4. TRICKY COVERAGE TERMS

The contracts offer seemingly generous periods of coverage, up to eight years/120,000 miles. But you get less than meets the eye. If you buy a plan when you purchase your vehicle, as 82 percent of our respondents did, you pay to finance the deal up front, and the meter on the plan typically starts running that day.

But the core coverage doesn't kick in until after the original factory warranty is up. About 37 percent of respondents who didn't use their extended service contract to cover repair costs said they didn't collect because the problem was covered by the factory warranty.

For example, if your Honda comes with a common three-year/36,000-mile factory warranty, the Honda Care eight-year/120,000-mile extended service really only covers repairs for the last five years or 84,000 miles, whichever comes first. Factory warranties on some cars are getting better. General Motors and Chrysler recently increased their powertrain warranty. Hyundai for several years has had a long powertrain warranty.


5. LOTS OF FINE PRINT

Many brochures we reviewed tend to wax eloquently about "comprehensive" coverage for hundreds of parts and other benefits. Those sales tools usually don't say much about numerous exclusions and limitations. To learn that, you need to delve into the contract:

Wear and tear. More than 57 percent of survey respondents who bought a contract when they purchased their car did so to guard against problems that develop as cars get older. A number of extended service contract brochures we examined said or suggested that the plans cover "wear and tear," which can be a confusing term.

In general, it means a covered part will be replaced if it dies prematurely during its expected lifetime, suggesting that it is associated with some hidden defect or is simply the bad egg of its production lot. Extended warranties, however, typically don't cover parts and labor related to normal wear items, such as brake pads, rotors, shock absorbers, belts, hoses, etc. A potential sticking point is how "normal" and "premature" are interpreted.

Covered part not covered. Ford's ESP contract, like some other agreements, does not cover "repairs needed to a covered part caused by the failure of a non-covered part."

Remember that worst-case worry about replacing the engine? If your fan belt, a part not covered, broke and caused the engine to overheat, the engine repair might not be covered. "We would have to see why the fan belt failed," Bardusch says.

Reasonable cost. Contracts can be imprecise in their promise to pay "reasonable" labor rates and parts costs. After Robert Cleaves, 77, spent $4,000 for an extended service contract, Warrantech, of Bedford, Tex., wouldn't pay more than $1,435 of an $1,825 claim on his 2002 Mercedes-Benz, based on its definition of "reasonable" labor and parts rates. So Cleaves, a retired Los Angeles attorney, sued, prompting full payment. "If I had that $4,000 now, I'd be money ahead," says Cleaves, who now counsels against buying such contracts.

Sometimes "you're dealing with a claims adjuster whose function is to pay as little as possible," says Bill Moss, co-owner of Advantage Certified Auto Group in Manassas, Va., and another author of the ASA's extended-warranty guide.

Tear-down diagnosis. A repair shop may take apart an engine to determine the cause and cost of repair. "You will be responsible for these charges if the failure is not covered," says Warranty Direct's MajorCare contract.

No maintenance records. All extended plans require that you perform and pay for regular maintenance according to the owner's manual. But they can deny claims if you can't produce records of that maintenance.


6. BANKRUPTCY RISK

Even if you follow all the rules, you still might not be able to collect on your plan because the administrator went bust. Last year Ohio-based Ultimate Warranty left more than 137,000 customers holding the bag on an estimated $45 million in expected claims. Tim Meenan is executive director of the Service Contract Industry Council, a trade group that has been effective in pushing industry-standard regulations for service contracts in more than 25 states. He says: "There used to be a tremendous amount of insolvencies in this business. There still are, though we've reduced that number."