10.6 Mechanical Breakdown Insurance and Motor Vehicle Service Agreements

Quick Answer: Auto physical damage forms cover damage from external accidental causes; they expressly exclude mechanical or electrical breakdown. Coverage for a failed engine, transmission or air-conditioning compressor comes from mechanical breakdown insurance (MBI) written by an authorized insurer, or from a motor vehicle service agreement regulated in Florida under Chapter 634, Part I. Forms range from listed-component powertrain agreements to exclusionary agreements that cover everything except a stated list. Wear items, maintenance, pre-existing conditions and consequential damage are the exclusions that decide claims.

An adjuster who does not know this boundary will mis-handle two files a month. A water pump that seizes is a breakdown. A water pump destroyed when a deer strike pushed the fan into it is comprehensive. The cause of the failure, not the failed part, decides which product responds.

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Why the Auto Policy Will Not Pay

Both the Personal Auto Policy (Part D) and the Business Auto Coverage Form (Section III) exclude:

• Wear and tear, freezing, and mechanical or electrical breakdown or failure, and
• Road damage to tires,

unless the damage results from the total theft of the covered auto or from another covered cause of loss. The insuring agreement pays for direct and accidental loss, so a part that simply wore out or failed has not sustained an accident in the policy sense.

The practical test an adjuster applies:

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Two Legally Distinct Products

Mechanical Breakdown Insurance

Written as an insurance policy by an authorized insurer, with forms and rates filed with the Office of Insurance Regulation. It is a true insurance contract, so the Insurance Code's claim-handling rules, unfair claims settlement practices, and adjuster licensing requirements apply to it in the ordinary way.

Motor Vehicle Service Agreements (F.S. Chapter 634, Part I)

Florida regulates the far more common product — the "extended warranty" sold at the dealership — as a separate line of business. Key points:

• Definition (F.S. § 634.011(8)). A motor vehicle service agreement is a contract indemnifying the holder, for the vehicle listed on the agreement, against loss caused by the failure of any mechanical or other component part, or any mechanical or other component part that does not function as it was originally intended. It also reaches agreements sold in conjunction with additive products and agreements providing vehicle protection expenses.
• What is not a service agreement. The usual manufacturer's or dealer's performance guarantee given free of charge with the sale of a vehicle is expressly outside the definition — a factory warranty is not a regulated service agreement.
• Which vehicles. "Motor vehicle" for this purpose is a self-propelled road device or its component parts, but excludes vehicles with a gross vehicle weight rating of 10,000 pounds or more that are not recreational vehicles, vehicles designed to carry more than 10 passengers including the driver, and vehicles used to transport hazardous materials. It does include personal watercraft and their engines and trailers.
• Who may sell it. Only a licensed motor vehicle service agreement company, with sales representatives and salespersons licensed or appointed as the chapter requires. Forms and rates are filed with the office, and the company must maintain the reserves, contractual liability insurance or net assets the chapter prescribes.
• Consumer protections. Chapter 634 imposes cancellation and refund rights, free-look provisions, and prohibitions on unfair practices in the sale of agreements.

Exam Trap: A Factory Warranty Is Not Insurance

The manufacturer's bumper-to-bumper warranty included in the purchase price is a performance guarantee, expressly excluded from the statutory definition of a motor vehicle service agreement and outside the Insurance Code. An extended service agreement sold for a separate charge is a Chapter 634 product. Mechanical breakdown insurance is a third thing — an actual insurance policy. Questions frequently ask you to sort the three.

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What Coverage Grades Look Like

The listed-component versus exclusionary distinction is the coverage analogue of named peril versus open peril, and it allocates the burden of proof the same way: on a listed-component agreement the holder must show the part is on the schedule; on an exclusionary agreement the company must show an exclusion applies.

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Standard Exclusions

• Maintenance and wear items. Oil, filters, coolant, spark plugs, belts, hoses, brake pads and shoes, wiper blades, tires, bulbs and fuses.
• Failure to maintain. Damage resulting from the holder's failure to perform the manufacturer's recommended maintenance, or from a lack of documented service records.
• Pre-existing conditions. Failures that existed or were developing before the effective date, which is why agreements impose a waiting period — commonly 30 days and 1,000 miles from purchase.
• Cosmetic and appearance items, upholstery, trim, paint, glass and body panels.
• Damage from a covered peril elsewhere. Collision, fire, theft, flood, vandalism and road hazard are the auto physical damage policy's job, not the service agreement's.
• Consequential and incidental loss such as lost wages, lost time and inconvenience, except where the agreement adds specific rental reimbursement, towing or trip interruption benefits.
• Misuse. Racing or competition, off-road use, overloading beyond rated capacity, towing beyond rated capacity, and non-approved alterations or performance modifications.
• Commercial use unless declared and rated for it.
• Environmental and non-mechanical causes including rust, corrosion, contamination and freezing.

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Deductibles, Term, Territory and Conditions

Deductible. Usually a flat dollar amount, most commonly $0, $100 or $250, applied one of two ways:

• Per visit — one deductible for the entire repair order no matter how many covered parts failed; or
• Per repair / per component — a separate deductible for each covered component repaired.

A disappearing deductible waives the deductible when the repair is performed at the selling dealer.

Term and territory. The agreement runs for a stated time or mileage, whichever occurs first, measured either from the vehicle's original in-service date or from the agreement purchase date. Coverage territory is normally the United States and Canada; repairs abroad are excluded.

Conditions the adjuster enforces.

1. Prior authorization. The holder must contact the administrator and obtain an authorization number before the repair begins. An unauthorized repair is the most frequent denial.
2. Repair facility. Work must be performed at a licensed facility, sometimes limited to a network.
3. Proof of maintenance. Service records demonstrating the manufacturer's schedule was followed.
4. Teardown. The administrator may require the shop to disassemble the component to diagnose the failure, and the holder generally pays teardown cost if the failure turns out not to be covered.
5. Limit of liability. Payment is commonly capped at the actual cash value of the vehicle or the price paid for it, and parts may be replaced with new, remanufactured or like-kind-and-quality used parts at the administrator's option.
6. Transfer and cancellation. Agreements are often transferable to a subsequent private purchaser for a fee, and are cancellable for a pro rata or short-rate refund less a cancellation fee, subject to Chapter 634's refund rules.