We have all, at some time or the other, been offered an extended warranty with the purchase of a product be it an electronic item or a car. And we have to admit that we have been tempted by the offer. But how many of us stop to consider what an extended warranty is and how is it different, if it all, from any other product that helps mitigate risk at a cost, like an insurance cover.
When we purchase a new car, we receive a warranty from the manufacturer that the car is made available to us in a perfect condition. What we forget is that an unconditional warranty is embodied in the Sale of Goods Act, 1930.
This warranty should be applicable through a time period generally accepted as the lifetime of the car. If breached, we have the right to have the manufacturer either replace or repair a particular part or the product itself. Besides, let’s not forget that the customer can always approach the consumer court for relief in all such circumstances.
The extended warranty, often sold with electronic goods, generally claims to cover limited items like defects in the product, malfunction, accidental damage or in some cases it could be an “all risk” cover but always for a limited period of time.
The question then is whether ‘extended warranties’ fall within the meaning of ‘warranties’ as provided in the Sale of Goods Ac, or if they are a form of insurance.
The question is intriguing because the two concepts seem deceptively similar but intuitively distinct at the same time.
A warranty, is essentially an assurance to another person of certain conditions which if not fulfilled could result in a claim for damages. An insurance contract on the other hand is simply a contract where for a specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of a particular event.
A closer look at insurance policy and warranty would reveal that insurance effectively provides cover for practically every eventuality, whereas the warranty and an extended warranty, with all their limitations and exclusions, may not.
Unfortunately, Indian law does not define ‘insurance’ but the Indian Contract Act, 1872 which deals with contingent contracts helps to understand the concept better. A contingent contract is an obligation to pay or do something dependent on the happening or not happening of a particular event. An insurance contract then clearly falls within the meaning of a contingent contract.
The other element of an insurance contract is that it is an indemnity, i.e., an obligation to make good a loss. Essentially, the insurance provider promises to save the subscriber from loss caused due to risks listed in the insurance policy.
The challenge is that though they seem like distinct concepts, extended warranties exhibit all the characteristics of an insurance contract but those who offer them would argue that they should be treated as warranties.
This means that despite the insurance sector being highly regulated, extended warranties escape the applicability of stringent insurance regulations entirely.
Interestingly, this issue has been discussed in detail by the Supreme Court of England when it ordered a company selling extended warranties to be wound up for being in the insurance business in the UK without authorisation by the Financial Services Authority.
The implications are far reaching for financial services regulations especially from an Indian perspective. The Insurance Act, 1938 provides ‘general insurance business’ with a wide definition which includes ‘miscellaneous insurance business’ but no guidance has been provided to determine what this means. This leaves us with a situation where financial products are being sold by unregulated entities to unsuspecting people.
The next time one is offered a product like this, one should stop to think whether the warranty offers anything more than what insurance could provides; why we need it at all since the law already provides us adequate protection; that an all risk cover insurance would in fact be more economical and useful to customers than an extended warranty; insurance is a regulated product and easier to claim; and the high cost of extended warranties is disproportionate to the risk it covers.
Retailers and manufacturers have created an illusion of need for such warranties in the minds of consumers, making them easy targets. Since these types of contracts are, in the law, indistinguishable from contracts of insurance, it may be time for the insurance regulator to wake up and take a cue from their British counterparts to start regulating a product that has so far remained under its radar.
Perhaps the Irda (Insurance Regulatory and Development Authority) would be inspired by the immortal words of the Bard of Avon: “What’s in a name? That which we call rose. By any other name would smell as sweet.”
By Kaushalya Shetty, Nidhi Killawala & Murali Neelakantan
Kaushalya is a Senior Associate; Nidhi is an Associate and Murali was, till recently, a Partner in the Corporate/M&A team at Khaitan & Co