With the rise in the consumer electronics industry, there has been an inevitable rise in retailers’ promotion for consumers to purchase extended warranties.  These ‘insurance policies’ are ‘intended’ to protect consumers beyond the expiry of the point of sale warranty. The warranties are often marketed under different names e.g. Service Plan, Service Contract, Product Support, Customer Support Agreements, Insurance Policy, and others.

According to the Association of British Insurers ‘insured extended warranties and non-insured service contracts provide valuable protection for customers against the cost of breakdown and repair – for non insured contract, the service and maintenance of household items and vehicles.’

Background
Some retailers actively promote extended warranties as they sell the base items in their stores or online – often incentivising sales staff with sales targets and hefty commission payments.   This has sometimes led to a negative public perception of extended warranty products. Consumer surveys have illustrated concerns about fair value for money for peace-of-mind products like extended warranties; moreover, consumer-focused websites advise the consumer to compare the products carefully and warn against possible scams.

Longer-term guarantees and warranties are usually underwritten by a third party (insurance company).  Insurance companies and underwriters are governed by the FCA. Notwithstanding the bad press that extended warranties already have, there is also the potential for further issues if the insurance company or underwriter that provides the guarantee for the warranty ceases to trade.  This has serious implications for the retailers.

Retailers obligations and duty of care
In cases where retailers cease to trade, trust funds are sometimes required to be set up to meet obligations to customers who hold extended warranties.

Where a retailer promotes and sells an extended warranty, that retailer has a duty of care to validate the insurer providing the guarantee.  However, in cases where the insurer then fails (ceases trading), there is an implied duty of care to the retailer.

If a consumer is unable to claim via an extended warranty because the insurer is no longer trading, then that consumer is likely to demand a refund or replacement from the retailer (thus defeating the object of the extended warranty).

Retailers must validate the financial stability of the insurance provider
Peter Collins, Managing Director of specialist insurance brokers Bespoke Risk Solutions, issued a strong warning: “If you are a retailer, then beware!  Some of the guarantees that you may be offering your customers could be with non-regulated companies”. Referring to FCA regulation, even though some guarantees are backed by trade associations, there is technically no vetting process to ensure best practice and compliance to relevant legislation.

This means that if a trade association approves a panel of insurers to provide warranty guarantees, and that insurance company eventually fails then there is a huge potential for damage in the brand equity of the retailer that has sold the extended warranties.

Implications to brand equity
Imagine the brand damage that could be caused to a national retailer like John Lewis or Argos if the extended warranties that they actively promoted became defunct because the underwriter had gone out of business?

Award-winning brand and marketing consultant, Sarah Brockwell, explained, “as a brand manager you will be aware that the failure of any supplier to your organisation has the potential to damage your brand equity”.  It is therefore imperative that all suppliers are thoroughly and continually vetted and this includes analysis of their financial stability.  So, for example if you are selling insurance products like warranties then you must choose a supplier that you can be ‘belt and braces’ confident that they can deliver.

Comet – a case study
As featured on the consumer website ‘This is Money’*1, when the national electrical store Comet went into receivership in 2012, many customers (including those with extended warranties) were affected.

According to This is Money, Comet’s guarantees were underwritten by The Warranty Group, apparently of which extended warranties are overseen by a separate business.  A company called ExtraCare was apparently responsible for the majority of Comet customers’ products. The ExtraCare website stated that it would protect customers if Comet went out of business, but many claims still remain unsettled.

Official comment

The FCA (Financial Conduct Authority – https://www.fca.org.uk), is reviewing the value of a distribution chain process in relation to insurance products such as extended warranties (see report in Insurance Times *2).  Its findings are expected by the end of 2018, and the report is expected to examine end-to-end relationships in a sample of distribution chains.

A spokesperson from the FCA advised “This review will enable us to identify how the amounts customers pay divides up between the various parties and how different distribution chains can affect the value of insurance product customer services.”

The Financial Ombudsman, set up by Parliament, is the UK’s official expert in sorting out problems with financial services.  The organisation claims that extended warranty insurance policies are often based on the principle of “indemnity”. This means that, in the event of a valid claim, the insurer is obliged to put the consumer in the position they were in prior to the loss or damage. Depending on the wording of the policy, this can be done:
by making the necessary repairs;
by replacing the necessary items;
by offering a credit note as settlement; or
by offering a cash settlement.

Retailers and trade associations please be aware of your duty of care, and carry out a review now !!!!