Retailers May Falter, But Service Contracts Survive

A Circuit City store i i

A Circuit City store in San Diego. After filing for bankruptcy protection this week, the electronics chain told consumers that product protection and service plans they had purchased would still be honored. Sandy Huffaker/Getty Images hide caption

itoggle caption Sandy Huffaker/Getty Images
A Circuit City store

A Circuit City store in San Diego. After filing for bankruptcy protection this week, the electronics chain told consumers that product protection and service plans they had purchased would still be honored.

Sandy Huffaker/Getty Images

When Circuit City filed for bankruptcy protection last week, it left many consumers wondering whether the additional product protection and service plans they had purchased from the electronics chain would still be honored.

Circuit City assured customers that their plans were secure. What many consumers didn't realize was that even though they may have bought these at a store, they actually were purchasing services from a third party.

This kind of transaction, whereby a retail customer enters into a service agreement with up to two additional companies — an administrator and an insurer — is increasingly common. Retailers such as Best Buy, Home Depot, Kmart and Wal-Mart all offer such plans. But without reading the fine print, consumers may not realize who really stands behind the promises.

"Our advice is that extended warranties are not a good investment," says Paul Reynolds, the electronics editor for Consumer Reports. The price of these extended warranties is typically what one would have to pay for a repair, but it's unlikely you'll ever need to repair the device, he says.

Consumers can also use their credit cards for added peace of mind at no additional cost. Many cards, such as American Express, typically double the manufacturer's warranty automatically.

Still, there's a relatively high level of interest in buying extended protection plans. A new Consumer Reports poll found that 35 percent of consumers say they would opt to purchase extended coverage.

It's not hard to find offers for extra coverage for consumer goods, automobiles or home appliances. And some companies run all or parts of their extended coverage plans. Sears Holdings Corp., for example, handles all aspects — from selling to servicing — of the protection agreements sold in Sears department stores.

In the 1970s and 1980s, some chains had troubles with their own warranty coverage, leaving customers empty-handed. A case in point was the Crazy Eddie electronics chain. It issued "crazy service contracts that were totally dependent on the solvency of the retail chain itself," says Timothy Meenan, the executive director of the Service Contract Industry Council, a trade group that represents many of the third-party companies that offer added protection for products.

Now the industry is more regulated, but many companies still opt to outsource these services for financial reasons so that they don't have to carry liabilities on their books. The demand for service and support for thousands of products 24 hours a day, 365 days a year is also among the reasons companies farm out these responsibilities, says Meenan.

And here's another bit of assurance for consumers: Some of the third-party providers are even accustomed to taking over the administration of contracts when a client goes out of business. New York City-based Assurant Solutions took over 3 million service contracts for CompUSA after that company became insolvent, says spokesman James Sykes. Now, Assurant is working with Circuit City; its clients also include Home Depot and Staples.

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