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Last Updated: Thursday, 18 December, 2003, 11:44 GMT
Q&A: Extended warranties
Shoppers regularly buy extended warranties

The Competition Commission has reported on the extended warranty marketplace.

BBC News Online asks what extended warranties are, what they offer and why they have been the subject of more than one government investigation.

What are extended warranties?

In short, they are a type of insurance where, for a price, a manufacturer, retailer or insurer promises to pick-up the bill for repair if the product insured breaks down during a specified period.

Extended warranties can be bought to cover a whole host of items from spectacles to cars.

However, the majority sold in the UK cover the repair costs for electrical items such as televisions and washing machines.

Extended warranties are popular, with one in five electrical items sold taking one - despite the fact that all electrical items in the EU come with a minimum one year manufacturer guarantee.

Put simply, our research shows that it is cheaper to pay for repairs as and when they happen rather than buy a warranty
Consumers' Association spokesperson

Extended warranty sales are big business - the industry earns retailers, manufacturers and insurers an estimated 900m a year.

Why are they so controversial?

Often premiums far outweigh the real costs of repair.

Hard-sell tactics used by retailers to sell them have also been criticised in the past - most warranties are sold by stores when an electrical item is purchased.

Warranties can set customers back more than half the cost of replacing the item insured.

Some insurers and the Office of Fair Trading (OFT) say that customers lose out in-store.

Insurer Warranty Direct claims shop bought warranties are, on average, 38% more expensive than policies taken out through an insurer, manufacturer or bank.

But, retailers say any difference in price reflects the fact that many shop-bought insurance policies cover items against accidental damage and theft - and so the customer is buying peace of mind.

Are they a good idea?

According to the Consumers' Association buying an extended warranty doesn't make sense.

"Put simply, our research shows that it is cheaper to pay for repairs as and when they happen rather than buy a warranty," a Consumers' Association spokesperson told BBC News Online.

The Which? magazine product reliability survey highlights the good reliability record of electrical goods.

For example, a widescreen TV has only 1 in 18 chance of breaking down in the first three years of life.

"With warranties running into the hundreds of pounds customers should question very seriously if they are really worth the money," the Consumers' Association concludes.

As for retailers' claims that the premiums charged reflect better cover - the Consumers' Association says theft and accidental damage should be covered by house insurance.

What has the government done about warranties in the past?

During the first investigation of the industry in the mid-1990s, it was decided that the self-regulation was the way forward.

But, in July 2002 - after a 10 month probe - the Office of Fair Trading (OFT) decided that self-regulation had failed.

The OFT was worried that many customers did not know they could buy warranties from several sources, not just shops.

As a result, the OFT passed on the case to the Competition Commission, which can order companies to clean up their act.

What action is being suggested by the Competition Commission?

The Competition Commission concluded that the extended warranty market was not acting in the interests of consumers.

As a result the commission has said that in future retailers will be required to:

  • Display the price of the extended warranty alongside the electrical good in the store and in press adverts.
  • Provide a standard leaflet to customers setting out customers statutory rights and availability of extended warranties from other sources such as the manufacturer.
  • Allow customers to cancel and obtain a full refund within 45 days of purchase. In addition, a customer can cancel an extended warranty at any time and and obtain a pro-rata refund.
  • Retailers will have to offer customers the warranty on the same terms for 30 days after the electrical item has been purchased - including any discount offered at the point of sale meant to tempt the consumer into buying the insurance.
The Department of Trade and Industry has said it accepts the commission's findings.

Shake-up of 'unfair' warranties
18 Dec 03  |  Business
Warranty buyers 'losing out'
15 Oct 02  |  Business
Watchdogs probe electrical stores
03 Oct 01  |  Business

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