It’s gotten to the point where I get so many robocalls on my cell phone that I don’t answer it when I don’t recognize the caller. Most often, it’s someone trying to sell me a Medicare supplement plan. Next most common is someone pushing an extended warranty on my car. Thankfully, the Federal Trade Commission (FTC) has done something about the latter.
The FTC announced on July 31, 2024, that it had entered into a stipulated order with CarShield. Although CarShield did not specifically admit liability, it agreed to pay a $10 million fine and promised not to violate the law in the future.
The following background and asserted violations of the law are taken from the FTC’s complaint.
Big money
CarShield (technically NRRM LLC) engaged in the marketing of vehicle service contracts (VSCs) which were designed and administered by American Auto Shield LLC (AAS), a separate legal entity. The VSCs, which CarShield and AAS insist are not “warranties,” take the form of month-to-month plans where purchasers pay anywhere from $80 to $120 per month for coverage, based upon the particular car covered. The VSCs are sold exclusively through bulk mailings and telemarketing.
This arrangement generated very large sums of money. Over a 38-month period, AAS earned over $1 billion in revenue, with 80% coming from CarShield sales. CarShield earned about $600 million in commissions.
The FTC, however, concluded that the CarShield/AAS business model and practices violated federal law by being false and misleading in several ways.
Little coverage
CarShield greatly overstated the coverage of these plans, falsely telling customers that they wouldn’t get stuck with expensive car repairs, would not need to worry about breakdowns, and that its administrators (AAS) would take care of expensive repairs so customers wouldn’t have to.
All CarShield VSC purchases were made over the telephone. Customers were given the choice of four coverage levels:
- Silver, which covered the entire powertrain and water pump.
- Gold, which added the A/C, alternator and starter.
- Platinum, which added the electronics.
- Diamond, which added the suspension, steering and fuel systems. This level was described as equivalent to the vehicle’s new-car factory warranty.
When a customer agreed to buy the VSC, the telemarketer obtained their authorization to sign the contract on their behalf, which was only then sent to the customer. The contract was a dense document, 25 to 30 pages, which contained myriad exclusions, and terms and conditions that limited coverage to much less than what was being described.
Celebrity endorsers
CarShield television ads contained testimonials from numerous celebrities. These included former basketball star Allen Iverson, former professional wrestler Ric Flair, baseball players Walker Buehler, Pete Alonso and Matt Vierling, sportscaster Chris Berman, and actors Ice-T, Vivica A. Fox, Adrienne Janic and Ernie Hudson. They all claimed to be happy CarShield customers, though most weren’t. Nonetheless, they all spoke about how much they had saved on repairs. Even those celebrities who were CarShield customers had few claims, which were handled differently due to their “preferred customer” status.
Many regular customers, however, complained that they were unable to get their auto-repair shops, or any others local to them, to work on their cars because these shops refused to deal with CarShield and AAS. Even some of the repair shops that were part of the “CarShield Repair Network” refused to accept CarShield jobs. Many simply said that CarShield and AAS “didn’t pay their bills.”
Customer complaints included the following:
- AAS would require proof that all maintenance had been performed in a timely manner before accepting a claim.
- The shops would have to do costly “diagnostic work” to establish the cause of a problem. When coverage was denied, customers ended up footing the bill for this diagnosis.
- AAS would require third-party inspections before approving a claim.
- Shops were required to use used or remanufactured parts specified by AAS. In many instances, AAS insisted on supplying replacement parts, which were often inadequate.
- AAS would only pay labor rates that it claimed were based on unspecified “nationally recognized labor guides,” which were nonexistent.
- Although the VSCs provided for rental-car coverage, AAS would not authorize a rental car until a repair had been approved, which often took months. Then there were strict limits on the daily rental rate and number of days.
Fined and forbidden
The FTC brought its action against CarShield and AAS, even though they are separate companies. The FTC thought that was appropriate because AAS exercised a lot of control over the CarShield business practices, as well as being responsible for many of the coverage complaints.
The settlement included $10 million that would be paid to the FTC, which would be used to make refunds to customers. CarShield and AAS also agreed to:
- Stop making deceptive and misleading statements in their marketing.
- Assure that all endorsers’ statements are truthful, accurate and not deceptive.
- Stop misrepresenting endorsers’ status as CarShield and AAS customers.
- Comply with standard FTC reporting and compliance provisions for 10 years.
Protect yourself
CarShield and AAS seem to have engaged in some pretty questionable business practices, and they were the big fish that got caught. But there are a lot of other companies selling VSCs, and it’s logical to assume that at least some of them engage in the same schemes that triggered this FTC enforcement action.
If you’re going to buy a VSC, make sure you read the contract carefully before committing to buy it. Yes, all of it, including the “fine print.” Do not rely on marketing materials or the statements of whomever is selling it to you, and certainly don’t agree to buy a VSC without actually seeing the paperwork first. There are always going to be exclusions and coverage limitations, so identify them beforehand. It also doesn’t hurt to shop around.
If you are already an aggrieved CarShield/AAS customer, contact the FTC and see if you are eligible for a refund.
John Draneas is an attorney in Oregon and has been SCM’s “Legal Files” columnist since 2003. His recently published book The Best of Legal Files can be purchased on our website. John can be contacted at john@draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.
