Beware of online marketers promising extreme discounts. Online marketers often claim discounts of 60% off dealer costs. The reality is that the cost of distribution through the dealer has been replaced with the cost of distribution through the internet. While this may result in a net savings to the consumer, it is unlikely that it would reach a 60% discount. What is more likely is that the online warranty provider is either not pricing his policy to accommodate the underlying risk of loss or that he has introduced restrictions in the policy to reduce that risk of loss.

The industry publication Warranty Week suggests: "It is our opinion that extended warranties should not be bought from dot-com companies that won't publish their physical address or the names of their executives." While it is possible this occurs, it is more likely that the consumer interacts with a common type of site known as a "lead generation" site. This site collects consumer information and passes it to the warranty administrator or, more likely, his authorized agent, who conducts the transaction.

Regardless of who is involved in the transaction, the most important thing for the consumer to keep in mind is who is liable for payments on the policy and how strong that company is. Ask who performs or pays for repairs under the terms of the service contract. It may be the manufacturer, the dealer, or an independent company. Many service contracts sold by dealers are handled by independent companies called administrators. Administrators act as claims adjustors, authorizing the payment of claims to any dealers under the contract. If you have a dispute over whether a claim should be paid, deal with the administrator.

Know:

1. Who is providing insurance for the service contract and their financial position (AM Best). Per our discussion of Risk Retention Groups, know the risks associated with policies underwritten by these types of carriers.
2. Know who is administering the service contract and know their financial position (AM Best) and reputation (BBB).
3. Know who is selling the policy and their history with consumers (BBB)

Find out if the auto service contract is underwritten by an insurance company. In some states, this is required. If the contract is backed by an insurance company, contact your State Insurance Commission to ask about the solvency of the company and whether any complaints have been filed.