Massachusetts consumers may consider purchasing a service contract to protect their personal property if repair or replacement of the property covered by the contract becomes necessary.
What is a Service Contract?
Service contracts are a guarantee, negotiated and purchased separately from the sale of a product, that provide protection for defective parts, mechanical or electrical breakdown, labor, or other remedial measures, such as repair or replacement of the property or repetition of services.
Under Massachusetts law (Massachusetts General Laws Chapter 175, Section 149M –X), a service contract is a contract to:
- perform the service, repair, replacement or maintenance of tangible personal property; or
- provide indemnification for service, repair, replacement or maintenance, for the operational or structural failure of an item due to a defect in materials or workmanship or normal wear and tear (which may or may not provide for incidental payment or indemnity under limited circumstances, for related expenses, such as rental and food spoilage).
- A service contract may also provide for the service, repair, replacement or maintenance of tangible personal property for damage resulting from power surges and accidental damage from handling and may provide for leak or repair coverage to roofing systems on residential dwellings.
In general terms, a service contract is purchased separately (ie: not included in the original sale/purchase of a product) as added protection in the event a covered item needs repairing or replacing. The contract may allow for a service technician to attempt to repair a defect or for you to purchase a new appliance, without any added cost to you, should the item break.
Service contract costs and contract periods may vary. The contract also may contain optional coverage that is available upon payment of an additional fee.
What is the difference between a service contract, a warranty, and an insurance policy?
A service contract is not a warranty. A “warranty” is defined as a guarantee incidental to the sale of a product that is made solely by the manufacturer, importer or seller of the property or services. For example: a new washing machine may come with a 1-year manufacturer’s warranty or the dealership where you purchased a new vehicle may have included an initial warranty (1 year or 30, 000 miles).
Most service contracts are not insurance policies. An exception is service contracts covering automobiles. In Massachusetts, service contracts covering automobiles are insurance products and must be approved by the Division of Insurance for sale in the Commonwealth.
Automobile warranties and service contracts offered by a manufacturer, or any subsidiary of such manufacturer, or an automobile dealer, or any subsidiary of such dealer, do not constitute insurance products when either the manufacturer or the dealer is the obligor on the contract. For example, when General Motors offers a contract on a Chevrolet and it is General Motors that is obligated to the holder of the contract, then such contract is not considered an insurance product. Similarly, where an automobile dealer offers a contract on the sale of an automobile from its lot, and it is the dealer that is obligated to the holder of the contract, that contract is not considered an insurance product. In both cases, the contract sold by the manufacturer and/or dealer is viewed as a warranty of performance.
On the other hand, where an automobile dealer offers a contract on an automobile and a third party company (e.g. XYZ Service Contract Co.) is the obligor standing behind the contract to fulfill its terms, that contract is an insurance product. Accordingly, in order to do business in Massachusetts, third party companies that market such plans must be licensed or approved as insurance companies.
In April, 2011, Massachusetts enacted a new law relative to service contracts and service contract providers which is codified at Massachusetts General Laws Chapter 175, §§149M-X. Among other things, this law requires service contract providers to register with the Commissioner (§149N). However, there are certain exemptions from the registration and other requirements provided in the law. Specifically, §149V(c) provides, in relevant part, that warranties, service contracts or other agreements regarding automobiles shall be exempt from G.L. c. 175, §§149M to 149W, inclusive. This exemption means that automobile service contracts cannot constitute G.L. c. 175, §149M service contracts, and providers of automobile service contracts cannot be licensed as G.L. c. 175, §149M service contract providers.
However, this does not mean that automobile warranty products or automobile service contracts are unregulated in MA. The Division historically has made a distinction between extended warranties and/or service contracts where a manufacturer or a dealer is obligated and those contracts where a third party is obligated. Extended warranties or service contracts (referred to as “contracts” above) covering an automobile where the manufacturer or the dealer of the automobile is obligated are not considered to be insurance products and would not fall within the regulatory jurisdiction of the Division. On the other hand, automobile contracts where a third party unrelated to the manufacturer or dealer is obligated would be considered insurance products and a license would be required to sell them.
Read Your Contract Carefully.
- If you decide to purchase a service contract to provide coverage for your property, compare it to your current automobile and/or homeowner’s insurance policy to be sure you are not purchasing duplicative coverage. A service contract may be considered excess coverage, which means that the service contract may not provide benefits for repairs that are covered by another insurance policy, warranty, or guarantee.
- The coverage and benefits of each service contract will be spelled out in the contract. Be sure to read the terms and conditions of the contract that you are considering to be certain it provides the coverage you need.
- What are your responsibilities under the service contract? You may need to call the provider and the company will arrange for a repairperson to come to your home. Alternatively, you may be allowed to choose your own repairperson with the provider’s prior approval. Make sure you know if the service contract will cover a repair before any work starts. In addition, check your contract to see if you are required to get a second opinion for a repair.
- What does the service contract say about repairing or replacing parts? The decision whether to repair or replace a part should be outlined in the service contract. If the provider decides to replace a part; it usually gets to replace the part with an equivalent product. For example, if your washing machine breaks down and the provider decides to replace it rather than repair it, you may receive a new washing machine with similar functions, but not necessarily the same brand name as the one being replaced.
- A service contract may require a deductible. If there is a deductible, verify whether it is for each service call or for each repair. For example, assume your deductible is $50. If your stove and your clothes dryer malfunction and only one service call is made, are you required to pay $50 or $100 deductible? You may also be charged a fee for each service call. Make sure you know how much the fee is and when it will be charged.
- A service contract may have maximum allowable benefits for certain types of repairs. These limits may be per contract or per covered item. Make sure you understand what the benefit limits are in the contract and how they apply.
- Is your service contract transferable? A service contract may or may not be transferable. Check the terms of your service contract for any restrictions on transferability. For example, if you sell your house or automobile, can you transfer the contract to the new buyer? If so, make sure you know what procedure you need to follow.
- Under Massachusetts law, a service contract holder may cancel and return the service contract to the provider within certain time limits. Please note there is no set time limit established by law so it is important to check the cancellation provisions in your contract. You may be charged a cancellation fee. Check your contract for cancellation provisions and procedures.
- Can you get a refund if you cancel your service contract? If you qualify and you follow the cancellation procedure described in your contract, you may be entitled to a full refund of the contract fee or a refund of the contract fee attributable to the unexpired term of the contract.
Know Your Rights.
1. All service contract providers doing business in the Commonwealth of Massachusetts must be registered or licensed as an insurance company (if offering an automobile service contract) with Division of Insurance.
2. Service contracts are not protected by the Guaranty Association or the Insolvency Fund. To ensure the provider's obligations to its service contract holders, a provider must obtain insurance on the contracts it has issued, sold, or offered for sale in the Commonwealth. If the provider cannot to fulfill its obligations under the contracts, the insurer will pay, on behalf of the provider, any covered sums the provider is legally obligated to pay, or in the event of the provider's non-performance, will provide the services which the provider is legally obligated to perform according to the provider's contractual obligations under the service contract.
3. A salesperson is allowed to promote, endorse or recommend the purchase of a service contract, but cannot require you to purchase a service contract as a condition of a loan or a condition for the sale of any property.
To verify whether a service contract provider is authorized to do business in Massachusetts, or to file complaint about a service contract provider or your service contract, please contact the Division of Insurance’s Consumer Services Unit at (617) 521-7794, or file a complaint online at https://www.mass.gov/file-an-insurance-complaint.