skip tocontent

ombudsman news

issue 1

January 2001

extended warranties

Around 10% of our complaints concern extended warranties. These policies are generally intended to cover unexpected breakdown of appliances after the expiry of the normal guarantee period, but in our experience, policyholders frequently misunderstand them. The policies provide for repairs to be carried out - usually by a person appointed by the insurer. Customers often find that the sales assistant will push the sale of extended warranties as part of the purchase of, for example, a washing machine or video cassette recorder. However, the sales assistant gives little, if any, explanation about the nature of the warranty, although its cost often makes up a significant proportion of the overall transaction.

So it is perhaps not surprising that almost all the complainants seem to have believed their policy offered protection against everything that might go wrong with the product. In practice, policies differ. Most are narrow in scope and include numerous exclusions. Furthermore, if other possessions are damaged at the same time - such as the clothes being washed in a faulty machine - that damage is often not covered. Perhaps more significantly, while some policies provide "new for old" cover, others limit repairs or replacement to the "market value" of the appliance. Some state that "market value" should be determined by deducting annual depreciation allowances. This can significantly reduce the amount of cover provided.

The variations in the product and the complexity that often underlies the policies suggest considerable care is required at the point of sale. Practice, however, seems to be less than ideal. Most of these policies are sold by relatively untrained staff who may not understand the insurance cover. In many cases, we take the view that the sale did not comply with the Association of British Insurers' Code (and now would also not comply with the General Insurance Standards Council code), because insufficient steps have been taken to draw the policyholder's attention to the important features of the policy.

In addition to limitations on cover, many extended warranties include complex procedural requirements that the policyholder is expected to follow in order to make a valid claim. A variation on this is "cashback" offers. These are designed to refund the premium at the end of the period of cover if no claim has been made. Not surprisingly, the idea of "no claim - no cost" is heavily marketed and is attractive to many customers.

In practice, however, the policyholders' ability to claim the cashback turns on their adhering scrupulously to various administrative procedures, within strict time limits. For example, if they fail to register with the insurer within a specified period they will not be entitled to claim the promised premium refund. Moreover, payment will only be made to those who remember to claim their entitlement in the month after their cover expires, typically five years later!

We have not yet been persuaded that any of these claims was validly rejected on the ground of policyholders' delay, whether in initially registering or in presenting the claim. Indeed our initial view is that such requirements may represent unfair terms, especially where little or no effort has been made to draw the customer's attention to these complex requirements.

In assessing all these complaints, we take a common sense approach. As well as the precise terms of the policy, we consider both the literature provided to policyholders and the policyholders' account of the sales process. In general, we uphold a greater proportion of such complaints than average. Until these policies are sold by fully trained staff and described clearly in the supporting leaflets, we are unlikely to see a significant reduction either in the number of these complaints or in the proportion we uphold.

case studies - extended warranties

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.