Warranties are Insurance, Except When They’re Not. Here’s How to Know the Difference

Our partners and staff have heard us talk about warranty products. But when we talk about warranties, are we talking about insurance products?

The real answer is: “It depends.” It’s the classic “definitely maybe” type of situation.

Different Circumstances for Warranty Products
What does “it depends” mean? Whether a warranty qualifies as an insurance product depends on the jurisdiction and the circumstances.

Different provinces have different regulations around warranties. In certain situations, a warranty must be provided directly by an insurer in the form of an insurance policy.
In other cases an insurance policy is not required. In those situations, the warranty holder will receive a warranty from the manufacturer, retailer, installer or an unrelated third party.

In many cases a warranty is not an insurance product, but it could still be backed by an insurer. These are sometimes referred to as underwritten, or insurance-backed or insured warranties. When a warranty is backed by an insurer, the warranty holder is protected should the warranty provider go out of business.

Types of Warranties

When discussing whether warranties may be considered insurance products, it is important to mention the common types of warranties.

Manufacturer or Retailer Warranties

A manufacturer or retailer of a product provides a warranty against defects, normally for a specified period of time or a certain amount of usage such as mileage or hours in service.

Manufacturers or retailers can normally provide a warranty on their products without the need for an insurance policy. In order to increase consumer confidence in the warranty, manufacturers may be inclined to offer their customers an insured warranty. This approach may set them apart from their competition or allow them to keep pace with the competition.

What if the manufacturer or retailer goes out of business and the warranty is not insured? That’s the downside for the warranty holder – they will not be able to make a claim on their warranty.

Installer Warranties

Some products require professional installation, and the installer may provide a warranty covering their work. The warranty is an agreement between the installer and the customer. Normally there is no requirement that the warranty be insured.

Same as the manufacturer or retailer warranties, if the warranty is uninsured, and the installer goes out of business, then the warranty holder cannot make a claim.

In some instances, installer warranties may be insured, or backed by the installer’s trade association, or sometimes both. Indeed, some associations provide warranties supporting their members’ work, and in some circumstances, the association uses an insurer to underwrite the warranty obligations.

Third-Party Warranties

Third-party warranties are provided by someone other than the product’s manufacturer, retailer or installer. In fact, third-party warranties are sometimes classified as insurance policies. For example, third-party automobile warranties are classified as insurance in Western Canada. In other cases, the third-party warranty must be insured due to a regulatory requirement or simply because market forces practically require it. Distributors like automobile dealers or electronics stores may be reluctant to sell uninsured warranties, as their customers may look to them if the administrator fails financially.

When it comes to the possibility that a third-party warranty provider could go out of business, the same principle applies as it does with the manufacturers’ or installer warranties. Namely, that if the third party warranty is insured, then the warranty holder can make a claim against the insurer. If it is not insured, then the warranty holder will be unable to make a claim.

Consumer Advice: Know Your Warranty

In the end, the person affected the most by whether a warranty is backed by insurance is the consumer. As such, when a consumer purchases a warranty, he or she must recognize whether it is an insurance policy and/or whether the warranty is underwritten by an insurer. Without that backing, they will be unable to make a warranty claim should the warranty provider go out of business.

Glen Shaw leads Trisura’s Risk Solutions & Warranty business.