A Warranty is a Warranty is a Warranty

We recently received a request from a dealer to convert the dealer’s service contract into a warranty. Upon receiving this request, we discussed with the dealer the differences between warranties and service contracts to make sure the dealer understood that offering a warranty would implicate an entirely different set of rules than a service contract.

It probably won’t surprise you that this issue comes up quite a bit. Unfortunately, car folks all too often use the word “warranty” to describe both service contracts and warranties. While warranties and service contracts may be similar in their scope of coverage, they have some key differences that can spell big trouble for dealers who don’t properly distinguish between the two.

Most significantly, warranties and service contracts are governed by different laws. The primary law governing written warranties is the federal Magnuson-Moss Warranty Act (“Mag-Moss”). Mag-Moss generally defines “written warranty” as a written affirmation, promise or undertaking relating to the material or workmanship of a motor vehicle, if such warranty becomes “part of the basis of the bargain” between the dealer and the customer. To be a “part of the basis of the bargain,” the warranty must be conveyed at the time of sale and the customer must not give any consideration for the warranty beyond the purchase price of the vehicle.

A service contract, on the other hand, is a contract for services relating to the maintenance or repair of a consumer product. Sounds a lot like a warranty, right? The best way to think about a service contract is as an agreement that would constitute a warranty but for its failure to satisfy the “basis of the bargain” test. Although Mag-Moss imposes some broad limitations on service contracts, service contracts are primarily governed by state law. In some states, a service contract may be treated as insurance subject to insurance laws. In other states, a service contract may be subject to specific laws governing automobile service contracts.

The keys to determining whether an agreement is a warranty or service contract are:

1. Whether the buyer must pay any additional consideration beyond the purchase price of the vehicle

2. Whether the agreement is entered into on or after the date of sale

Here’s an example. Let’s say, at the time you sell a car, you provide to your customer free of charge a written promise to repair any defective car parts. Applying the test described above, your written promise will constitute a warranty subject to Mag-Moss because the buyer did not give any additional consideration and because the promise was made at the time of sale.

Easy enough, you say. You’ll just call this written promise a “service contract,” and not worry about all this Mag-Moss hogwash, right? Not quite. A promise that meets the definition of “warranty” under Mag-Moss will be treated as such, even if you call it a “service contract.”

As a written warranty subject to Mag-Moss, your written promise must comply with the Mag-Moss disclosure requirements. These requirements provide, among other things, that the promise be clearly designated as a “full warranty” or a “limited warranty,” not as a “service contract.” In addition, unless the repairs made under the warranty would be made at no charge to the customer, the warranty can’t require all repair work to be done at your dealership. Such a requirement would violate the Mag-Moss prohibition on “tying” arrangements.

And, go figure, Mag-Moss also has a thing or two to say about how the terms of your warranty are communicated to the customer. The law would require you to make the warranty available for examination by your customers before the customer decides to buy. You can do this by displaying the warranty in close proximity to the warranted car or by furnishing the warranty upon request prior to the sale. You also must provide a copy of the written warranty to the customer after the sale.

Finally, if you sell used cars, don’t forget that your decision to offer a warranty or a service contract (or both) will impact what information you must disclose in your buyers guide, as required by the federal Used Car Rule. Non-compliance with the Used Car Rule can have some pretty hefty penalties, too.

So, why does all this matter? Well, it is important for dealers to know whether they are offering a service contract or warranty so they’ll know exactly which state or federal law governs the transaction. As you make your decision to offer a warranty or service contract (or both), it is important to understand what laws are implicated by what you are offering to your customers. You want your warranty or service contract to keep your customers happy and avoid lawsuits, right?

Vol. 3, Issue 3