Third party car warranties

Regarding this post by Mr. Slant in IMHO:

I know very little about this. How does they, work, and what makes them bad?

Teach me to edit a sentence. How do they work?

You pay them some amount of money, and when something on your car breaks that’s covered by the warranty, they reimburse you for it.

The reason they’re considered ripoffs is that they have to make a profit. Which means that, on average, you’re paying more for the warranty than you would for the repairs it covers. It’s repair insurance, basically.

It’s the same concept as home/health/collision insurance, except that the dollar amounts involved are much smaller. You accept the necessity of paying for home insurance (despite the fact that the insurance company has to make a profit, and most people never have to file a claim) because, if a tornado levels your house, you (probably) wouldn’t be able to buy a new one.

However, most people are capable of paying for even major car repairs. There’s no reason to buy insurance for something that you can easily pay for yourself.

There’s probably a 10% chance that, for a given car, the warranty will be worth it, and a 90% chance that it won’t. There’s no reason to take those odds: if you fall in the unlucky 10%, just suck it up, and you have a 90% chance that things will work out better on your next car.

I’m sure someone else can explain things much more clearly than me, but that’s my understanding of it.

That’s a pretty good explanation. Consumer Reports generally has said the same thing. I’ll add to it a little though.

It is like health insurance on your car, but a catastrophic illness for you could cost tens of thousands of dollars and the insurance can keep you alive. With the car it’s much less dramatic. I don’t know exactly how you get paid; if the dealer sells you the warranty they may file directly for reimbursement on your behalf so the process is transparent. Other situations may require you to pay up front then file for reimbursement.

It’s like playing a slot machine. You pay money to play. If the car breaks, you hit the jackpot. Otherwise, part of your money goes to pay other “winners” and part goes to the profit of the company, and I understand that this profit is quite high. A statistician would say that “the expected value is negative.” That essentially means that all the money that everybody pays in totals more than all the reimbursements that come back. Just like a casino. A few happy winners, a whole lot of losers.

Now, profit is not all evil. In fact, the car manufacturer plays the same game with your “free” warranty, but the cost is built into the price of the car so you don’t see it separately.

So in a nutshell, stay away from third-party car warranties. If you want a car warranty, only buy the manufacturer’s warranty.

My biggest objection is the AMOUNT of profit.
For some reason, it appears that the payout ratio on this particular financial device is… 30% or so.
If it was 90%, I would go ahead and buy them.
If it was 75%, I would consider them, if I was broke, MAYBE.
At 30%, I’ve got better odds if I buy accidental death and disability on my dogs…

I picked up a 3rd Party Warranty for my '98 Tracker when I bought it (pre-owned) a couple of years ago. It added around $1,500 to the purchase price, but I’ve always had terrible luck with buying second-hand cars, so I figured I’d just go along with it. Turns out it actually worked, iin one sense. They must have covered almost two grand in repairs (gasket leaks, brakes, front struts, O2 sensor, AC parts, etc – I told you I had bad luck!). So although it only saved me around $500, I looked on it almost as a savings plan for car repairs. It was an amount I could budget for every month, because it was included in my car payment, and when it came time for repairs, our bank account didn’t take a direct hit, so to speak.
They way they worked it, for payment, was: The garage tells them what they need done; 3rd Party OKs it; garage draws up 2 invoices: one for the Warranty, one for me (including $50 deductible); the company gives the garage a credit card number for their part of the bill, and I pay for the difference. They had a guy in the area who acted as their inspector, who would occasionaly stop at the garage to make sure the repairs were legitimate; they would also send me a card after every job to make sure what they had paid out matched what my copy of the invoice said. That would lead me to believe that the repair try to screw them over, as well as the average joe.

I bought an extended warranty for my car and wish I hadn’t.
I still ended up paying big repair bills for things that were considered wear and tear and therefore not covered by the warranty. It seemed to me like damned near everything was wear and tear. For example I had to replace two oxygen sensors ($800) that weren’t covered. All sensors were specifically excluded in the fine print. A $400 part that could fail the day after I bought the car and they still wouldn’t be covered.

Bear in mind that even if the repair you need is covered, you may be required to go through certain channels to get it paid for by the warranty.

<anecdote>A friend of mine on a car trip with his family had a breakdown, and ended up getting the shaft for a $600 repair because the other option was to do some damn fool warranty procedure that would have taken a huge bite out of his planned vacation.</anecdote>

When evaluating a warranty for anything, you should consider not just the expected value (which is always negative), but also the time and hassle of going through the warranty procedure. This is most obvious on easily replaceable items like electronics. Why would I want to get a warranty on my TV that will take 2 months and shipping costs to get it fixed, when I could just go down and buy a new one the same day?

A car (or anything for that matter) manufacturer offers a warranty, in part, to preserve the reputation of their product. Shinola happens sometimes, and the manufacturer doesn’t want thier product badmouthed because of some fluke. Any decent company wants an opportunity to make things right with thier customers.

Third party warranty companies have no such motivation. The less the pay out, the more they make. Thus deny, delay, and make the customer jump through no end of hoops so they won’t bother filing another claim becomes the order of the day.

When I worked in the service department at Circuit Shitty, they told us that the claim rate for their extended service plans was less than 5%. Meaning that 95%+ of the ESP’s that were sold never had a claim filed against them.

The 3rd party insurance companies are careful to craft their coverage so that they only cover the middle part of the bathtub curve. Sometimes they will extend the coverage all the way to the begining of the curve to increase the apparent value of the coverage, but it’s usually pointless because their is concurrent coverage by the original manufacturer’s warranty during the first year of product ownership.