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Navigating Express and Implied Warranties

These days, there seems to be no end to the large, weighty future-facing questions confronting business owners. But rather than add to that stack, let’s take a few moments to wrestle with a few pointed questions that could matter greatly in the here and now.

When is a customer expectation rightfully something more than an expectation? When does a product or service claim become something rather more than a promise? Answer: when either expectation or claim ventures into the grey area of express and implied warranties. And that happens a lot more often than you might think.

The vast majority of consumer purchases are covered by a warranty. This happens even when such a warranty is not stated explicitly. A customer rightfully assumes that a product or service will perform the function intended, and in the event it does not, grounds exist for a claim against either the manufacturer or service provider to make good. This basic foundation underlies products and services as varied as cars and coffee makers, dry cleaners and landscape services.

This guarantee takes one of two forms. An express warranty is one that is clearly stated either verbally or more often in writing with defined rights and limitations. An implied warranty applies in most other cases in which the value of the goods exceeds a certain amount and provides a basic level of protection.

Knowing the basics of both types is crucial to understanding why and how express and implied warranty coverage might be an essential element of your security strategy.

Express Warranties

You’ve seen many of these, even on items as simple as a child’s toy. Express warranties can take various forms, both spoken and written, and the purpose is to provide a guarantee that the product will meet a specified level of quality and performance. In the event the product fails to do so, the manufacturer is obliged to fix or replace the product or service at no additional charge. Such an express warranty can be either optional or extended; for our purposes, they all are expressed explicitly.

Verbal warranties or promises are also express warranties. To cite just one common example, a car dealer may make a verbal claim that the engine and drivetrain of a vehicle will be “good for another 100,000 miles.” Those words comprise an express warranty and constitute a valid claim against the seller if either the engine or drivetrain should fail under normal use. Proving such a claim is, of course, a challenge.

Express warranties appear so often that we rarely think about them. The words “lasts for 1,000 hours” on a package of light bulbs constitutes an express warranty, so does “covers in one coat” on a can of paint. In each case, the words alone are an express warranty even though the words “warranty” or “guaranteed” never appear.

Implied Warranties

All pretty straightforward to this point, right? Express warranties are covered by the federal Magnuson-Moss Warranty Act, which protects the rights of consumers in such cases. Implied warranties, or those warranties that are unwritten or unspoken, are governed by the laws of each individual state.

An implied warranty is based on the common law concept of “fair value for money spent.” Under this enduring idea, virtually every consumer product purchase not covered by an express warranty comes with an implied warranty of merchantability. In other words, the item is guaranteed to work if it is used for its intended purpose.

Let’s assume you buy a blender. If it fails to work as intended, you have the right to return the item for an exchange or refund. Importantly, this is also true of used items, with the additional disclaimer that it will work as intended given the condition of the item at time of resale.

Here’s the interesting part. While such warranties are not covered by federal law, most states require four years of coverage under an implied warranty! Some states only require that such a warranty lasts as long as any express warranty supplied with the purchase.

Express and Implied Warranty Coverage

Armed with a deeper understanding of the world of warranties, here are a few take-outs. Express and implied warranty coverage is designed to cover amounts paid in order to satisfy express and implied warranties offered by the insured to its customers. These include all warranties and guarantees made in relation to the work performed.

A standard assumption is that a business has a certain amount of regular warranty work year in and year out. This is both predictable and controllable. But what happens in an anomalous or unusual year? This is the type of situation in which express and implied warranty coverage becomes a business life preserver.

For example, imagine a manufacturer that experiences a temporary flaw in their manufacturing process or product design. It is not uncommon for such an anomaly to affect an entire batch of products. In service businesses, a repeated mistake with regard to work accomplished could also give rise to an inordinate number of warranty claims.

Any of these situations can result in abnormal expenses and rapidly escalating dollar amounts. It would not be unheard of for a company with a regular annual expense of $100K in claims to suddenly be facing a $500K year! To cover such eventualities, express and implied warranty coverage offers two distinct types of solutions. Covered products are generally listed in the declarations page for specific products of the insured. Covered work refers to all warranties and guarantees expressed or implied as it relates to work performed by the insured.

Businesses will almost always act to preserve their reputations. For this reason, if they perceive that something is not right in a given situation, they will act to make it so, often absorbing the cost without having insurance in place.

But unusual years and circumstances can expose a business to hefty losses. The wise course would be to determine if adding express and implied warranty coverage now, through a captive insurance company, would spare you difficulty and expense then.

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