Mechanical breakdown insurance
Don't buy what you don't need
If you buy a car from a car dealer, they might offer you
mechanical breakdown insurance. Here we explain what this insurance
is, and how it can be an unnecessary purchase when you are covered
by other statutory and new car warranties.
What is mechanical breakdown
Mechanical breakdown insurance, or motor breakdown insurance
(MBI), is a type of add-on insurance policy that a car dealer might
offer you when you buy a car from a car dealer. It provides some
cover for the repair or replacement of specific parts of your car
if you suffer an unexpected mechanical failure.
However, there are lots of exclusions which means many
mechanical problems are not covered and, if you already have a new
car warranty, the MBI only kicks in after the new car warranty
Sometimes MBI is called extended warranty insurance, because it
commences after your new car warranty ends. However, this is
different from a manufacturer's extended warranty as it is provided
by an insurance company. If you're not sure what your buying, or
who is providing the cover, make sure you ask.
ASIC's Peter Kell talks about mechanical breakdown
Listen to ASIC Deputy Chairman, Peter Kell talk
about the sale of add-on insurance policies like mechanical
breakdown insurance through car dealers and how the market is
Subscribe to ASIC View podcast via iTunes or PodBean.
Do I need mechanical breakdown
Depending on what the problem with the car is, your rights under
Australian Consumer Law protect you after the new car warranty
expires. This means you can ask the car dealer or manufacturer to
fix a major fault with the car. So MBI doesn't necessarily give you
any more protection than you already have if you buy a new car.
Visit the ACCC's website for details on consumer guarantees under
Australian Consumer Law.
Although car dealers sell you MBI when you buy a new car, the
coverage doesn't start until the new car warranty expires. So, if
you get an MBI policy when you buy a car that comes with a 3-year
new car warranty, you will be paying upfront for a policy you won't
be able to claim on for at least 3 years.
Things you should know about
mechanical breakdown insurance
Car dealers get commissions for selling insurance
Car dealers who sell these policies receive a commission on the
sale. This incentive to make the sale might be in their best
interests but might not be in yours.
You are already covered for major faults
New car warranties and the Australian Consumer Law cover you for
most mechanical failures for a few years so it can be unnecessary
to buy mechanical breakdown insurance.
Insurance will add to the cost of your car
MBI policies often charge premiums that are packaged into your
car loan. Because you pay interest on the premiums, the insurance
is even more expensive and the amount you have to borrow is
Our MoneySmart Cars app can help you work out the real cost of
buying a car and allow you to crunch the figures on add-on
MoneySmart Cars app
Cancellations and refunds
If you've paid for the policy by packaging it into your loan,
and you cancel the policy because you no longer want it, you will
usually only receive a partial refund, much less than the unused
portion of your policy.
What to ask before taking out motor breakdown insurance
Buying a car can be a long process. You can spend hours
negotiating with sales people, making endless decisions, and
filling in paperwork, but it's important to remain calm and ask
questions if you're unsure about anything.
Here are some things to consider if you are offered an MBI
policy by a car dealer:
- Cost - Ask for the full cost of the
premium, including the cost of any interest payable if it is added
to your loan.
- Restrictions and exclusions - Find out what is
- and is not - covered. Make sure the coverage is worth the
- Vehicle servicing obligations - Ask about how
often and where you have to get your car serviced in order for the
insurance to remain valid. Mechanical breakdown insurance policies
sometimes restrict where you can go to get your car serviced, if
you go somewhere else they might reject any future claims.
- Coverage period - Find out how long you will
be covered for.
- Commission - Ask the car dealer how much
commission they will get if you buy the insurance policy.
- Cooling off period - Is there a cooling off
period where you can cancel the policy at no cost if you decide you
don't need it?
How to make a claim, cancel or
complain about motor breakdown insurance
See our add on insurance webpage for details
on how to make a claim on your policy, cancel it or make a
Before you buy mechanical breakdown insurance,
make sure you understand how much it will cost you and what it
really covers. Salespeople can be very persuasive but when you are
covered by Australian Consumer Law, this type of policy can be an
Last updated: 15 Sep 2016