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. Extended warranties cost extra and for a percentage of the item's retail price. 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. Thus, what is often promoted as a five-year extended guarantee is actually only a four-year guarantee.

Overview

An extended warranty is coverage for electrical or mechanical breakdown. It may or may not cover peripheral items, wear and tear, damage by computer viruses, re-gassing, normal maintenance, accidental damage, or any consequential loss. Most state insurance regulators have approved the inclusion of normal wear and tear, accidental damage from handling, rental car and towing, power surge and other coverages in addition to the standard coverage for defects in materials and workmanship. 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. In retail consumer electronics, extended warranties cost 20% to 30% of the price, and give sales associates up to 15% commission at some retailers.

Consumer advocate groups, such as the non-profit Consumers Union, advise against purchasing extended warranties unless they can be purchased at manufacturers cost. David Butler of the Consumers Union says, "The extended warranty is definitely in the best interest of the company because if the product breaks down they want you to be satisfied with it and buy another one when the time comes, but isn't often in the best interest of the consumer unless it can be purchased at cost with no or very little markup." Consumers Union says only two products deserve extended warranty consideration: projection TV's and digital cameras. Both are expensive to repair and need repairs frequently.

Extended Auto Warranty

An extended auto warranty is a service contract between the owner of a vehicle and an auto warranty provider. All new cars come with a warranty that cover repairs for a certain period of time and a certain number of miles, such as 3 years and 36,000 miles. When that time period runs out, consumers have the option to purchase an extended auto warranty. This warranty is not an extension of the terms and coverages provided in the original car manufacturer’s warranty. Rather, it is a new contract provided a third-party provider.

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.

By region

United States

In the United States, extended warranty's are regulated by many state insurance commissioners as "service contracts." Service contracts can cover automobiles, consumer goods (such as appliances, electronics, lawn equipment, etc...) and homes. The regulatory structure requires licensure or registration of the warranty providers, financial solvency regulation, and service contract consumer disclosures. Service warranty "providers" apply for licensure or registration, and then may sell their products, usually at the point of sale of the product, for example at the car dealership, or at the retail consumer electronics store. In the United States, a type of extended warranty called vehicle service contracts are typically regulated by the states as insurance. In July 2010, California issued a cease and desist letter to several corporations which were selling the insurance illegally in the state; the corporations contended that it was not insurance because the contracts required that certain additives be used.

United Kingdom

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.

See also

• Warranty
• Extended service plan

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
• Dissatisfaction Guarantees? The Legal Issues of Extended Warranties
• Information from the Office of Fair Trading