Extended Warranties- Scope as insurance under Indian Contract act

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It is a common practice and a marketing strategy among most sellers wherein at the
beginning of the sales pitch, one of the enticing factors is an extended warranty, we have all,
at some time or the other, been offered an extended warranty with the purchase of a product
be it an electronic item, cable network or even a car and we would have to admit that we have
been tempted by it. But how many of us stop to consider what an extended warranty is and
how is it different, if it all, from any other product that helps mitigate risk at a cost, like
insurance for example.  When we purchase a new car, for instance, we receive a warranty
from the manufacturer that the car is being made available to us in a perfect condition for a
specified period of time.

The warranty usually leaves you wondering what it actually covers considering the number
of limitations it has. What we forget is that an unconditional warranty is embodied in the Sale
of Goods Act, 1930 (the Sale of Goods Act) and should be applicable through a time period
generally accepted as the lifetime of the car. If breached, we have the right to have the
manufacturer either replace or repair a particular part or the product itself. Besides, let's not
forget that the customer can always approach the Consumer Court for relief in all such
circumstances.

The main issue is whether “extended warranties” fall within the meaning of “warranties” as
provided in the Sale of Goods Act, or if they are a form of insurance. The question is
intriguing because the two concepts seem deceptively similar but intuitively distinct at the
same time.

A warranty, as explained above, is essentially an assurance to another person of certain

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(2013) PL (CL) November 66
will always be insured. A closer look at the insurance policy and the warranty would reveal
that the insurance effectively provides cover for practically every eventuality, whereas the
warranty and an extended warranty with all their limitations and exclusions may not.

On the other hand the Indian law does not explicitly define what an insurance is, Section 31
of the Contract Act, 1872 (the Contract Act) which deals with contingent contracts helps to
understand the concept better. A contingent contract is one that is dependent on the
happening or not happening of a particular event. An insurance contract clearly falls within
the meaning of a contingent contract, as it may be enforceable on the happening of a certain
event and is subject to certain conditions.2 The other element of an insurance contract is that
it is effectively an indemnity, as provided under the Contract Act. An indemnity under the
Contract Act, is explained to be a contractor  where the promisor promises to save the other
from loss caused to him by the promisor's conduct, or from the action of a third person.
Essentially the provider of the insurance promises to save the person subscribing to the
insurance from loss caused due to factors provided for in the insurance policy. The Supreme
Court clarified this concept further in the case of General Assurance Society
Ltd. v. Chandmull Jain3, where it explained that the four essentials of a contract of insurance
are: (i) the definition of the risk; (ii) the duration of the risk; (iii) the premium; and (iv) the
amount of insurance.

The challenge is that though they seem like distinct concepts, extended warranties or
other similar financial products that offer an all risk cover at a price, exhibit all these
characteristics of an insurance contract  but those who offer them would argue that they be
treated as warranties.

This means that despite the insurance sector being highly, regulated extended warranties
escape the applicability of stringent insurance regulations entirely. For instance, an issuer of a
warranty, be it the car dealer or the manufacturer, can get away with charging an arbitrary
amount for the cover whereas the insurance premium is regulated. Interestingly, this issue has
been discussed subsequent to the Supreme Court decision in Digital Satellite Warranty Cover

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Commr. of Excess Profits Tax v. Ruby General Insurance Co. Ltd., AIR 1957 SC 669.
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AIR 1966 SC 1644 : (1966) 3 SCR 500.
Ltd., In re4, (DSWC). The Court in case ordered DSWC to be wound up for being in the
insurance business in the UK without authorisation by FSA, which was in breach of the
general prohibition provided in the Financial Services and Markets Act, 2000. The Court
categorised warranty contracts, like the ones issued by DSWC as insurance contracts dealing
with “miscellaneous financial loss”. The Court reasoned that the risk in both the cases was
the same and that only the cover was different. If the equipment breaks down or malfunctions
in any way, it would be inevitable that the insured will incur some cost in having to pay for
either repair or replacement of the equipment. Therefore, a contract which mitigates the risk
of financial loss for the insured, such as the “extended warranty contract” issued by DSWC
fits the bill. The Alberta Queens Bench in Brick Protection Corpn. v. Alberta5 drew a
distinction between warranties, which cover “the risk that the covered product will fail due to
some inherent fault or weakness in the course of normal use,” and insurance, which covers
“the risk of unforeseen events or perils to the product unrelated to an inherent weakness in the
product itself.” This judgment suggests that a significant distinction may exist between a
“warranty” and “insurance” for risks other than manufacturing defects.

In Central Bank of India v. Hartford Fire Insurance Co.6 the insurance was against loss
of goods by fire, riot or civil commotion for a period of one year from March 20, 1947. There
was destruction of the goods by fire through the action of rioters on August 15, 1947. The
assured claimed the amount due under the policy from the insurer. The policy contained a
clause (clause 10) which was in the following terms:

“This insurance may be terminated at any time at the request of the insured. This
insurance may also at any time be terminated at the option of the company, on notice to
that effect being given to the insured, in which case the company shall be liable to repay
on demand a ratable proportion on the premium for the unexpired terms from the date
of cancelment. ”
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(2013) 1 WLR 605 : 2013 UKSC 7.
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2009 ABQB 744 : 2009 AJ No. 1450.
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Central Bank of India v. Hartford Fire Insurance Co., AIR 1965 SC 1288.
 The insurance company purported to terminate the insurance after August 10, 1947, by a
notice to that effect to the insured. Hence the company relied on such cancellation by it of the
policy in its defence. When the matter came up before the Supreme Court, the main question
was whether clause 10 was valid and binding and if so whether the policy had been
terminated. It was urged on behalf of the assured that clause 10, wide as it was, must be
reasonably construed as implying an inherent limitation on the power of the insurer to
terminate only for a reasonable cause and that if it cannot be so construed, it ought to be held
void.

Retailers and manufacturers have created an illusion of need for such warranties in the minds
of consumers, making them easy targets. Since these types of contracts are, in the law,
indistinguishable from contracts of insurance.