MAKING SURE SERVICE CONTRACTS REMAIN A DEALERSHIP
PROFIT CENTER, NOT A LIABILITY
By: Keith E. Whann
The increased popularity of service contracts among
consumers (as evidenced by the rising sales penetration rates in dealerships
across the Country),
combined with problems of a major service contract provider, has produced
numerous inquires on the types of issues a motor vehicle dealer should
consider when analyzing a service contract program. As with any other
product or service, a dealer should do some due diligence beforehand
with respect to both the service contract provider and the product
it is offering. Remember, you must be realistic when looking at a particular
service contract program. As with dealership paperwork, the cheapest
is not always the best. Since the dealership is the one selling the
product
to the consumer it can be exposed to liability regardless of what the
actual service contract or service contract provider’s dealer agreement
might say.
The first and foremost issue to consider is whether the provider is
offering a “dealer obligor” or “third party/administrator obligor” service
contract program. While the actual mechanics of the program will be somewhat
similar, the dealership bears full responsibility for all of the obligations
to the consumer under a dealer obligor program, including financial responsibility
for the payment of claims. A careful review of the service provider’s
dealer agreement and the service contract itself should enable you to
ascertain the structure of the program. In conducting your review, focus
on each party’s contractual obligations and how those obligations are
fulfilled rather than document headings that may contain labels such
as “administrator” or “provider”.
Even when dealing with third party or administrator obligor service
contract programs, if everyone else involved with the program becomes
insolvent, the consumer’s last resort is the dealership where the service
contract was sold. In some cases the consumer can be successful, as some
dealers are discovering in dealing with the recent financial difficulties
encountered by a major service contract company in the market place.
When selecting a program, a dealer should consider the service provider’s
current ability and past history with respect to the payment of claims.
Dealers should also inquire about the type of insurance coverage the
provider has obtained for the program and obtain copies of the current
insurance insurance policy. An important factor to consider when analyzing
the insurance coverage is whether the policy provides first dollar coverage
or “stop loss” coverage.
Apart from the dealer’s belief or any statements made by the service
provider during its sales presentation indicating that the dealership
will have no liability under a given program, the dealer agreement and/or
service contract itself often contain other areas of potential liability
for a dealership. For example, many service contract programs provide
for a delay in coverage between the date of sale of a motor vehicle and
the effective date of a service contract, thereby limiting coverage during
one of the most crucial time periods when the consumer owns the vehicle.
Other service providers require that an application for a service contract
be received and accepted by the provider before the service contract
becomes effective, once again limiting coverage and potentially exempting
the service contract provider from responsibility for paying claims that
arise during those first few days of ownership of a vehicle.
Many dealer agreements also make it the selling dealership’s obligation
to repair, or assume liability for the cost of repairing, any damage
to vehicle components covered by the service contract that existed at
the time of the sale of the vehicle to the retail customer. This can
present a number of problems when a service contract is sold in conjunction
with a used motor vehicle. Furthermore, many of the dealer agreements
provide that the service provider can deny a prospective consumer’s claim
if the vehicle has been modified from the original manufacturer’s specifications.
Since it is virtually impossible for anyone dealing in used vehicles
to be familiar with the original manufacturer’s specifications and equipment
for the motor vehicles with which they deal, this creates another potential
area of exposure for the dealership.
Claims administration is also an important consideration. Effectively
handling claims and getting them paid helps to keep your customers loyal
customers to the dealership. Additionally, if your dealership will be
performing any of the repair work pursuant to the service contract, you
should inquire as to what the standard is for the payment of labor rates
(i.e. are they determined by national averages, flat rate manuals or
actual time spent?), whether the provider will pay the entire cost of
the repair or only what the “reasonable” cost of repair should have been
according to the provider, and whether you are obligated to provide any
additional warranty to the customer in connection with the repair.
A motor vehicle service contract program can, if structured properly,
be an important profit center for a dealership. The exercise of a little
due diligence by the dealership prior to executing a dealer agreement
with a service contract provider and engaging in the sale of its products
will not only protect the dealership from unforeseen liability, but will
help ensure the overall success of the program. |
