Hedging Your Bet With Warranty Insurance; Good or Bad?

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There was a time when selling transmission overhauls was a simple matter. Most shops offered one service at one price. If the customer approved it, the job was carried out. The problem with that one service was that many times it didn’t suit the customer’s nor the shop’s needs. If a customer wanted more than a 12 month, 12,000 mile warranty he was out of luck. If the shop needed a way to make an overhaul more profitable it had a hard time finding one. So customer choices and shop profits were limited.

Over time somebody figured out that you could sell extended warranty coverages of different lengths on the same overhaul. If it worked out successfully because the transmission made it to the end of the warranty without breaking, there was extra money to be made. That wasn’t a bad idea except that when the insurance commissions in several states heard about it they decided that selling different warranties on the exact same product or service was the equivalent of selling insurance which was a regulated activity. Therefore, only registered companies could sell these so called “policies”.

If you wanted to sell different levels of warranty you had to buy the warranties from one of these companies and resell them to customers, hopefully at a profit. The shop was usually on the hook for the first part of the warranty and then, at some point, the extended policy would kick in. There was a major flaw in this plan though. How it got by the insurance commissions, nobody knows. The companies that were selling the warranties were, for the most part, not insurance companies. If you, or your customers, didn’t read the fine print you wouldn’t realize that these were just administrative companies who had purchased some kind of a bond from a major insurance company to cover catastrophic loses up to a specified amount. The problem was, and still is, that even though these companies had actuarial studies done to find out how long transmissions would last after they had been rebuilt, they could not control the quality of the product they were trying to warranty. Some shops, knowing that they were only responsible for the first part of the warranty might have been shortcutting, knowing that if the customer kept the car for awhile they would get paid if they had to redo the transmission. So when these administrative companies spent all the money they collected in premiums to cover their operating expenses, profits, pay claims, and when the small bond they purchased was gone, so were they. That left thousands of shop owners to cover warranties that they had already paid the administrator to handle.

Why were the shops stuck for the warranties? Well, the fine print stated that the administrator warranted the job to the shop. The shop in turn warranted it to the customer. When the administrator was gone, the shop legally still had to make good, but it went beyond that. The neighborhood shop owner, who wanted to keep his customers happy, felt a commitment to handle those warranties even though he wasn’t being paid to do so.

After being burnt a few times by new warranty administrative companies who swore they weren’t going to go out of business and leave their customers hanging, some shop owners figured out a way around this costly problem. They decided that if they were going to be on the hook for the warranty anyway, they might as well make the profit. The only way to make that work was to offer customers different levels of service on a transmission overhaul. Each level had to be unique so that they weren’t selling the same service with different warranties. As an example:

A 3 year, 36,000 mile transmission might have every part replaced that would be necessary to bring it back to original factory specifications plus any recommended updates and several upgrades such as a heavy duty torque converter, all bearings, bushings and thrust washers replaced, new solenoids and force motors, an external transmission cooler, new speed and throttle position sensors, a shift improvement kit, an external filter, and three years of transmission power flush services.

A 2 year, 24,000 mile transmission would again be rebuilt to original equipment standard and might include all of the updates and only some of the upgrades offered with the 3 year, 36,000 mile warranty.

A 12 month, 12,000 mile transmission would be rebuilt to OEM standards but would not necessarily have any of the updates or upgrades of the more expensive alternatives.

Last, there could be a repaired transmission that might carry a 6 month, 6,000 mile warranty. It would only have gotten soft parts and whatever hard parts were necessary to get it back on the road and functioning normally.

Compliance with the insurance regulations was only part of the issue. The other was the funding of the additional length warranties. Some very smart shop owners started separate interest bearing bank accounts in which they deposited any money they charged that was over and above the additional parts and labor that had to be provided to bring the warranty from its basic (let’s say 12 months, 12,000 miles) on up to whichever one they sold (either the 24, 24 or the 36, 36). That money would only be withdrawn if it was needed to provide a warranty repair during the extended portion of the warranty, not the original 12, 12 which would have been paid for out of the money collected for the basic overhaul and would be in the company’s general account.

The price of the upgraded transmissions was determined by the additional parts and labor involved to bring them to a grade high enough for the shop owner to feel safe in offering the longer warranties. So it isn’t a matter of selling longer warranties. It’s selling a better product that happens to come with a longer warranty.

If you’re thinking about doing this yourself there are some considerations:

1) The transmissions you build should be bullet-proofed to last much longer than any length warranty you issue.
2) Enough updates and upgrades must be sold at the higher warranty levels to cover extended warranty claim costs (if any) and to make additional profit.
3) The money you save up in the “slush fund” to cover warranty claims is probably taxable. (ask your accountant)
4) When the extended portion of a warranty expires the money to fund it can be withdrawn from the “slush fund”. It can then be considered profit dollars and used somewhere else. 5) If you build the transmissions right there is a very good chance that if they make it through the initial warranty period they will make it through the extended portion as well.
6) People are funny. Even though many of them will opt for extended warranty coverage, a good number of those who do will not keep the vehicle long enough to ever avail themselves of the benefits. Although they make the decision to buy the more expensive package, once they do, they begin to think about what other major component will break now that the transmission has broken? For many of them, within a year after they have had the transmission fixed, they sell or trade in the vehicle.

Having control of the quality and the ability to sell the job at a high enough price, you can probably afford to carry the warranties yourself and make good profit for the shop while doing it. So why be at the mercy of some administrator who might leave you twisting in the wind when you can get paid for taking a much more controlled risk?

About the Author: Terry Greenhut is a highly sought after Automotive Aftermarket Sales Trainer and Key Note Speaker. He has authored numerous Automotive Aftermarket Sales Training Articles in many of the major automotive trade journals over the years. His best selling Automotive Aftermarket Sales Training Course is recognized as the industry standard. You can learn more about Terry by visiting his website at www.terrygreenhut.com