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