The Magnuson-Moss Warranty Act is the federal law that governs consumer product warranties. Passed in 1975, the act was created to protect consumers from deceptive warranty practices, ensure warranties are easy to understand and make violations legally enforceable. Perhaps one of the more surprising unintended consequences of the act is how it can benefit dealers, not just consumers.

It’s easy to see, for instance, how the dual levers of transparency and accountability behind Magnuson-Moss benefit consumers. The act prohibits implied warranties in most cases, misleading or deceptive warranty terms and “tie-in sales” provisions.

A tie-in sales provision requires the customer to buy an item or service from a particular company to keep the warranty in force. For example, if a customer has modified his or her car with aftermarket parts and takes it to the dealership where it was purchased, that dealership must still honor the warranty. According to Magnuson-Moss, vehicle manufacturers, with some exceptions, are not allowed to void the vehicle warranty just because aftermarket parts are on the vehicle.

So, how can adhering to Magnuson-Moss benefit dealers? In addition to helping to improve customer satisfaction rates, the Act can provide a secondary revenue stream for a dealership.

But there’s a catch.

Who’s on the hook?

At a high level, extended warranties are defined by which party is ultimately responsible: an outside vendor or the dealership itself.

Administrator obligor puts the responsibility of meeting the terms of the service contract in the hands of a warranty administrator, a company independent of the dealership. Dealer obligor, on the other hand, is when the dealer assumes all contingent liability, instead of a warranty administrator.

To a consumer, it may not matter which party is on the hook for fulfilling their service contract. But to a dealer, it is an important distinction.

Dealer obligor service agreements could create new problems for a dealership, with increased risk and liability. A dealer is totally responsible for all current claims as well as for any future contingent liability. This responsibility could become a tall hurdle if the dealer plans to sell the dealership.

The safest route, then, may be to choose the administrator obligor approach, as long as the chosen administrator abides by Magnuson-Moss.

How to avoid consumer lawsuits

Granted, all written consumer service contracts or warranties are regulated by Magnuson-Moss, but not all such contracts are equal. And therein lies the rub. By partnering with the wrong warranty provider, you could find yourself unknowingly in violation of the act and, ultimately, as a defendant in a class-action lawsuit.

Under the terms of Magnuson-Moss, the drafter of the warranty is responsible for any ambiguous statements in it, and breach of warranty is a violation of federal law. For example, if your warranty provider is telling your customers that they have to use your dealer service shops to install only OEM parts or their warranty will be avoided, this would be misleading, as noted above, and you could be at great legal risk.

Winning in court, consumers can recover costs. This means, if your dealership loses in court, you may have to pay the customer's costs for bringing the suit, including their lawyer's fees. Clearly, it’s better to be safe than sorry by partnering with only reputable warranty providers.

Where to find more profit

Customer-friendly extended service contracts can become a cream separator for dealers, giving their business a unique positioning statement in a very competitive market. By offering a lifetime powertrain warranty, for instance, a dealership can help distinguish itself from the competition while, at the same time, building a loyal customer base that can become repeat buyers and referrals.

Before offering extended warranty protection to your customers, remember to protect yourself and your dealership first and pay close attention to the exact service your warranty vendor plans to provide — or not provide. Any warranty program you’re affiliated with should be backed by an A-Rated insurance carrier.

Dealer beware

Cars are products and products can fail and, when they do, extended warranties exist to help minimize the financial impact on both buyer and seller. The real beauty of reinsurance is that it can create another profit channel for your dealership.

But caveat venditor … let the seller beware.  If you make the wrong decisions as a dealer and embrace the wrong warranty provider, an extended warranty can turn into an extended legal quagmire. The devil of a class-action lawsuit could be in the details. And that’s the catch.

Jim Binkley is the founder and chief executive officer of Binary Automotive Solutions, providers of an integrated, customized package of programs to help dealerships sell more vehicles, hold gross and retain more customers. You can reach him at jbinkley@binaryauto.com.