Considering an extended auto warranty?
Regret, anger, despair — that and more define how Indianapolis resident David Sweat feels when he thinks about the extended auto service warranty he purchased several years ago for a used Chevy V6 half-ton pickup truck he bought after deciding to go into business for himself as a house painter.
Like hundreds of thousands of other consumers around the country, Sweat bought the warranty from U.S. Fidelis, a Missouri-based third-party vehicle service warranty firm owned and operated by brothers Cory and Darain Atkinson. Sweat says he purchased what he thought was a “bumper-to-bumper” warranty for $5,000, as advertised on a TV commercial. Several months later, after making nearly $1,000 in payments on the warranty, Sweat says he tried to get the company to pay for his truck’s new transmission, but representatives from U.S. Fidelis refused to honor the warranty and pay for the repair.
Despite numerous calls to Fidelis and filing a complaint with the Indiana attorney general’s office, Sweat was stuck with a $4,000 repair bill, and no way to get to the painting jobs he’d booked.
“I didn’t have money to buy a new truck or to rent one,” Sweat says, so in the time it took to get the money for the repairs, he lost clients and ultimately, his business.
Sweat isn’t the only Fidelis consumer left holding a worthless warranty, federal investigators say. In July, following a two-year investigation of U.S. Fidelis by the Internal Revenue Service, U.S. Postal Service, FBI and the Missouri attorney general, a federal bankruptcy judge in Missouri accepted a settlement in the case that places $14.1 million, garnered from liquidating the assets of the Atkinson brothers, into a restitution fund to compensate eligible consumers who submit a valid proof of claim with the bankruptcy court. Investigators say the men, who also did business as National Auto Warranty Services and Dealer Services, sold warranty packages to as many as 625,000 consumers in 29 states, plus the District of Columbia.
The settlement follows the men’s guilty pleas earlier this year to one count each of federal felony charges of conspiracy to commit mail and wire fraud, and filing false tax returns, according to the Missouri AG’s office. The federal indictment says the pair deceived consumers from 2006-08 by marketing and selling worthless vehicle service contracts with no affiliation to an automobile manufacturer, no authority to provide an automobile manufacturer’s factory warranty and no authority to alter or extend a factory warranty.
Darain’s sentencing was scheduled in August, and Cory’s sentencing is set for later this month. The federal conspiracy count carries a penalty of five years in prison and/or fines up to $250,000. The federal tax count carries up to three years in prison and fines. The brothers also pleaded guilty to felony stealing, insurance and consumer fraud charges in Missouri, according to state records. The men’s attorneys did not return calls.
Although Sweat says he plans to make a claim to the restitution fund, he’s not sure he’ll get his money back. “I’d love to sue the pants off [U.S. Fidelis] ... I’d light them up for lost wages, everything,” he says.
Be wary of unsolicited warranty offers
Industry experts say buyers must beware when it comes to unsolicited offers to buy service contracts that come via the mail, over the phone or from a TV commercial.
“A number of these third-party warranty companies are fly-by-night operations that go belly up within a few years, costing consumers hundreds of dollars in out-of-pocket repairs and leaving them without coverage,” says Ron Montoya, senior consumer advice editor for Edmunds.com, a top online resource for auto information. “A third-party warranty is so named because it has no direct business relationship with the product it covers. In this case: your car.”
Terry Tolliver, deputy director of the Consumer Protection Division for the Indiana attorney general, advises consumers to proceed with caution before buying. “Seldom will you find the extended warranty that pays for itself, but some risk-averse people feel better having it in their back pocket,” he says. “Consumers need to investigate that it covers what they think it covers.”
Factors to consider include the plan’s details and cost, the vehicle’s age and mileage, how long you plan to drive it, and its maintenance schedule. Pay particular attention to providers who have no connection to vehicle manufacturers. “Third-party warranties are where you get the complaints,” Tolliver says. “There are some that are good and will cover what they say they will and there are others that will make you fight for everything.”
In addition to joining the legal action against U.S. Fidelis, the attorney general won a default judgment in March against now-defunct Indiana Warranty Inc., a Franklin, Ind.-based third-party warranty company operated by William L. Pennington Jr. Court documents say Indiana Warranty closed its doors in July 2009 after experiencing financial problems, but fraudulently concealed that information from used car dealers and consumers. On March 16, a Johnson County judge ordered Pennington to pay $49,436 in restitution and fines for violating the state’s deceptive consumer sales act.
James Mathews of Indianapolis says he learned Indiana Warranty went out of business in August 2009 when his 1999 Saab had engine problems and he called to use the warranty for repairs. “I probably lost $1,500,” Mathews says of the warranty, which had two years left on it when he bought the car from a friend.
But Mathews isn’t eligible for restitution, AG spokeswoman Erin Reese says, because the judgment included only seven consumers who purchased warranties at the time the company knew it was going out of business. “Many of the consumers purchased warranties some time before Indiana Warranty went out of business and while failing to honor that warranty would amount to a breach of contract, it didn’t rise to the level of deception,” she says.
What's in a service plan
Commonly called an “extended auto warranty,” the product is actually a prepaid service contract or vehicle service plan. A service plan is separate from the original manufacturer’s warranty, which is included in the price of a new car, according to the Federal Trade Commission. Service plans pay for specified repairs over a defined number of years or miles, after the factory warranty expires.
Vehicle manufacturers, auto dealers or independent third-party providers offer the plans. Also, the FTC says many vehicle service contracts are handled by independent administrators, who act as claims adjusters, so it’s important to research both the seller and the administrator.
Dealerships sell the most plans, with the cost rolled into the vehicle’s financing, says Bruce Norton, spokesman for the Indiana Independent Auto Dealers Association. On average, plans cost $1,500 to $2,000, he says, and most include either comprehensive or exclusionary coverage, or named-component coverage. A comprehensive plan lists all exclusions.
“Some people might call a comprehensive or exclusionary plan ‘bumper to bumper,’ but there’s no such thing, even on new cars. Neither bumper is covered, and a lot of stuff in between isn’t covered,” he says. A named-component plan lists what’s specifically covered.
Indiana law also requires these companies to insure their contracts, Tolliver says. Norton adds that the insurance policy protects consumers if the company defaults on claims or goes out of business. He also advises keeping detailed maintenance records since many warranty plans may void coverage if you fail to do specific maintenance.
Do you need an extended auto warranty?
More than half of about 1,000 Angie’s List members responding to a recent online poll say they’ve purchased an extended auto warranty. However, nearly 66 percent say they didn’t shop around or negotiate for the best deal, but Montoya thinks it’s important. “You can negotiate,” he says.
Member Don Trainor of Carmel says he typically finds little value in vehicle service plans, but he thinks they can be worthwhile in some cases. He bought plans for a new 1997 Ford van and three used cars that his sons drove while in college. He says the plans made him feel more secure about his sons’ ability to easily manage repairs, and one more than paid for itself after two repairs.
Fred Kuhn, owner of A-rated Glendale Automotive in northeast Indianapolis, says he generally advises customers to avoid service plans. If you buy one, he says, withhold approval for service work until the mechanic confirms coverage. “The company will tell me how much they’ll pay,” Kuhn says. “On a $100 part, they may say the national average is $75. They may not pay for diagnostic time, any fluids or shop supplies. Then there’s the deductible. So you can have a $265 bill that you actually pay $175 on.”
Ken Walters, financial services manager for A-rated O’Brien Toyota Scion of Indianapolis, says auto service contracts aren’t for every driver. “Anything that’s like insurance is designed so the chances of you getting more out of it than you’ve paid are slim,” he says.