Q&A: Extended warranties

The Office of Fair Trading is warning Christmas shoppers to think carefully before taking out an extended warranty on electrical presents.

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 extended warranties are a type of insurance.

In return for a premium a manufacturer, retailer or insurer promises to pick-up the bill for repair if the product insured breaks down during a specified period.

Guarantees
Extended warranties are popular despite the fact that all electrical items in the EU come with a minimum one-year manufacturer guarantee

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

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

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

Currently one in five electrical items sold are purchased with an extended warranty.

The electrical extended warranty market is so developed that it is possible to cover the costs of repair to small items such as food processors and even kettles.

Extended warranty sales are big business - the industry earns retailers, manufacturers and insurers an estimated £500m a year.

Why are they so controversial?

The size of the premiums charged relative to the real costs of repair and the tactics used by retailers to sell them are the reasons why warranties court controversy.

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

Price questions
Warranties can often set customers back more than half the cost of replacing the item insured

The vast majority of warranties are sold to customers by retailers when the electrical item is purchased.

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

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

In response, retailers claim that any price differential reflects the fact that many shop-bought insurance policies cover items against accidental damage and theft.

In addition, large retailers have sophisticated repair and user back-up service in place. As a result, extended warranty purchases are buying peace of mind.

Are they a good idea?

According to Simone Collins of 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," Ms Collins told BBC News Online.

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

A widescreen TV for example has only a 6% of breaking down in the first three years of life - a 1 in 18 chance.

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

As for retailers' claims that the premiums charged are a reflection of enhanced cover and service - Ms Collins' verdict is damning.

"Theft and accidental damage should be covered by house insurance, there is a danger that by buying extended warranties consumers are double insuring," she said.

Is the government taking any action?

The extended warranty industry was first investigates back in the mid-1990's.

At the time it was decided that the self-regulation was the way forward.

However, last July, after a 10 month investigation, the Office of Fair Trading (OFT) decided that self-regulation had failed.

The OFT was worried that many customers are unaware that they can buy warranties from several sources, not just the retailer at the point of sale.

As a result, the OFT has now passed on the case to the Competition Commission it has the power to order companies to clean up their act.

The Competition Commission has until July 2003 to outline what it intends to do about extended warranties.

In the meantime, the OFT has produced leaflets for shopping centres.

The leaflet will pose the questions: "Do I need more time to make my decision?" and "Do I need this - or am I already covered?".