Secret Warranties

Secret warranties are a multi-billion consumer abuse. Every auto company makes mistakes in building cars. Whether they are design defects that affect every car or whether they are manufacturing defects which affect only some cars, they must be repaired. The only question is who pays for the manufacturers' mistakes, the manufacturer or the consumer. Although the auto manufacturer often establishes a secret warranty to pay for the repair, all too often it is the consumer who pays for the manufacturer's mistake because the consumer never finds out about the secret warranty. That's wrong and the Center for Auto Safety wants to change it.

In a 1987 report the Center for Auto Safety (CAS) created national headlines by identifying 10 exemplary secret warranties covering 30 million vehicles and $3 billion in repair costs. Yet this is but the tip of the iceberg for we estimate that at any one time over 500 secret warranties exist for all auto companies. According to a Toyota whistleblower who provided a complete list in May 1988, Toyota alone had 41 secret warranties at that time.

By exposing secret warranties, CAS forces manufacturers to pay for their mistakes and creates a strong incentive for them to build better cars in the future. Once secret warranties are disclosed, consumers will save hundreds, if not thousands, in repair bills on their personal cars. Spurred on by CAS exposes, state legislatures are moving to pass secret warranty disclosure laws that will protect consumers. Until then, consumers must rely on the strategies suggested in this book to discover and use secret warranties to pay for repairs in their vehicles.

What is a secret warranty?

Auto companies hate the term secret warranties. They call them policy adjustments or good will programs or extended warranties. But whatever they are called, they are a longstanding industry practice. When a car company has a major defect that occurs after its written warranty expires, it establishes an adjustment policy to pay for repairs rather than deal with many thousands, if not millions, of complaints on a case by case basis. But the auto company communicates the policy only to regional offices and not even always to its dealers. The auto manufacturers never notify the consumer; so only the consumer who complains loudly enough gets covered by the secret warranty. Other consumers end up bearing the costs of the manufacturer's mistakes.

Examples of Secret Warranties

CAS has documented case after case of secret warranties since our founding in 1970. One of the first and most famous was Ford's J-67 Limited Service Program which covered rust on 12 million 1969-72 cars and trucks. In this case a bulletin which went out only to Ford regional offices stated, "This is a limited service program without dealership notification and should be administered on an individual complaint basis." Under this program, Ford would pay up to 100% to repair rust and paint damage on its vehicles even if it cost over a $1000.

CAS has uncovered secret warranties on all auto companies with little differences between them. A 1972 Mazda secret warranty bulletin doubled the coverage for rotary engine damage but cautioned, "Since this is a temporary program which may be terminated at [any] time, owners are not to be informed of the extended coverage." Honda had secret warranties on head gaskets and rusting fenders in the mid-1970's; Chrysler had rusting fenders on Volares and Aspens in the late 1970's; GM had the transmission secret warranty caused by a ban on sperm whale oil as a lubricant; Peugeot and Subaru both covered defective head gaskets; and VW covered valve stem seals.

Secret warranties soared after 1980 when the federal government dropped all efforts to ban them. GM had a 5 year/50,000 mile secret warranty covering repair of defective rack and pinion power steering systems on all 16 million of its 1981-88 front wheel drive cars. Toyota covered pulsating brakes on its 1983-86 Camry in a $100 million secret warranty. Ford never told owners of its 1985-92 F-series pickups that America's most popular truck had peeling paint because Ford skipped the primer layer. According to Nissan documents provided to CAS by a whistleblower in 1990, Nissan had at one time up to 48 secret warranties covering various cars and trucks.

There is no doubt that auto manufacturers presently have many other secret warranties. However, assessing how widespread secret warranty programs are is difficult because these programs, by definition, are not intended for public disclosure. Sometimes, auto makers keep secret warranties better than the military does with military secrets. One Honda insider told CAS that Honda has only one secret warranty book for each of its regions. The book is chained to a desk. Every page has the region's number superimposed on it so that any photo of a book page would show the region from which it came.

But it is known that the regulatory climate has been very favorable to the automakers in the last twelve years. Furthermore, secret warranties are viewed by the automakers as an effective tool to maintain good customer relations. Loyal customers and customers that complain loudly and persistently are rewarded. Other consumers get saddled with repair costs caused by the manufacturers' mistakes.

No Uniform Law Requires Secret Warranty Disclosure

No federal law requires auto companies to disclose secret warranties. In the late 1970's, the Federal Trade Commission (FTC) sought to litigate individual secret warranties against each auto company beginning with piston scuffing and cracked blocks in 1976-78 Fords. The FTC settled its case by requiring Ford to notify and directly compensate owners according to the secret warranty policy and to notify all future owners until the consent agreement expired eight years later in 1988. Although the FTC later filed similar complaints and actions against GM, VW, Honda, and Chrysler in the late 1970's, it dropped the requirement of secret warranty notification. In 1981 after the change of Administrations, the Commission completely dropped its efforts to expose secret warranties.

Where a secret warranty exists, consumers could ban together to file a class action against the manufacturer for an unfair trade practice but this is a major effort which is rarely used and is a poor substitute for a disclosure law. In 1989, CAS helped the Center for Public Interest Law successfully sue Toyota over a secret warranty that covered up to $1800 in repair costs for pulsating brakes in over 400,000 1983-87 Camrys. To settle CAS' class action Toyota agreed to 1) notify all present and past owners, 2) reimburse consumers for all repair expenses already incurred, and repair all cars with this defect that had not yet been repaired. CAS estimates the total cost to Toyota to be over $100 million, most of which would have been borne by consumers but for CAS' action.

State Secret Warranty Laws

In order to protect consumers from undisclosed defects, four states (California, Connecticut, Virginia, and Wisconsin) have enacted secret warranty laws and many states are now considering secret warranty legislation. The state secret warranty laws already enacted require manufacturers to disclose their "warranty adjustment" programs by giving direct notice of any warranty extension to affected owners, including information about the terms of the warranty, and provision for reimbursement to consumers who already have paid for the covered repair.

How to Find a Secret Warranty

Until secret warranty disclosure laws become the law of the land, the only way to find out about secret warranties is just plain hard work. First, one checks the technical service bulletins for your vehicle type and model year. Service bulletins are published by the manufacturer and sent to dealerships to assist them in diagnosing and repairing problems on the vehicles they service. The existence of a service bulletin does not conclusively prove the auto company has a secret warranty but it does show a defect or problem exists for which the manufacturer has had to develop a repair. Service bulletins can be difficult to decipher, but it is well worth the effort. Finding the right bulletin could save you thousands of dollars in repair costs. The right bulletin is the one that tells the dealer how to diagnose and fix the problem. It also will authorize the dealer to make the repairs at the manufacturer's expense even though the defect is no longer covered by the manufacturer's express warranty.

The trouble is that manufacturers often do not put the terms authorizing free repair in the technical service bulletins but give this information only to their factory representatives so that both the dealer and consumer are kept in the dark. Watch for code words in bulletins such as "check for availability of good will assistance." Companies often use such language to get around the triggering requirements for customer notification in states that have secret warranty disclosure laws.

Secret warranties are often revealed when owners of vehicles of the same type and age are treated differently by the dealer or manufacturer. If some owners get their vehicles repaired at no cost or at a discount whereas other owners of the same vehicle do not, it is possible that a secret warranty covers the defect involved. However, it is also possible that the dealer or manufacturer has decided on a case-by-case basis to reimburse a relatively small number of owners to retain their goodwill and not as part of a warranty adjustment program. To constitute a secret warranty, the difference in treatment of customers must be based on a corporate policy to reimburse owners that is communicated to regional offices and usually also to dealers but that is not communicated to consumers.

How to Use a Secret Warranty

After determining that your vehicle is covered by a secret warranty, the next step is to take advantage of your knowledge. The best way to do this is to take the service bulletin that proves the existence of the secret warranty with you when you go to your dealer to get the defect repaired. Without the bulletin, you will have a much more difficult time getting the dealer to repair your vehicle free of charge. Even if the dealer refuses to recognize the existence of the secret warranty [he might not know that the secret warranty exists] or if your vehicle is beyond the period of coverage of the secret warranty, he still may repair your vehicle at no expense as part of a goodwill adjustment.

If the dealer claims your vehicle is not covered by a secret warranty and refuses to give you a goodwill adjustment, your next step is to pursue your claim directly with the manufacturer. You should do this for two reasons. First, unlike dealers, the manufacturer will know always know if a certain defect in one of its own vehicles is covered by a secret warranty. Second, every manufacturer has a system to handle consumer complaints, which should be followed even though it may not work in most cases. Complaint handling mechanisms outside the manufacturer's system (e.g. arbitration) require exhaustion of all remedies that the manufacturer provides.

Contact the manufacturer's division (also called regional, district or zone) office in your area. The locations and correct names of district offices and the complaint procedures are often spelled out in the owner's manual. If the manufacturer's representative refuses to see you, contact the regional office or the manufacturer's owner relations office, often located in Detroit.
If the manufacturer refuses to extend the secret warranty to your vehicle (perhaps because your car is beyond the time or mileage requirements of the secret warranty), do not give up. Manufacturers only reimburse those owners who complain loudly and persistently; those who put off complaining, or who never complain at all, must pay for the manufacturer's mistakes.

The next step is to make enough noise outside the manufacturer's complaint handling system to get results. A strong commitment is necessary to successfully use this procedure, because you will not get results unless you are willing to persistently follow up letters and phone calls.

Complain in writing to the manufacturer's Chairman of the Board or President with copies of that letter to others. Set forth the defect covered by the secret warranty clearly and precisely within the letter and refer to the collected documentation of the car's troubles and your attempts to have the car repaired "within the system."

Send copies to various organizations such as local and national consumer groups, local and state consumer protection agencies, state attorneys general, federal agencies and members of Congress. Even if these agencies or groups cannot act directly on your behalf, they may send complaints on to the manufacturer requesting that the manufacturer take action.

Tell the local media about your secret warranty problem. Many consumers get reimbursed because a local Action Line, newspaper or television station starts to take an interest in a secret warranty. After all, if a manufacturer is trying to keep a secret warranty secret, the last thing the company wants is publicity on the secret warranty. A particularly good strategy is to announce the formation of a group to expose the particular secret warranty affecting your car. Even if the group is small as you and your neighbor, a group is powerful and attracts more attention than an individual.

Small Claims Court

Manufacturers often stonewall the consumer over secret warranties knowing that many consumers will give up in utter frustration and go away mad. Don't. Take the documentation on the secret warranty and your repair efforts to small claims court. At this point, it's the manufacturer who often gives up knowing that the legal rights are on the consumer's side. The manufacturer relies on its own complaint handling mechanism to wear down consumers. Once you show you won't be beat by the manufacturer's complaint handling mechanism, you should succeed. The manufacturer will finally recognize its responsibility for the defect in your car and reimburse you.

Conclusion

The squeaky wheel gets the grease. The consumers who complain the loudest get reimbursed under secret warranties. The good customer who goes away quietly gets ripped off. Until auto companies wake up and realize that consumer protection is good business, consumers have to be aggressive or they will wind up paying for an auto company's mistake. Since billions of dollars in repairs are covered by secret warranties, the total benefit to consumers in exercising their rights is enormous.