Warranties and Guarantees¹

Suppose you bought a new boat and found that it would not float, or a new washing machine and discovered it would not wash clothes. If neither carried a written warranty or guarantee, what would you do?

Even though the boat and washing machine had no written warranty, they are covered by an implied warranty. The store is legally obligated to do one of three things -- repair the defective merchandise, replace it or refund your money.

A warranty and a guarantee are the same thing. However, "warranty" is the preferred term. A warranty is a promise of quality given by the seller or manufacturer of a product to the buyer at the time of the sale.

Often sellers and buyers view warranties differently. Many consumers accept the term "warranty" without thinking about it. They assume that it is an assurance of quality. They do not focus on the coverage until there is a problem with the purchase.

Some sellers see warranties as a promotional device or as a way to limit their responsibilities. Others see warranties as a way to assure their customers of quality and avoid misunderstandings.

Historically, the warranty evolved as a part of the bargaining process between buyer and seller. In recent years the obligations of the seller have been precisely spelled out in the Uniform Commercial Code and through the Magnuson-Moss Warranty Act. The Uniform Commercial Code recognizes two basic types of warranties -- implied and express. The Magnuson-Moss Warranty Act spells out conditions involved in the written or express warranty.

The Implied Warranty

Implied warranties are promises that are legally in effect even though they are not in written form. Any ethical and responsible manufacturer or retailer will honor them. Implied warranties include the following provisions:

• Clear title. A promise that the item is not stolen or illegal. If the seller does not have a clear title to sell the item it can be taken from you and returned to the rightful owner. You then have the right to demand that your money be refunded to you by the person or business who sold you the item.
• Suitability, or fitness for purpose. This implied guarantee assures the buyer that the product will do what it is supposed to do. For example, if you tell the seller you want a machine that will sew fabric, or a pair of scissors that will cut fabric, then you can get your money back if the scissors will only cut paper or the machine will only sew leather.
• Merchantability. This promise means the product must live up to reasonable expectations of its performance. For example, a boat must float and a television must produce a good clear picture and sound.

Implied warranties are legally valid. If they are not met, the merchant or manufacturer usually will either refund your money or exchange the merchandise. They are most often honored on recently purchased new items. They do not provide much recourse over a longer period of time because it is legally difficult to determine what is a "reasonable expectation" over a "reasonable period of time."

The Express Warranty

Express warranties are written warranties. Until the Magnuson-Moss Warranty Act was passed in July 1975, it was not always easy to know exactly what the terms of a warranty really meant. This law does not require a company to give a written warranty. It was designed to simplify and organize the rights guaranteed in any written warranty so that it could be easily and clearly understood by the consumer. Some parts of the Act became effective in 1976 and other parts in 1977.

Written warranties must now be in one of two forms, "full" or "limited." They must be clearly labeled as such.

• Full warranties. As the name implies, it means the entire product is covered by the warranty including both labor and parts, for a specific period of time. If the product is defective during the warranty period, the seller or manufacturer may either repair or replace the item. Or he may give a cash refund. It is up to the manufacturer to decide which will be done. If a "reasonable" number of attempts fails to repair the problem, the product must be replaced with a new one. If the manufacturer or seller chooses to refund the purchase price rather than make repairs, a small reasonable deduction from the total purchase price can be made to pay for use of the product, if you have used it over a period of time.

   

• Limited warranties have restrictions that full warranties do not have. A limited warranty must tell you specifically what is covered and, if needed for clarity, what is not. For example, a warranty for parts may say "for a period of one year we will replace any parts that prove to be defective, but you, the buyer, will pay the cost of the labor needed to install these parts."

Information in an Express Warranty

The express warranty must be written in simple language and disclose all terms. The Federal Trade Commission (FTC) has issued disclosure rules which apply to all written warranties for consumer products that cost more than $25. These include:

• A clear description of what is covered and, when necessary for clarification, what is not covered by the warranty.
• What the warrantor will do if the product is defective or malfunctions, including a description of the items or services to be paid for by the warrantor and, if necessary for clarification, what will not be paid.
• To whom the warranty is extended. For example, is it extended to the original owner only or does it extend to second owners of the product?
• How long the warranty is in effect and when it becomes effective.
• A detailed explanation of steps to be followed to get repair or replacement of the product under warranty. This must include: the name of the warrantor and the address; the name, title and address of the department responsible for warranties; and where consumers can get warranty information free. No unrealistic restrictions can be made. For example, the warrantor may not require the return of a piano to the manufacturer for repairs.
• Information about any settlement mechanism to resolve warranty complaints.

Disclaiming implied warranties is prohibited. Warranties may be limited in duration but not disclaimed.

Pre-Sale Warranty Information

A shopper must be given the opportunity to see the warranty before buying the product. This is important because the warranty should be a major consideration in product selection.

A retailer can use any one of several methods to make the warranty information available for a shopper to see. A copy of the warranty can be on display. A sign can be used to tell shoppers that they can see the warranty upon request. Or, the warranty can be attached to or printed on the item's carton or box.

The Magnuson-Moss Warranty Act also applies to mail orders, catalogs and door-to-door sales. In a catalog or other mail order advertising, the text of the warranty should be placed next to the description of a product or a statement included that a copy of the warranty is available upon request. Door-to-door salespersons must tell their prospective customers that copies of the warranties can be inspected at any time during their presentation.

Dispute Settlement

A unique aspect of the warranty law is that it recognizes the problems and expenses which consumers have sometimes had in resolving disputes. For this reason the legislation encourages the establishment of an informal and independent process to quickly, fairly and inexpensively resolve disputes. The law does not spell out what kind of dispute handling process should be established, but it does establish minimum requirements for the process, including record-keeping, investigative processes and audits.

FTC rules establish the duties of the warrantors who decide to incorporate the dispute settlement process into the terms of their warranties. These require that the warrantor using a dispute-handling process must disclose this information in the written warranty.

• A statement of the availability of the mechanism and its name and address, or its toll-free telephone number.
• A brief description of the process for using the mechanism and the types of information needed or required for prompt dispute-settlements.
• If the terms of the warranty require that the consumer first use the complaint process before seeking certain legal action, it must be clearly stated in the written warranty.

Other Coverage

Class action suits. The Magnuson-Moss Warranty Act provides legal rights when the warranty is not honored. In some cases consumers can use a "class action" suit when individual action would be too costly. The courts have been given the right to award payments, attorney's fees and other costs to the winning party.

Consumer Responsibilities

The consumer has obligations, too. If you do not live up to your end of the bargain, the warranty will be worthless. Some of your obligations are:

• To use the product as it is intended to be used. For example, don't use a dinner knife as a screw driver, or use aluminum foil over food in a microwave oven.
• Take reasonable care of the product. For example, keep the correct air pressure in your car tires.
• Examine a product carefully before buying it. If that isn't possible, examine it as soon as you buy it. If you wait three months to open a package of dishes, you may not get a replacement for one that is chipped.
• Clearly understand the terms of a warranty before buying. Some offer good protection but others are worthless. For example, shipping and handling fees may be as much as the cost of a new replacement.
• You do not have to return a registration card for a warranty to be in effect. But, you will need proof of the date of purchase. The card enclosed with a product is a marketing tool. It helps the company know who buys the company's products. However, the card enables the company to notify the buyer in case of a product recall.
• Keep sales receipt and warranty in a safe place. The sales receipt is important to verify.

Improving Warranty Service

The quality of warranty service depends on who has control over the service, the availability of replacement parts and the skill of the repairmen.

From the consumer's point of view, probably the best solution is for the warrantor to have complete control over the warranty service operation. Some large companies have this control. These companies have a strong incentive to provide satisfactory service. Even under these conditions there will still be variations in the quality of service. Decentralized factory service facilities make it easy for consumers to return merchandise and communicate complaints. This type of service is very costly to the company and requires strong, high-level administrative ability.

Less satisfactory from the consumer's point of view are warranties that require the product to be returned to the manufacturer for centralized factory service. Such service is not limited by cost or administrative ability but rather by the nature of the product. For example, who wants to send hard-to-pack items back to the manufacturer?

If the warrantor cannot provide either of these options, he must rely on a type of service over which he has less control. This may be the dealer who sold the merchandise, or an independent organization specializing in providing service. If the dealer holds an exclusive franchise for the sale of the product (for example, automobile dealerships), the warrantor has more control. Policing the warranty standards may involve considerable administrative costs and authority which the manufacturer may or may not be able to afford or desire. If the dealer sells many competing brands the warrantor has very little control over the quality of service.

The way the servicing organization is paid often influences the quality of the warranty service. There is considerable opportunity for conflict between the warrantor and servicing agent over fair payment and the record-keeping.

Look for the Facts

Before buying, compare warranties of competing products. Look for answers to the following questions. Then choose the warranty that offers you the best protection:

• Is the warranty full or limited?
• How long is the warranty period?
• How easy would it be to obtain repairs or replacement? Who would pay shipping charges or delivery charges?
• What is covered, the entire item or only a certain portion of it?
• Are parts and labor both covered?
• Can you get a similar product on loan while yours is being repaired?
• Who gave the warranty? Will the company be in business if you need repairs or replacement?

Warranty information must be available to consumers in a form that is easy to read and understand. However, it is the consumer's responsibility to read and use this information in comparative shopping. It is up to the consumer to understand the terms of the warranties before buying and to buy only from reputable sellers. A well-written warranty is of little value if the company giving the warranty has disappeared when service is needed. A reputable seller, a responsible consumer, and plain human decency on the part of both the seller and buyer are the ingredients for a satisfactory sales transaction.

Extended Warranties and Service Contracts¹

Mary N. Harrison²

If you have purchased a major household appliance or a car recently, you were probably encouraged to buy an extended warranty or service contract. Some retailers promote the sale of extended warranties or service contracts while others do not. Perhaps you wonder if the extra protection is worth the additional cost.

The advisability of buying an extended warranty or service contract has been debated for years. There are advantages and disadvantages that the consumer should consider before making a decision. Your best decision is one that is based on your individual situation and what is important to you.

Some people buy service contracts because they are afraid that repairs will be needed and they will not have the money to pay for the repairs. Others think that an extended warranty or service contract ensures them faster or more reliable service than the general public receives. However, some people believe extended warranties are a waste of money since they cover only the first years of a product's life, the time when repairs are less likely to be needed.

What Are Extended Warranties and Service Contracts?

An extended warranty and a service contract are basically the same thing. It is an agreement made between the owner of the serviceable product and someone who can (theoretically) fix the item if it needs service or repairs. It is much like an insurance policy that pays for repairs on a piece of equipment that is not functioning properly. The owner pays a set fee, usually by the year or for a specific number of years, and in return receives needed repairs at no additional charge. For cars, the coverage is for a specified number of miles.

Service contracts are widely used. One major department store chain has over five million customers with service contracts on its household appliances and another company has over one million customers with service contracts on its televisions. The number of extended warranties sold for new cars is increasing. Extended warranties and service contracts are big business, and a major money-maker for those that sell them.

Who is Responsible for Financing the Repairs Under an Extended Warranty?

Service contracts are usually handled in one of three ways by companies that sell them.

• The service contract is offered by the parent company through its retailer. The retailer sells the service contract. If the company is only one store, it keeps all of the money and does the repairs. If the company is a chain, much of the money goes to the home office. If repairs are done, the home office is billed and the local store is reimbursed for the work done.
• The retailer or company that sells the merchandise collects money for the service contract. Part of this money is paid as a flat-fee to a service company to handle any repairs that may need to be done. The same flat-fee is paid to the repair shop whether or not repairs are made.
• The retailer or company works in cooperation with a financial organization. The money is divided between the financial organization and the retailer. If repairs are needed, the store or dealer's repair department does the work and then bills the financial organization for payment.

The method the retailer uses to handle service contract funds and repair work is important to the consumer. If an individual retailer is totally responsible for the service contract, repair work will usually be done by the store or its designated service center. If a large chain, a corporation, or a finance company handles the account, repairs are usually available at different locations. Be sure to find out who will make the repairs, where the repair shop or service center is located and the quality of work done. It is also important to find out who will handle the funds used to pay for repairs, and if possible, its financial stability.

It is profitable for a business to sell service contracts because the money you pay for a service contract is divided between the retailer and a repair center or financial organization. Also, the repair center or financial organization expects to collectively receive more money than it will have to pay out for repairs. Some individual consumers do receive repairs of greater value than the amount of money paid for the service contact. However, many others need only minor repairs or no repairs during the extended warranty period, thus they receive less value for their investments.

What Happens to Your Money if You Do Not Need Repairs or Service?

When you paid your money it was placed in a collective fund with fees paid by many other people. From this fund, payments are made for needed repairs. If you do not need repairs, your money is used to pay for other people's repairs. You receive no refund or no value for your investment other than knowing repairs would be made if needed.

When Should You Pay for a Service Contract?

Most service contracts are sold to people at the same time they buy the appliance or the car. People are more likely to buy at this time because they are concerned about how well the purchase will perform and they are thinking about warranties, thus extended warranty has a real appeal. Also, most major purchases are financed. The cost of the extended warranty is added to the purchase price of the car or appliance and is also financed. This ADDS to the cost, but buyers seem to be unaware of this. Fewer service contracts would be sold if a purchaser had to go back to the retailer to buy the extended warranty at the time the manufacturer's warranty expired.

Some merchants charge a lower price for a service contract purchased at the same time that you buy your new car or appliance. The reason is simple, fewer people would buy a service contract later unless their car or appliance had required repairs. The cost of the extended warranty can be kept lower by having service contracts on a mix of trouble-free purchases and those needing repairs.

When you buy an extended warranty or service contract, realize it offers very little or no additional protection during the period that the manufacturer's warranty is in effect. Unless there is substantial savings, buy a service contract at the time the manufacturer's warranty expires. Why should the company hold your money, interest free, for several months, or a year?

How Likely Are You to Need a Service Contract?

Most people over-estimate the number of repairs an appliance or car will need over its expected life and especially during the early years of ownership. A study by the Massachusetts Institute of Technology found that with major appliances most of the repairs needed during the first five years of ownership, occur during the first year. That is when the appliances are under the manufacturer's warranty. Publications such as Consumers Report publish predicted repair records for some products. Independent service centers can also give you information about the frequency of repairs needed by different makes and models of items they service. However, these service center reports may be biased by individual preferences.

How Expensive Are Service Contracts?

Service contracts are usually reasonably priced for the first three to five years of product ownership, the time when the risks are low. After this period of time, a service contract becomes more expensive because the appliance or car is older and is more likely to need repairs. Often, service contracts or extended warranties are not offered for older merchandise.

Does a Service Contract Ensure Better Service?

In most instances, service is no better or faster with a service contract than without one. There are some service departments however, that do take special care to see that repairs are done correctly the first time to avoid return trips. Some other service centers won't be in a hurry to make repairs because they have already received their money. A service contract does tie you to a specific repair place or type of repair center, thus preventing you from going to another place if you are dissatisfied.

How Do I Decide if an Extended Warranty or Service Contract is a Good Investment for Me?

Find out the cost of a service call and types of repairs that commonly occur. How do these costs compare with the price of the service contract? Talk with people who own the same or similar appliances or motor vehicles. Read the service contract very carefully to learn what is covered, not covered, and under what conditions.

Many people have saved money on costly repair bills by having a service contract. However, even more people have spent more money buying a service contract than the total value of the repairs received.

What about your personal feelings? Does owning a service contract contribute to your sense of security? How does the cost of the contract affect your budget, or the amount of the monthly payment?

The merchant who sells a service contract is betting your purchase will be trouble-free. If you buy an extended warranty or service contract, you are betting you will have repair bills. Your decision to buy, or not buy, is a personal one.

Find Out What is Covered

Before signing on the dotted line, find out the answers to the following questions. These answers may help you decide what is best for you.

• Does the contract cover both parts and labor?
• Are extra charges made for calls on weekends, holidays and at night?
• Are all parts covered or just one or two parts such as the picture tube of a TV?
• Will a prorated refund be made if the item is stolen? What if it is sold?
• Will the contract remain in effect if you should move to another city or state?
• Is there a limit to the number of repair calls or trips that can be made during the year?
• Is the extended warranty transferable if you sell the item?
• Does the contract provide for at home service, or must you return the appliance to the store or shop?
• What kind of protections are provided for secondary disasters such as a loss of food if the freezer fails?
• What provisions are made for an emergency where an appliance or vehicle requires several days to repair?
• Who is responsible for making the repairs? Will the business still be there when service is needed?
• Where are repair centers located?

The Decision is Yours

You may consider depositing the annual cost of a service contract in a savings account and holding it as a fund to be used for repairs, if needed. Carefully consider all alternatives before making a decision.

Warranty, no guarantee

The collapse of National Warranty Insurance Group raises new questions for consumers about the reliability of extended warranties, a big business with limited regulation.

Having three major car repairs within a month is just plain bad luck. But Lisa Deptula of Odessa didn't sweat it because she had spent $2,500 for insurance against such misfortune.

When she showed her Warranty Gold contract to her repairman at the end of July, however, she found her luck had run out. The company that bills itself as "the No. 1 online marketer of affordable extended warranties for your car, truck or sport utility vehicle" was no longer paying repair bills as promised for thousands of vehicle owners.

By the end of August, Lisa and her husband were out $2,250 in repairs for their 1999 Daewoo Leganza and 2000 Ford Windstar.

"They basically said, "That's too bad. If and when this gets straightened out, you might get your money back,' " Deptula said. "We weren't taking any more chances. We traded both cars in."

The mess Warranty Gold says it's trying to straighten out was the collapse in June of National Warranty Insurance Group, a company in the Cayman Islands with U.S. headquarters in Nebraska. Over 20 years, National Warranty, which is now in liquidation, has insured up to 1-million warranties through about a dozen warranty companies, including Warranty Gold of Austin, Texas. Analyst company A.M. Best estimated that unpaid claims by National Warranty could exceed $60-million.

The case raises new questions for consumers about the reliability of extended warranties, a big business with limited regulation. The $10-billion auto service warranty industry sells more than 8.7-million contracts a year, according to Universal Underwriters Group.

Consumer advocates say to check carefully before buying an auto warranty that doesn't come directly from the vehicle's manufacturer. Some say to stay away from such policies altogether.

Warranty Gold, which has sold more than 65,000 warranties since 1996, says it, too, was a victim of National Warranty's collapse.

"We're talking about a company that has been in business for 20 years," Warranty Gold general manager Kurt Nelson said. "In March, they were given an A- rating by A.M. Best. All of a sudden, 60 days later, they're in liquidation. We just think that's very unusual."

On June 9, two days after Warranty Gold learned National Warranty was headed for liquidation, it switched to a different insurer and went right on selling policies. (The company says it's not selling currently in Florida, though, until the company confirms that its new insurance administrator meets the state's standards.)

Warranty Gold manager Nelson said it has raised prices by 25 to 30 percent to put more into reserves. Warranty Gold's Web site tells new buyers that it now insures policies through two separate administrators to guarantee claims.

"The warranty is only as good as the financial status of the company that issues it," the marketer's Web site assures new customers. "Warranty Gold doesn't gamble with our customer's money."

That's little solace for Warranty Gold's past customers. The company has just begun informing those customers that their warranties aren't still as good as gold. "In hindsight," Nelson said, "we should have done a better job of communicating to our consumers."

Its advice to them now: Hold the policies, file the claims for necessary repairs and hope to be reimbursed. Or cancel the policies and wait for a prorated refund if funds held by National Warranty become available through the courts.

But paying for an expensive fix-it job is not an option for everyone. When a bad oil pump led to engine failure and a $5,000 repair bill for Frank Pirillo's 2000 Bonneville, the Lakeland resident left it sitting it at the dealership.

"This is after I paid for a $1,000 repair a week earlier with the hopes of one day getting reimbursed," said Pirillo, who spent $1,354 for a seven-year, 100,000-mile Warranty Gold contract in July 2000. "I will not pay upfront on this repair."

Warranty Gold recently started a Web site, www.WarrantyNews.com to state its case. The company maintains its lawyers are fighting hard to get back as much of its customers' money as possible.

"We're working diligently every day to get a portion of those funds to make sure our customers will be taken care of," Nelson said. "But at this point, we just honestly don't know."

While a judge in the Cayman Islands released an undisclosed amount from a National Warranty escrow account in a Sept. 5 ruling, Nelson said that money is still tied up.

Las Vegas lawyer Robert Gerard has filed a class action lawsuit against a number of organizations that were connected with National Warranty, including A.M. Best, legal and financial services company KPMG and international accounting firm Deloitte Touche and Tohmatsu. Gerard said he thinks National Warranty has $75-million in reserves, enough money to honor the pending contracts. Gerard said more than 600 warranty holders have contacted him about the lawsuit. Warranty Gold is not named as a defendant in the suit.

As the legal maneuvering drags on, those who feel duped or abandoned by Warranty Gold are flooding automotive Web sites with complaints. Since June 6, there have been more than 450 messages posted to the Warranty Gold discussion board at Edmunds.com, an automotive information Web site.

Those who are posting messages commiserate about their plight and share stories about how little progress they made in complaining to the company, regulators and consumer groups. One frustrated participant wrote: "If anyone is ever ever ever considering a third party warranty again, please call your shrink and get some meds. NO OFFENSE! I will never get one again."

Not all of the Warranty Gold's old customers are that disillusioned with extended warranties or with the company.

Steve Miller of Madeira Beach, a retired computer analyst, was so pleased with the service he got from the five-year warranty he bought for his 1996 Chrysler convertible that he paid $1,428 for another three years with Warranty Gold.

"I collected way more from the first warranty than I paid for it," Miller said. "When I bought the second one, I asked the salesman if they were making any money on the things."

Now that he's waiting to be reimbursed for an $800 oil leak repair, he's trying to be understanding.

"Although the contracts read as though Warranty Gold is responsible for my warranty, I don't think they're an evil company," Miller said. "They simply don't have the money because they gave it to these other guys. I don't want to see them go out of business, but I will do what I can to get my money back."

- Benita Newton can be reached at bnewton@sptimes.com or 727 893-8318.

Considering an extended warranty?

J. Robert Hunter's advice for buying extended auto warranties: Don't.

The director of insurance for the Consumer Federation of America said the industry is not well-regulated, and there's not enough solid data available to judge the strength of the warranty companies.

"It's too hard to tell the good ones from the bad ones," said Hunter, who recommends simply saving money to pay for unexpected repairs. "It's just sort of a big mess."

Automotive Web site Edmunds.com recommends checking the reliability record of a car before buying it, then considering a manufacturer's warranty first, if one is available, even though extended warranties backed by major automakers are usually more expensive.

The site advises consumers to check the financial strength of third-party warranties through analysts such as A.M. Best or Standard & Poor. But A.M. Best awarded one of its highest ratings to National Warranty Insurance Group only months before that leading backer of extended warranties went into liquidation.