Service contracts: Hard-sell tactics plague dealers, customers
Paul Broome, a Cadillac dealer in Independence, Mo., hears from about 10
customers a month who complain about his dealership's high-pressure
sales of service contracts. But Broome has nothing to do with the
disputed contracts or their marketing.
Instead, some peddlers of third-party contracts tap vehicle registration
data to reach customers of dealerships such as Broome's by telephone,
e-mail and direct mail. Their sales pitch includes the claim — often
false — that the customers' factory warranties have expired or are about
to do so.
They assert or imply — also falsely — that they represent a dealership
or automaker. And in some cases, vendors allegedly charged consumers'
credit cards for thousands of dollars without authorization.
The boiler-room promotions are "giving the industry a black eye," says
Broome, who chairs the Missouri Automobile Dealers Association.
State regulators are stepping in. Missouri Attorney General Jay Nixon is
suing six independent service contract vendors, alleging deceptive sales
tactics. He has settled similar charges with two other providers, who
did not admit wrongdoing.
Nixon's office has gotten complaints from more than 200 consumers around
the country, says a spokesman, who adds that the investigation has not
uncovered any fake contracts. Several companies named in the lawsuit
told Automotive News they are cooperating with Nixon to resolve the matter.
The Missouri attorney general has cited other misleading marketing
practices by some independent vendors of vehicle service contracts:
• Promoting a service contract as an "extended warranty"
• Contacting customers who are on federal or state "do not call" lists
• Failing to honor money-back guarantees for canceled contracts
Source: Missouri Attorney General's Office
Dealers and regulators say rogue service contract vendors churn out
"notices" to consumers that look and sound official. In an effort to
make an immediate sale, they tell vehicle owners their warranty coverage
is exhausted or soon will be. In many instances the customers have more
than a year left on their manufacturer warranties.
"Customers say, 'I thought my warranty is still good,' " dealer Broome
says. "Or, 'You already sold me a service contract, so why is someone
telling me the warranty is about to expire?' "
Dave Robertson, executive director of the Association of Finance and
Insurance Professionals, says such scare tactics have "long been the
staple of the junk mail and recorded phone solicitation trades." The
association trains and certifies dealership F&I managers in law and ethics.
Complaints have escalated with the rise of automated telemarketing and
online commerce, dealers say.
Three of the vendors named in Nixon's lawsuit say they are cooperating
with his investigation. They are Service Protection Direct, of St.
Louis; Dealer Warranty Services, of St. Charles, Mo.; and Certified Auto
Warranty Services Inc., of Lenexa, Kansas.
The vendors admit mislabeling service contracts as "warranties" and
claiming factory warranties are about to expire when that is not always
"We target owners of vehicles that are 2 years and 3 months old," says
Billy Bell, president of Certified Auto Warranty Services. "Depending on
their driving habits, they could be out of warranty. We have no way of
knowing the mileage on the vehicle."
Certified Auto Warranty Services and Dealer Warranty Services say some
consumers who filed complaints with Nixon confused them with vendors
that market service contracts with similar names. They say they
typically honor money-back guarantees and government do-not-call lists.
They deny claiming ties to dealers or automakers or improperly charging
Ted Conrad, administrator for Dealer Warranty Services, says
disreputable vendors have "ruined the industry."
"We try to do our utmost to satisfy customers, but others do not," he says.
John Hamill III, a lawyer for another defendant — National Auto Warranty
Services Inc., of Wentzville, Mo. — says the company does not discuss
pending litigation. Calls to the other defendants — National Dealers
Warranty Inc., of St. Peters, Mo.; and Direct Dealer Warranties, of St.
Louis — were not answered.
Dealers say hard-sell vendors of service contracts gravitated to
Missouri because the state's regulation traditionally has been loose.
The Missouri Automobile Dealers Association lobbied for tougher
regulation that took effect in 2007, says Sam Barbee, the association's
executive vice president.
Missouri now requires service contract vendors to register annually with
the state's department of insurance. They must show that they have
enough insurance to pay claims, place a reserve fund in trust with the
department, document net worth of at least $100 million or prove that a
parent company has agreed to cover claims.