Extended Warranty

An extended warranty is a contract to repair or replace a consumer product over a defined period, sold separately from the product itself. Federal law does not use the term. The Magnuson-Moss Warranty Act defines a "written warranty" as a written affirmation or undertaking about a product that "becomes part of the basis of the bargain" when the product is sold, and defines a "service contract" as "a contract in writing to perform, over a fixed period of time or for a specified duration, services relating to the maintenance or repair (or both) of a consumer product." The Federal Trade Commission's interpretive rule at 16 CFR 700.11(c) then places what the market calls an extended warranty in the second category, because an agreement calling for consideration beyond the purchase price, or entered into after the purchase, fails the basis-of-the- bargain test.

The name and the legal category point in opposite directions, and the regulation says so in as many words. 16 CFR 700.11(c) provides that "an agreement which would meet the definition of written warranty in section 101(6)(A) or (B) ... but for its failure to satisfy the basis of the bargain test is a service contract", and gives the two ways that failure happens: "an agreement which calls for some consideration in addition to the purchase price of the consumer product, or which is entered into at some date after the purchase of the consumer product to which it applies". Both of those describe an extended warranty exactly. The regulation adds a third variety of service contract: an agreement that only promises maintenance or inspection, without undertaking anything about a level of performance or freedom from defects, "even when offered at the time of sale and without charge to the consumer".

One consequence is genuinely useful and almost never mentioned at the counter. Under 15 USC 2308(a), no supplier may disclaim or modify any implied warranty to a consumer with respect to a consumer product if, among other things, "at the time of sale, or within 90 days thereafter, such supplier enters into a service contract with the consumer which applies to such consumer product". A disclaimer made in violation of that section is, under 2308(c), "ineffective for purposes of this chapter and State law". So a service contract bought from the seller of the product, at the sale or within 90 days, protects the implied warranties that seller would otherwise have been free to disclaim. Read the operative word carefully: the statute speaks of "such supplier", the supplier of the product. A contract bought from an unrelated third-party administrator is not the same thing and does not carry this effect. Subsection (b) separately allows implied warranties to be limited in duration to that of a written warranty of reasonable duration, where the limitation is conscionable and "set forth in clear and unmistakable language and prominently displayed on the face of the warranty".

Whether it is insurance is a state question, and the FTC says so. 16 CFR 700.11(a) recognizes that some agreements meeting these statutory definitions "are sold and regulated under state law as contracts of insurance", giving automobile breakdown insurance policies as an example, and explains that the McCarran-Ferguson Act generally prevents federal law from superseding a state law "enacted for the purpose of regulating the business of insurance", with the Magnuson-Moss Warranty Act not among the three laws given a separate proviso. The practical translation is that the answer to "is this insurance?" is set by the law of your state and by how the particular product is structured, and it decides which regulator hears a complaint and what reserves or backing stand behind the promise.

The duplication problem is the arithmetic most buyers skip. A product usually arrives with a manufacturer's written warranty, and an extended warranty's term typically begins on the day of purchase rather than when that warranty runs out. Where that is so, the early part of the coverage period is something the buyer already had. The honest price is not the fee divided by the full stated term; it is the fee divided by the months the contract adds. Some payment cards also carry purchase-protection or extended-warranty benefits, and where they do the terms sit in the card's benefits guide, so it is worth checking before buying a third layer over the same period.

The exclusions do the work, so they are where the reading effort belongs. What is covered, what counts as normal wear, whether accidental damage is included, whether there is a per-visit or per-claim fee, whether the payout is capped at the product's depreciated value, who chooses the repairer, whether parts must be original, and whether the contract transfers on resale are all answered in the document rather than by the category. Two contracts sold under the same words at the same counter can differ on every one of those points.

At or after the point of sale, the buyer is offered a contract covering repair or replacement for a stated term. The obligor may be the retailer, the manufacturer, or a third-party administrator, and who it is decides who must perform and who regulates them. When something fails, the owner contacts the administrator rather than the retailer, an authorized repairer is assigned, any per-visit fee is paid, and the claim is assessed against the contract's covered components and exclusions. Coverage generally ends at the earlier of the term's expiry or a stated payout cap.

A hypothetical example of the duplication arithmetic, with invented numbers and no particular product. A $900 appliance carries a manufacturer's written warranty of 12 months. The retailer offers a 36-month extended warranty for $180, running from the date of purchase. The headline cost looks like $5.00 a month ($180 divided by 36). But the first 12 months are already covered by the manufacturer, so the contract adds 24 months of coverage that did not otherwise exist (36 minus 12), and the real price of what is being bought is $7.50 a month ($180 divided by 24). If the contract also charges a fee per service visit, that comes on top, and if the payout is capped at the product's depreciated value rather than its replacement cost, the ceiling on what can ever be recovered is lower than $900 by the time a claim is likely.

Pros

• Converts an uncertain repair bill into a known cost, which is worth something to a household that would struggle to absorb the repair.
• Bought from the seller of the product at the sale or within 90 days, it prevents that seller from disclaiming the implied warranties, which is a real legal benefit independent of any claim.
• Some contracts include things a manufacturer's warranty never covers, such as accidental damage, and where they do that is genuinely additional.
• Where a state regulates the product as insurance, the obligor is subject to that state's requirements rather than to contract law alone.

Cons

• It is not a warranty. The protections that attach to a written warranty and those that attach to a service contract are not the same set.
• The term usually starts at purchase, so part of what is paid for duplicates the manufacturer's coverage.
• The exclusions, the per-visit fee and any cap on payout decide the value, and they are in a document handed over after the decision rather than before it.
• A contract from an unrelated third party does not carry the 90-day implied warranty protection that one from the product's own supplier does.
• Whether the obligor is regulated, and by whom, depends on state law and on the structure of the product, so recourse varies.
• It is sold at the moment of purchase, when the buyer has already decided to spend and is least inclined to read another document.