Extended warranty

An extended warranty, sometimes called a service agreement, a service contract, or a maintenance agreement, is a prolonged warranty offered to consumers. The extended warranty may be offered by the warranty administrator, the retailer or the manufacturer. These warranties extend the period of the manufacturer's standard warranty and are usually not "double coverage". Extended warranties cost extra and for a percentage of the item's retail price. In retail consumer electronics, extended warranties cost 20% to 30% of the price, and give sales associates up to 15% commission at some retailers.

Overview

An extended warranty is coverage for electrical or mechanical breakdown. It does not cover peripheral items, wear and tear, damage by computer viruses, re-gassing, normal maintenance, accidental damage, or any consequential loss. The indemnity is to cover the cost of repair and may include replacement if deemed uneconomic to repair. It is important for consumers to read and understand the terms and conditions offered at the point of sale.

The value of extended warranties lies behind the organization promoting and selling them. Most of the major retailers employ specialist administrators to manage the claims and to ensure the product is priced on a sustainable basis. An essential part of this is to determine the appropriate provisions on the balance sheet to reserve for future claims. Similarly, the income must be earned over the period of cover. Companies that have been around for several years will usually have the systems and data in place with which to do this. Less reputable organizations may not adequately price their extended warranties and may therefore have insufficient funds to provide for future claims costs.