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1.8.1.6 Extended Warranties, Service Contracts, and Mechanical Breakdown Insurance

Extended warranties, service contracts, and mechanical breakdown insurance are functionally equivalent to each other. The consumer pays an additional amount to the seller or a third party for protections against product defects beyond those offered by the express and implied warranties. Service contracts and extended warranties are technically not warranties and not covered by the UCC Article 2 warranty provisions. Service contracts are not part of the original basis of the bargain for the product’s purchase, because there is an extra charge for them.440

The Magnuson-Moss Warranty Act however has provisions that do apply to service contracts. Most importantly, breach of a service contract is a Magnuson-Moss Act violation.

The Magnuson-Moss Act applies to service contracts even if such contracts are regulated as insurance; the Federal Trade Commission has retracted its former position to the contrary. The Commission’s former position was based on a misinterpretation of the scope of the McCarran-Ferguson Act that places certain limits on federal regulation of insurance.441

Chapter 20, infra, examines the consumer’s rights when enforcing service contracts or when the contract coverage is less than the consumer assumed. The consumer’s rights are generally determined by state service contract and/or insurance law, the Magnuson-Moss Warranty Act, UDAP statutes, and ordinary contract law.

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