Motor Vehicle Service Contract Ancillary Products
Aaron Lunt | January 3, 2020
Service contracts are an area of law that fall under most state insurance department's regulatory jurisdiction but are oftentimes afforded relaxed regulatory oversight that doesn't rise to the same level as traditional insurance. A standard service contract covering an automobile, consumer good, or home appliances/systems extends coverage when there's a mechanical breakdown caused by appropriate usage of the good or due to normal wear and tear. Said another way, it simply stops working as intended.
Beyond this application, there are several ancillary products, primarily in the automotive space, that are treated as service contracts but extend helpful benefits to consumers that, without an adequate pipeline of products and coverages, would leave consumers financially exposed. Let's explore!
How Are Ancillary Products Regulated?
Before exploring different types of ancillary products, it's important to understand how they are regulated. As a general rule, most states include ancillary products as falling under service contract statutes or regulations in some fashion. 1 These "ancillary" products can sometimes be sold on a stand-alone or bundled basis but usually are attached to a standard service contract that is designed to cover mechanical breakdown to automobiles that are caused by mechanical failure or normal wear and tear.
To set the context, many states expressly include certain ancillary products in their definition of a service contract. For example, North Carolina Article 43 titled "Service Agreements" under section 66-370(b)(1) states the following.
b. A motor vehicle service agreement includes a contract or agreement to perform or to indemnify the holder of the motor vehicle service agreement for performance of any of the following services:
- The repair or replacement of tires or wheels on a motor vehicle damaged as a result of coming into contact with road hazards.
- The removal of dents, dings, or creases on a motor vehicle that can be repaired using the process of paintless dent removal without affecting the existing paint or finish and without replacing vehicle body panels, sanding, bonding, or painting.
- The repair of chips or cracks in or the replacement of motor vehicle windshields as a result of damage caused by road hazards.
- The replacement of a motor vehicle key or key fob in the event that the key or key fob becomes inoperable or is lost or stolen.
- Other services which may be approved by the Commissioner of Insurance, if not inconsistent with other provisions of this Article.
As you can see, mechanical breakdown due to a mechanical failure or normal wear and tear are traditionally what service contracts cover, but there are ancillary benefits to explore.
What Types of Ancillary Products Exist?
Several states extend service contract oversight to the following types of products.
Tire and Wheel Coverage
This coverage, as its name indicates, covers automobile tires. Although tires can be purchased from retail establishments, such as Costco, they are regulated primarily as service contracts. The product essentially covers flats or road hazards that cause the tire to pop, deflate, or lose effectiveness. For example, if a nail is embedded in the sidewall, and the coverage period has not expired, this would typically be a covered peril. In certain products, roadside assistance can be extended to help with automobiles that are immobilized due to a tire issue that renders the automobile inoperable.
Windshield Coverage
This is coverage to automobile windshields, which is typically caused by some sort of road hazard, such as an errant pebble or flying object that strikes the automobile's windshield resulting in a chip or crack. Automobiles are still usually operable after a chip or crack occurs to a windshield, but visibility can be impaired, and the damages, which oftentimes start out small, can progressively get worse. Seeking repairs oftentimes may be covered under a standard automobile policy, but higher deductibles and/or fear of submitting a claim, which may impact premium pricing, can serve as a deterrent. Windshield coverage through a service contract can be a cost-effective, relatively painless alternative.
Paintless Dent Repair
Dents happen to automobiles for a variety of reasons, but often the damage creates a nuisance or an unappealing appearance for consumers. Automobiles are usually still operable after dents happen (which can be caused in countless different ways—think about an errant baseball at T-ball practice!), but repairs may be desired. In addition, much like windshield coverage and other potential ancillary products, coverage under a standard automobile policy might not be preferred, or even covered, due to high deductibles and/or fear of submitting a claim that may impact premium pricing. This product, if typically offered as an ancillary benefit to a standard service contract, extends coverage to remediate the aesthetic damage caused by a host of perils that damage the body of an automobile.
Vehicle Appearance Products
Several influences can deteriorate the appearance of automobiles, both inside and outside. Several "appearance" products are available that help keep internal upholstery and exterior elements looking in tip-top, pristine condition. As Auto Consumer Info indicates, vehicle appearance products extend the following.
Exterior Protection products are designed to protect your vehicle's exterior from such elements as acid rain, bird waste, tree sap and other contaminants that can damage the surface of your vehicle. Interior protection products protect your vehicle's fabric, leather or vinyl from damage caused by food and beverage stains, fading and discoloration from the sun's ultra-violet rays. Vehicle appearance protection products can help keep your vehicle looking beautiful inside and out.
Etch/Antitheft
Automotive theft remains rampant in the United States, but there are several precautions a consumer can take to protect their assets. According to the Insurance Information Institute (I.I.I.), in 2018, 748,841 automobiles were stolen. 2 In securing antitheft products, it can assist, via the insertion of tracking and/or identifiers into the automobile, law enforcement agencies to identify, track, and recover stolen automobiles. To illustrate, engraving technology can be used to insert traceable security codes that serve as a deterrent to automobile theft but also will extend a cash payout in the event the stolen automobile cannot be recovered. 3 As automobiles are oftentimes the first or second most expensive investment/asset for consumers, deterring theft or recovering a stolen automobile remains a significant priority.
Key Fobs
Almost all new automobiles come with keyless devices that are programmed to communicate with the automobile's systems, including ignition ports and other component parts within the automobile. It's essentially a portable communication device. If lost or misplaced, these devices can be quite expensive to replace. Coverage can be extended to cover a replacement key fob to ensure consumers have the ability to utilize this technology.
Final Thoughts
Service contracts remain a very relevant product for consumers, which help cover unforeseen losses due to breakdowns in automobiles. Beyond standard service contracts that traditionally cover mechanical breakdown due to a mechanical failure or normal wear and tear, there are several ancillary products that cover unique portions or products associated with the ownership and operation of an automobile. These ancillary products are critical to ensure consumers have adequate financial protection in the unforeseen event that there is a breakdown or peril that damages the covered item.
Disclaimer
The purpose of this article is to provide information rather than advice or opinion. It is accurate to the best of the author's knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to non-CNA websites are provided solely for convenience, and CNA disclaims any responsibility with respect to such websites.
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