Extended Warranty Laws by State

The Service Contract Model Act and its adoption

The National Association of Insurance Commissioners (NAIC) created The Service Contract Model Act (SCMA) in 1995 to provide a framework for regulating third-party extended auto warranties — also known as vehicle service contracts (VSCs). This act was designed to help ensure fair competition in the warranty industry, place the risk burden on providers and suggest guidelines for legal regulations.

Service Contract Model Act key provisions

The SCMA proposes regulations on aftermarket extended car warranty providers that include:

• Financial security requirements that would guarantee a provider’s ability to pay claims as agreed in contracts.
• Contract disclosure stipulations that would require providers to use clear language in all contracts, print contracts in 10-point fonts or larger, state clearly whether contracts are backed by reimbursement insurance and fully disclose all contract terms, coverages, limitations, exclusions and procedures for filing claims and using coverage.
• Cancellation policies that give consumers at least 20 days to cancel for a full refund if no claims have been made and assess penalties for late reimbursements.

The SMCA also prohibits several practices, including:

• Deceptive or misleading marketing language.
• Requiring the purchase of a vehicle service contract as part of a sale or auto loan.
• Using misleading terms such as “insurance” or “surety” in company names or branding, unless established before the SMCA.

Service Contract Model Act limitations

While the NAIC has some influence over legislation, it is only an advisory agency. It has no authority or ability to enforce proposals on how extended auto warranties work put forth in the SCMA. This means that provisions of the SMCA are only legal requirements when they have been adopted by state governments.

According to the NAIC, 42 states have adopted provisions in the SCMA into their laws as of 2022. These states include:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• Connecticut
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• South Carolina
• Texas
• Utah
• Vermont
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming

State-specific extended warranty laws

Laws and regulations around extended auto warranties are not the same in every state. While national warranty laws exist, some states go beyond the requirements of the federal government, typically in the name of increased consumer protection.

When state extended warranty laws differ from federal regulations, they tend to be in the following areas:

• Who can sell extended auto warranties
• How extended car warranties are labeled
• Financial requirements for warranty administrators
• Terms and conditions of extended auto warranty contracts

States with strict extended warranty laws

Three states in particular have significantly more regulations for third-party extended auto warranty providers than the rest of the country. State laws in California, New York and Florida place additional requirements on companies that can change how they operate.

California

California has the most robust consumer protection laws around extended auto warranties. The most impactful of these additional requirements are those governing who can sell VSCs and how the industry is regulated.

In California, only licensed dealerships are allowed to sell vehicle service contracts. Third-party VSC sales are a felony under state law. Third parties can sell similar coverage as mechanical breakdown insurance (MBI), but only if they are licensed through the California Department of Insurance (CDI). The CDI also regulates the MBI market as it does with all other auto insurance products.

California also places financial requirements to ensure providers’ ability to satisfy policy claims. CDI regulations also give the agency the ability to issue cease-and-desist letters to unlicensed providers and issue fines for violations.

New York

New York has looser requirements than California, but still has additional regulations for extended auto warranty providers beyond those in the Magnuson-Moss Warranty Act (MMWA). In New York, warranty providers must fully insure the warranties they sell, keep a reserve fund greater than or equal to 40% of the revenue from active contracts or demonstrate a net worth of over $100 million. State laws also give the government the authority to issue fines to companies in violation of these requirements.

Florida

Florida provides additional protection for extended warranty customers around cancellation policies and claims processing. Under Florida law, extended car warranty providers must offer at least a 60-day window for customers to cancel their contracts and receive a full refund if they haven’t made any claims. The state also requires providers to satisfy warranty claims within 30 days of filing.

Impact of state-specific warranty laws

Variations in extended warranty regulations affect both consumers and businesses in different ways. For consumers, many of the more strict laws around warranties provide additional protections, such as customer-friendly cancellation policies, licensing requirements and regulatory oversight. These types of laws can help keep customers safe from bad actors within the warranty industry.

For businesses, these laws affect how warranty companies can operate in different states, especially third-party providers. When operating in states with more restrictive laws, providers may need to adjust their business practices or contract terms. Extended auto warranty companies may also have to comply with different regulatory agencies in some states.

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Federal laws and their interaction with state regulations

Extended auto warranties are regulated to some degree at the federal level. The key piece of legislation that governs the industry is the Magnuson-Moss Warranty Act, which became law in 1975. Commonly known as “lemon laws,” this act includes regulations for extended warranties among other related topics designed to protect consumer rights.

The MMWA does not require any product sold to include a warranty, but it does have a few regulations around how warranties can be advertised or sold. These include:

• Prohibits misleading claims or language in marketing materials
• Requires contract language to be clear and easy to understand
• Requires contracts to be made available to customers prior to purchase
• Requires warranties to be labeled as “full” or “limited”
• Prohibits providers from requiring customers to use OEM replacement parts or parts from specific suppliers to use warranty coverage

How does the Magnuson-Moss Warranty Act affect state laws?

The MMWA does not supersede, or override, state regulations around extended auto warranties that go beyond its requirements. It may be helpful to think of the MMWA as the minimum requirements for state warranty regulations. State laws can provide additional protections beyond what’s included in the MMWA, but they cannot remove or reduce any of its regulations. This enables states to give consumers access to the benefits of extended car warranties while limiting their downsides.

What to consider when buying an extended warranty

No matter which state you live in, an extended auto warranty can provide valuable financial protection against unexpected repair bills. In exchange for an upfront or monthly payment, extended warranties cover the cost of repairs for mechanical breakdowns to systems and components covered under the contract. This can help drivers avoid paying potentially unaffordable repair costs out of pocket.

However, an extended car warranty isn’t the right solution for everyone, whether it’s an aftermarket warranty or a manufacturer’s extended warranty. A VSC can cost more than a car is worth, for example. Owners of extremely reliable vehicles may not use all or even some of the coverage they pay for.

How to decide if an extended auto warranty is right for you

It’s worth considering an extended auto warranty for your vehicle if any of the following apply to you:

• You may have trouble coming up with up to $2,000 on short notice to pay for repairs
• You drive an unreliable vehicle that is likely to need mechanical repairs
• You need a functioning vehicle to get to and from work and run errands
• You prefer paying a monthly fee in exchange for repair coverage to keeping a vehicle repair fund
• You value the peace of mind that comes with having extended warranty protection

Whether an extended car warranty is right for you comes down to both practical considerations and personal preferences. Generally speaking, VSCs offer more financial value for less reliable vehicles and cars that are expensive to repair. You should also consider whether you prefer a monthly contract payment to trying to set aside money each month to cover potential repair costs.

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