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All you ever wanted to know about Mechanical Breakdown Insurance

Mechanical breakdown coverage polices and contracts, due to their unique nature, generate more than their fair share of confusion.

To help you have a better understanding of this product, this section lists the definitions of some of the terms and phrases that have unique or special meanings in mechanical breakdown.

 

1. What is Mechanical Breakdown Insurance?

"Mechanical breakdown insurance" means a policy, contract, or agreement that undertakes to perform or provide repair or replacement service, or indemnification for that service, for the operational failure of a motor vehicle due to a defect in materials or skill of work or normal wear and tear, and that is issued by an insurance company authorized to do business in California.

A mechanical breakdown insurance policy (MBI) is a true insurance product. Like personal auto or homeowners insurance, the MBI creates a direct relationship between the vehicle owner and the insurance company. MBI coverages and premiums are regulated by the California Department of Insurance, assuring a fair price for the coverage is provided. Likewise, administrative, underwriting, and claim handling functions are subject to the review and control of the California Department of Insurance. They would also be covered by the California State Insurance Guarantee Fund providing a higher level of consumer protection over other types of contracts, including those that may be issued at the dealership or from a third party company.

2. What is a manufacturer warranty?

A manufacturer warranty is the first layer of mechanical breakdown coverage on any new vehicle. The coverage is provided, at no cost to the vehicle purchaser, by the manufacturer. A warranty has a specific term expressed in months or miles (ex. 36 months/36,000 miles) and usually protects the entire vehicle against defects in workmanship and material. Special federal laws (and in some cases, state laws) regulate the manufacturer's performance under the warranty coverage.

3. What is a Vehicle Service Contract?

Under California insurance regulation, vehicle service contracts may only be sold by a manufacturer or automobile dealer. A vehicle service contract (VSC) is a written agreement between the vehicle buyer and the dealership or third party company. This contract is often mistakenly called an "extended warranty". According to the contract language, the dealer or third party company becomes responsible for providing mechanical breakdown coverage or reimbursement to the vehicle owner. Many service contracts are restrictive and conditional. They are not always regulated and may not be backed by an insurance company or are backed by insurance companies with limited financial resources. Also, in most states, the dealer is allowed to set the actual price of the contract at whatever level he chooses.

4. What other warranties might my vehicle have?

The best example is the powertrain warranty provided by certain manufacturers. In this case, only the powertrain (engine, drive axle, transmission) is protected for an additional length of time or miles (ex: 6 years/60,000 miles, 7 years/70,000 miles). The powertrain represents approximately 25% of the vehicle. In other words, 75% is unprotected.

Another example is the special factory warranty required by state and federal laws covering emissions and exhaust system components. Vehicles are covered by two types of emissions control system warranty, "Emission Defect Warranty" and "Emissions Performance Warranty". Under California standards, if a vehicles fails an Emissions Inspection and Maintenance test, the dealer is authorized to do whatever it takes to bring that vehicle within specs. The factory will pay for parts, labor and diagnosis time.

The balance of the Emissions Warranty is the Defect Warranty portion. The Defect Warranty is generally consistent with the manufacturer's bumper-to-bumper warranty with certain parts (catalytic converter and electronic emissions controls (PCM) for up to 8 years/80,000 miles. Please refer to your owner's manual for your exact coverage.

5. Where can I find additional information?

The California Department of Insurance maintains a web site containing a wealth of information about MBI policies and their regulation. You may access their site at http://www.insurance.ca.gov/0100-consumers/0100-insurance-guides/0100-automobile-series/guide-to-automobile-repair-agreements.cfm#mbi1. You may check on the insurance license status of your broker/agent at http://www.insurance.ca.gov/license-status.