Insurance

How Do Warranties Work?

Jacob Stein
 on 
July 19, 2018
What’s A Warranty?

You’ve undoubtedly heard businesses advertise about their warranty — how great it is, or how long it lasts. But, what’s a warranty, service contract, protection plan, etc. exactly, and why do companies brag about them?

As the FTC explains, a warranty is a guarantee that the manufacturer or seller of a product, depending on who issued it, will cover the cost of repair or replacement in the event the product is damaged as a result of its specified or normal use within the timeframe designated by the warranty.

Claims

If a product is damaged at any point during the life of the warranty, the customer can file a claim to the issuer of the warranty, which is a formal request for compensation to repair or replace the damaged product. Once the claim is approved, the customer will be compensated. It is inherently detrimental to the reputation and the bank account of the issuer of the warranty to approve claims, so it’s important to make sure customers partner with the right insurer.

How Warranties Are Used

One way to think about warranties is in terms of a manufacturer or seller making a bet. To a varying degree, most consumers are risk-averse. They want to be assured that if anything happens to their property, especially if it’s of high value, it will be covered. Offering a warranty is a way for manufacturers and sellers to encourage conversions by mitigating the risk involved in making an expensive purchase. The bet manufacturers are making is that the customer won’t have to file a claim.

For example, if a bicycle manufacturer builds a rock-solid, mountain bike, equipped with durable, high-quality parts, a) it is going to be pretty expensive, and b) because it’s more expensive, consumers are going to need a bit more encouragement to buy it.

In response, the bike manufacturer will likely make a bigger bet and offer a longer, more comprehensive warranty — it’s on the hook to dish out a larger sum of money for a longer period of time. The manufacturer does this because it’s betting that the bike will not break and the customer will not have to make a costly claim. The upside, however, is that more shoppers will feel more comfortable investing in the bike.

The Big Picture

A warranty is in essence then a statement about the quality of a product. Manufacturers and sellers will place higher stakes bets — longer, more comprehensive warranties — on higher quality products because they believe the product will not require repair or replacement.

A lifetime warranty, for example, says to consumers, “you should buy our products because they’re so well made that we’re willing to bet that if they do get damaged under normal circumstances, we’ll cover the cost of repair or replacement forever.”

Extended Warranties & Accidental Handling

Most warranties, however, are limited in what they cover. If a cyclist misuses his road bike and sends it flying down a mountain, it’s unlikely any warranty would cover the damage that would certainly result from this stunt. But warranties often don’t cover accidental handling either.

Extended warranties, technically known as service contracts, explains the FTC, often do cover accidental handling, though. A service contract, however, unlike the manufacturer or sellers’ warranty, is not included in the price of the product. But, if it covers accidental handling, it’s certainly worth investing in because accidents do happen.

While the manufacturer’s warranty is unlikely to cover the replacement cost of a new camera when someone spills a beer all over it, a good service contract will.

Where Does Clyde Fit In?

The US market for extended warranties (link to our post) is $40 billion annually, yet is dominated by only a handful of massive companies (think Amazon, Apple, Best Buy, Walmart). Clyde is democratizing this market, increasing consumers’ access to extended warranties by connecting insurance companies with retailers that have long been out of reach to do business with.

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