Information about Extended Warranty

An extended warranty, sometimes called a service agreement, a service contract, or a maintenance agreement, is a prolonged warranty offered to consumers. The extended warranty may be offered by the warranty administrator, the retailer or the manufacturer. These warranties extend the period of the manufacturer's standard warranty and are usually not "double coverage". For example, a refrigerator's extended warranty covers two years past the manufacturer's one year warranty. Extended warranties cost extra and for a percentage of the item's retail price. In retail consumer electronics, extended warranties cost 20% to 30% of the price, and give sales associates up to 15% commission at some retailers.^[1][2] Occasionally, some extended warranties that are purchased for multiple years state in writing that during the first year, the consumer must still deal with the manufacturer in the occurrence of malfunction. What was often promoted as a 5 year extended guarantee thus becomes only a four year guarantee.

Overview

An extended warranty is coverage for electrical or mechanical breakdown. It does not cover peripheral items, wear and tear, damage by computer viruses, re-gassing, normal maintenance, accidental damage, or any consequential loss. The indemnity is to cover the cost of repair and may include replacement if deemed uneconomic to repair. It is important for consumers to read and understand the terms and conditions offered at the point of sale.

The value of extended warranties lies behind the organization promoting and selling them. Most of the major retailers employ specialist administrators to manage the claims and to ensure the product is priced on a sustainable basis. An essential part of this is to determine the appropriate provisions on the balance sheet to reserve for future claims. Similarly, the income must be earned over the period of cover.^[3] Companies that have been around for several years will usually have the systems and data in place with which to do this. Less reputable organizations may not adequately price their extended warranties and may therefore have insufficient funds to provide for future claims costs.

Consumer advocate groups, such as the non-profit Consumers Union, advise against purchasing extended warranties. David Butler of the Consumers Union says, "The extended warranty is definitely in the best interest of the company, but isn't often in the best interest of the consumer." He adds, "The company is much more likely to profit from the extended warranty than the consumer is." In many cases, if the item does need repairing, the cost of repairs are less than the cost of the extended warranty. Other advocates also advise against purchasing extended warranties, maintaining that they are a cash cow for retailers, many of whom will refuse to repair items covered under such plans, if at all possible.^[4]

Consumers Union says only two products deserve extended warranty consideration: projection TV's and digital camcorders. Both are expensive to repair and need repairs frequently.^[5]

Extended warranties in the UK

The extended warranty market has been subject to several investigations. In 2002 the Office of Fair Trading decided that self-regulation of the industry had failed and passed the case onto the Competition Commission. This concluded that the market was not acting in the interests of consumers. The Citizens Advice Bureau have expressed concerns about extended warranties being mis-sold.^[6]

Extended warranties in the Canadian province of Québec

Based upon the Québec civil code and the "Loi sur la protection du consommateur" every merchant is responsible to uphold the legal guarantee of a product. This legal guarantee protects the consumer from: purposefully hidden malfunctions, defaults that could not be readily identified at the moment of purchase, the guarantee that the item purchased can be used for its stated uses and finally guarantees a reasonable life expectancy based on the price paid. This guarantee survives even when the initial purchaser sells his goods to another person. A merchant cannot ask a consumer to pay any fees or shipping charges in order to be eligible to receive their legal guarantee. The office for the protection of consumers does not take a particular stance towards extended warranties. However, they recommend that consumers should be vigilant and question themselves whether the warranty really adds anything to the already applicable legal warranty. Finally they point out that the number of consumers who go to court against merchants in order for them to apply the legal warranty is almost proportional to the number of consumers who take legal means against a merchant for failing to respect extended warranties they have sold.^[7]

See also

• Warranty
• Extended service plan

References

External links

• CBC Marketplace article on extended warranties
• Consumer's Union study on extended warranties for cars
• Extended warranties article on NBC4
• Extended Warranties, page on the BBC UK website
• Information from the Office of Fair Trading
• Laptop extended warranties: sometimes worth it? The Walyou Blog