A VSC is a contractual agreement for a separately stated consideration issued by a vehicle service contract provider. VSC coverage is provided for a specific period of time/mileage to perform the repair, replacement or maintenance of a vehicle. VSCs can also be used for indemnification of repair, replacement or maintenance, for the operational or structural failure due to a defect in materials, workmanship or normal wear and tear, with or without additional provision for incidental payments (including but not limited to towing, rental and emergency road services). Ancillary products such as tire and wheel, road hazard, paintless dent repair and windshield repair are frequently sold as VSCs.
Value of Product
By making a pre-planned and budgeted purchase, the consumer’s exposure to expenses that arises from mechanical and electrical repairs can be reduced or eliminated. There are typically several levels of coverage from powertrain to “bumper to bumper” and various terms (mileage and time) to meet customer needs. VSCs are available on new or pre-owned vehicles.
Who Buys this Product?
Consumers who want the peace of mind knowing that major and minor repairs of their vehicles will be covered.
VSCs are primarily offered to consumers by licensed automobile dealers or directly by financial institutions. VSCs are also offered through direct marketing.
How is it Regulated?
Currently, over thirty (30) states regulate VSCs. In 1995, the NAIC adopted a model act and regulations.
States require VSCs to include specific disclosures; to include a “free-look” period during which time the consumer can cancel the contract for a full refund (if there have been no claims) and a pro?rata refund after the free look period has expired. States impose solvency standards on service contract providers and insurers that insure them. While not insurance, many providers insure their obligations under VSCs and many states permit consumers to go direct to the insurer in the event that the provider fails to perform. Several states require that the VSC be filed and approved with the state before being offered to consumers. State and federal laws also require disclosure on the finance documents of the purchase and cost of VSCs.