There are many different types of vehicle service contracts and coverage plans, among them “Listed Component Coverage,” so called “Listed Bumper-to-Bumper Coverage,” and “Exclusionary Contract Coverage.” There are also vehicle service contracts that are either self- insured, reinsured or directly insured by the provider. It’s not only confusing on paper, but in real-life enactment of the policies, unfortunately often to the policy-holder’s detriment. Educating yourself regarding these differences can save you some cash, and for many people, some potentially costly cynicism as well. Not all warranties are fool’s gold. Like the vehicles they protect, they come in all shapes and sizes, providing their buyers with varying amounts of protection and satisfaction. The key is clearly understanding your options, and then making a choice with same critical eye you used shopping for your vehicle.

Let’s start with listed component coverage. Many online providers and automotive dealers offer these “tiered” coverage plans. Usually there are three tiers of coverage.

The first is basically powertrain coverage; the coverage is for the major components of the engine, transmission/trans axle and differential or final drive. This coverage is very simplistic and I do not recommend it for any vehicle still under the manufacturer’s basic auto & car warranty. Several manufacturers do offer extended drive train coverage, check your owner’s manual for the complete auto & car warranty coverage.

Our second coverage is an extension of the basic powertrain coverage but will add other components. The additional components are usually steering, electrical, air conditioning, cooling system and fuel system parts. The coverage is more expensive than the basic powertrain coverage, but again is limited only to the parts that are listed. If a component is not listed, it is not covered.

Above and beyond all the smoke and mirrors is the exclusionary contract! An exclusionary contract is just the opposite of listed component coverage. Every component on the vehicle is covered except what is specifically excluded. This is the most comprehensive coverage available. Most items that are not covered are normal maintenance items.

Reinsurance is often the most deceiving, so we will go into a little more detail about it. Many providers of this coverage state that their plans are fully insured, but this could not be further from the truth.

This is how an RRG (Risk Retention Group) works: a group forms a company and in many cases they are the administrator of the service contracts. Most will have names that sound like an insurance company, but they are not. The easiest way to tell if a Risk Retention Group underwrites a contract is that it will have RRG after its name. The RRG will have their contracts reinsured by an insurance company with a positive AM-Best rating. You may see ”Re-insured by AM-Best A+ Insurance Company” on many websites or in a vendor’s brochure. An RRG is not regulated by the state insurance departments and has very little regulatory oversight at all. If a RRG goes in to bankruptcy, you would think that the re-insurer would cover any losses beyond the financial capacity of the insolvent RRG; unfortunately not. These agreements between the RRG and Re-insurer might pay only 5-10% of claims beyond the scope of the insolvent RRG. The service contract is an agreement between you and the administrator or provider, not the re-insurer. Many of the re-insurers in the service contract business are not even U.S. based companies. As far as RRG’s go, we do not know of any with a positive AM-Best Rating.

Finally, the directly insured service contracts. There are only a handful of these providers on the Internet, in banks, credit unions and auto dealers.

A directly insured service contract is fully insured by an actual insurance company. The insurance company must have an approved filing for the products and services offered in each state they conduct business in. The state’s insurance commission approves the filings. Insurance companies insure a diversified range of products and also invest capital and surplus into diversified portfolios. This is done to protect the client’s investments. All admitted insurance carriers must file quarterly or annual reports with each state, in this case to ensure compliance with the respected state’s guidelines. States also have what is called a “Guarantee Fund.” All insurers remit premiums to this fund, which provides additional protection for policyholders.

Moody’s Investor Services, AM-Best, Fitch and Standard and Poor’s all rate insurance companies. These rating determine the company’s solvency, financial strength and ability to meet future financial obligations. Many established insurance companies have been in business for over a century. The years of experience equate to a vast knowledge and understanding of the industry. This benefits the consumer by insuring the quality of the products or services offered. A major factor to keep in mind; is that a directly insured service contract is an agreement between you and the insurance company. This is the safest way to ensure that if you have a claim it will be paid.