Insurance vs Warranty. Similarities and Differences.

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While an auto warranty could be considered a form of insurance in a loose sense, it is different than car insurance, although sometimes they can be confused. We’ll take a minute here to explain the similarities and differences between the two and describe situations where claims can be made against each type of coverage.

The Purpose of Auto Insurance

Traffic accident - one driver on the mobile phone, second expressing anger

Car Accident: Liability + Collision Coverage= All Costs Are Covered

Vehicle insurance is an indemnity policy that protects you from the risk of financial loss associated with your automobile and caused by an external source. This could include a collision, vandalism, your car being stolen, catching on fire or being damaged in an act of nature such as an earthquake or hailstorm. Not all types of policy, however, cover every event.

Most states in the U.S. require vehicle owners to obtain at least a minimum amount of insurance on an automobile before it can legally be registered to be driven on public roads. This minimum coverage, called liability protection, covers you in the event that you’re responsible for causing a loss to any third party while operating your vehicle. Benefits paid through a claim made on liability coverage are always paid to a third party, not to the named policyholder. In order to personally collect any monetary benefits from your auto insurance policy it must have additional coverage above the basic liability, such as collision and/or comprehensive protection.

Note: While there are many types of insurance policies available to drivers, liability and collision are the two that most people are legally bound to purchased if they are going to drive in the United States. Every driver in the US is required to have liability coverage, however, collision coverage is optional in most states. Liability policy is designed to take care of the other party’s expenses and to assure the other party that all damages will be covered in full, while collision coverage protects your own vehicle after the accident or if you are hit by an uninsured driver.

The Purpose of an Auto Warranty

Businessman on a mobile phone in front of a broken car

Mechanical Breakdown: Factory Coverage + Vehicle Service Contract = Total Protection

A car warranty, whether it is a new coverage from the manufacturer or an extended vehicle protection (also known as service agreement or contract) on a used car, is meant to protect you from financial loss due to a mechanical problem with a component or system in or on the vehicle. To make it simple, look at it this way:

If your vehicle stops running because you ran it into a tree or another car, that claim would be made on your collision coverage policy (assuming you have collision coverage, which is not required in all states).
If your vehicle stops running because the engine blew up or the transmission went bad, that claim would be made on your factory automobile protection plan or service contract policy.

Vehicle Insurance Car Warranty/Service Contract
Mechanical Breakdown Covered*
Corrosion Covered*
Rust Covered*
Accident Covered*
Collision Covered*
Car Rental Covered* Covered*
Roadside Assistance Optional Optional
*Different protection plans can be offered to the drivers by policy providers. 

Here’s a Test

Here are a few examples to consider.

1. Q: You’re out driving and begin to hear a loud clanking under the hood of your car. You take it to a mechanic who, after diagnosing the problem, informs you that the valves need to be replaced. Under which policy should you file a claim?

A: The answer is your automobile warranty or vehicle service contract (which is an extension of your original manufacturer’s protection plan).

2. Q: You’re out driving again and this time you inadvertently drive over a large rock that’s rolled onto the roadway. Upon impact, the rock pierces the bottom of your engine and all the engine oil leaks out onto the ground, which you realize after seeing the engine oil light illuminated on the dashboard. You need to be towed to a garage and there you learn that the oil-pan must be replaced. Under which policy should you file a claim?

A: The answer here is your automobile collision coverage policy, since the damage to the oil-pan was caused by an external force and not an inherent failure or breakdown of the part requiring replacement.

3. Q: You’re out driving and the car in front of you slams on his brakes. When responding by stepping on your brakes you discover they’re not working and you end up rear-ending that vehicle, damaging both cars. With whom should you file your claim?

A: The answer is BOTH. Because there has been a collision, you must automatically file with your automobile insurance carrier. Because the accident was caused by a faulty brake system, however (which must be repaired), a claim should also be filed under your factory or extended protection policy.

Resources:

Insurance – is a “contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.”

Source: http://www.investopedia.com/terms/i/insurance.asp

Warranty – “is a type of guarantee that a manufacturer or similar party makes regarding the condition of its product. It also refers to the terms and situations in which repairs or exchanges will be made in the event that the product does not function as originally described or intended.”

Source: http://www.investopedia.com/terms/w/warranty.asp