Worthless service contracts sold by the vehicle service contract (VSC) industry have cost consumers millions of dollars nationwide, a Better Business Bureau (BBB) study
The BBB undertook the study after consumers filed thousands of complaints about the industry and in the aftermath of the bankruptcy of industry giant US Fidelis. The marketing of contracts is centered in the St. Louis area. Many companies call the contracts “extended warranties” and frequently sell them as a way for consumers to save money on auto repairs. However, all too often, many repairs are excluded.
Consumers have been frightened and tricked into parting with thousands of dollars by misleading solicitations and high-pressure sales tactics. Many in the industry have preyed on the elderly and other unsophisticated buyers who believed they were getting warranties sanctioned by auto manufacturers. What most of them got was a worthless piece of paper.
The industry has been evolving for at least the past 25 years, but enforcement of consumer protection laws increased only in the past five years or so. The BBB recommends that state and federal authorities be more vigilant and vigorous in prosecuting violators, including criminal prosecution of the more egregious offenders.
The Missouri Attorney General began prosecuting vehicle service contract sellers in 2008. Since then, it has filed suits against 13 companies and 20 individuals, obtaining compliance agreements or consent orders in eight cases. Four of the companies paid $78,925 in penalties or restitution and were sued again when allegations of wrongdoing continued.
This month, Missouri joined other states by enacting stiffer laws regulating the industry. A federal regulation has brought robo-calling solicitations to a virtual halt. This, along with prosecution of some offenders, “may herald a new beginning in the industry,” the study concludes. It warns that if enforcement remains lax, the industry “may continue to find ways to evade the laws.”
The study pointed out that the multi-tiered industry—made up of sellers, providers, administrators, insurers and financing entities—causes confusion among consumers. It notes that in a survey of 660 BBB complainants, 64 percent said they did not know the name of the provider of the contract who was responsible for paying claims, and 16 percent thought the provider was the insuring company.
Once a contract was accepted and payments begun or completed, 93 of the consumers surveyed said the companies refused to allow claims that they thought were covered. Consumers spent an average of $1,480 for the covered repairs, the study says.
The survey revealed that 92 percent of respondents felt that the company’s selling tactics were misleading or otherwise improper. While telephone calls accounted for 28 percent of the first contacts with a company, a like number of consumers said they called a company because of TV or radio advertising. Thirty-one percent said they responded to a mail solicitation.
The study shows that many consumers felt they were misled about what a contract provided. While the new law passed by the Missouri Legislature seeks to address the problem by requiring a “free-look” period, the seller must provide a blank contract only if the prospective purchaser requests it.
The study recommends that the Department of Insurance, which oversees the VSC industry, consider a regulation that requires consumers to physically sign a contract before it becomes valid and prohibits “signatures” by telephone. It recommends that the Department of Insurance consider a regulation that prohibits VSC providers from insuring contracts with reimbursement insurance contracts in which they or affiliated entities are members, and that Congress amend the Liability Risk Retention Act to prohibit VSC providers from forming risk retention groups to insure contracts.
The BBB advises consumers who are considering buying a vehicle service contract:
- Always read the contract carefully before agreeing to buy it. See what is covered, what isn’t covered and what conditions apply. If the seller won’t provide a contract, don’t buy it.
- If you are on a do-not-call list, report any violations to the attorney general’s office or FTC.
- Do the arithmetic. Sometimes the cost of a contract may be more than the car’s value.
- Ask the seller the names and locations of the providers, administrators and insurers. Ask how claims are processed.
- Check all companies involved in the contract with the BBB at www.bbb.org
The study is at http://stlouis.bbb.org/Storage/142/Documents/VehicleServiceContractStudy2011.pdf