is available free under warranties, or they may cover the period while the product is new and perhaps least likely to break down. Other service contracts actually may provide very little protection at all, either because of the exclusions from coverage or because the company that is obligated to perform the services doesn't carry out its promises.

Yet products do break down and need to be repaired, and when they do, repair costs can be substantial. If the needed repairs are not covered by the manufacturer's or dealer's warranty, a service contract may offer real and important protection. Yet some studies indicate that the cost of a service contract may be much more than the repairs probably would have cost. For example, a Massachusetts Institute of Technology study concludes that the cost of a service contract for a television is 10 times greater than the average cost of repairs, and that the cost of a refrigerator service contract is almost 16 times greater than the average repair costs.

Nevertheless, there are some good reasons why you may want to buy a broadly-protective service contract that is backed by a reputable company:

• SECURITY. Buying a service contract is like buying an insurance policy that provides protection against future repair costs. Some people feel more comfortable knowing that the repair costs will be taken care of, even if they pay a comparatively high fee to obtain the protection.
• HIGH RATE OF REPAIR. Some people find that they often end up with unusually high repair bills for the products they buy. If you have high repair bills because products that you buy break down frequently, a service contract may be a good idea. However, you also may want to examine the kind or quality of the products you buy and how you use them.

Create Your Own Service Contract

As an alternative to buying a service contract, you could deposit the money you would have spent on a service contract into a bank. In a bank, the money will draw interest and can be withdrawn to pay for repairs as needed. If repairs are not needed, you have created a savings account.

Service Contract Disclosures

You should always read, examine and understand any service contract before buying one. The law requires the seller to allow you to inspect the contract, or a descriptive brochure, before you commit yourself to purchase it.

The law also regulates the contents of service contracts. The law states that a service contract must list its terms and conditions in simple and readily understood language. (2)

The law also provides a benchmark for service contracts on home appliances and home electronic products. The service contract must include a statement that, except as otherwise expressly provided in the contract, the contract obligates the service contractor to provide to the buyer of the product all of the services and functional parts that may be necessary to maintain proper operation of the product under normal operation and services for the duration of the contract and without additional charge. While the service contract also can include conditions, limitations and exclusions, those are legally ineffective unless they are spelled out in the contract in simple and readily understood language which is displayed as conspicuously as the benchmark language in the preceding sentence.

The service contract also must contain a description of your cancellation rights (at least 30 days and possibly longer), and a great deal of other important information. (3) If your service contract covers a home appliance or home electronic product, it must include a statement of the service contractor's general obligation together with any exceptions.

Therefore, before purchasing a service contract, or deciding not to cancel a contract you've purchased, it's important that you know your rights under the contract and understand what you are buying. Remember that there is no such thing as a "standard service contract;" the benefits and protections you receive depend entirely on the language in the service contract. Like most things in this world, there are both good service contracts and bad ones, and there are many whose price is unfairly high and then whose price is probably reasonable. Here is what you should look for:

1. What the service contract covers.

• How does the contract describe the product?
• What components are included and what are excluded?

2. When the contract term begins and ends.

• Does it begin on the date of purchase, or some other date?
• Does it end after an elapsed period of time, or mileage, or some other measure?

3. Is the protection limited to the first buyer or lessee, or can you transfer the service contract?

• Are there limits on transfer or assignment?
• How will these limits affect you or your ability to sell the product?
• Is there a transfer fee?
• How are transfers made?

4. What are the conditions, limitations and exclusions?

• Who decides if the repairs are covered?
• Are manufacturing defects covered?
• Are breakdowns due to normal wear and tear covered?
• How is the cause of the product's failure determined?

5. What does the service contract give you that the warranty does not?

• Are you buying protection already provided by the manufacturer's or seller's warranty?
• Compare the service contract with the warranty to see if the added coverage is worth the additional expense.

6. What is the total cost of the service contract?

• How much does the service contract cost?
• What other costs will you have (transportation, shipping, labor)?
• Is the full charge for each repair paid, or only part of the charge?
• Do you have to pay a set fee (a "deductible") each time you have product repaired?
• Is there a maximum dollar amount for all repairs covered by the contract?

7. Where must the product be serviced?

• How do you get service?
• Must you return the product to the selling dealer? This may not be what you want if the dealer has not been able to repair the product previously, or if you live far from the dealer.
• What happens if you need to have the product serviced while you are away from home?
• Do you have to get permission for repairs in advance?
• Is there a cancellation fee?
• How are refunds calculated?

8. Who is legally responsible for the contract?

• Where is the firm located? (Often the company's name on the contract means that it is merely the "administrator" of the contract.)
• What must you do to keep the agreement in force? Is regular maintenance required? Do you have to keep a record of the maintenance of the product?

9. Can you purchase the service contract later? If so, take the time to think about it.

Prepared by:

Richard A. Elbrecht
Supervising Attorney
Virginia J. Taylor
Staff Counsel
Legal Services Unit

NOTICE: We attempt to make our legal guides accurate as of the date of publication, but they are only guidelines and not definitive statements of the law. Questions about the law's application to particular cases should be directed to a specialist.

Department of Consumer Affairs
400 R Street, Suite 3090
Sacramento, CA 95814-6200