Warranty / Equipment Maintenance

Definitions

Warranty

A statement by the manufacturer or seller that a product is free of defects and will perform the functions for which it is sold. A product warranty includes a promise to repair or replace it or to refund the purchase price if a defect is discovered under normal conditions of use. In this sense, a warranty is a promise of indemnity against defects, while insurance is a promise of indemnity against loss or damage from perils unrelated to the product itself.

A warranty is a contract that is “issued” by the OEM, thereby creating a financial liability that must be carried forward on its balance sheet. Although many multiyear warranties are provided free of charge to consumers, they pose potential back-end costs for the “obligor,” the legally obliged party to respond to the warranty contract.

Estimating the potential cost of this liability is difficult, given the unknown nature of product use and life. The more warranties issued for different products, the more these liabilities accrue on the balance sheet. Competition among OEMs also can raise the stakes by compelling companies to provide longer duration warranties to differentiate their products.

But there are more than financial issues at play, as companies must also manage the terms of the warranties they issue. Reliable customer service and support is at the heart of this (e.g., obligors must promptly fulfill product replacement and repair requests). Obviously, this is not a core competency at most OEMs, which are focused on product design, manufacturing and quality.

Insurers can customize programs enabling manufacturers that accrue warranty liabilities to strengthen their balance sheets by letting them absorb the risk. Given that warranties are, in effect, insurance contracts, OEMs would be wise to consider an expert in risk analysis and risk transfer to take this liability off their books.

Extended warranty agreement

A contract or agreement under which someone other than the manufacturer assumes the cost of repair or replacement of a product due to mechanical breakdown, wear and tear, deterioration or other reasons. Extended warranties are sold on such items as automobiles and other motor vehicles, major appliances, etc. In some states, an extended warranty agreement is considered an insurance contract.

Automobile service contract

A contract issued by an automobile manufacturer or dealer (sometimes backed by insurance) that promises to perform (or pay for) certain repairs or services to a specific automobile. It differs from a manufacturer’s warranty, which comes with a new vehicle and is included in the original price. A service contract may be purchased at any time at a separate cost.

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Equipment Maintenance Insurance

An alternative to equipment service contracts from Original Equipment Manufacturers and Third Party Service Providers. Eliminating the inefficiency of multiple service contracts.

Equipment Maintenance insurance programs can offer significant cost savings, expanded equipment coverage, and complete program management support.

The Equipment Maintenance Insurance provider does not perform the equipment service. You continue to choose your preferred service provider. The program reimburses you or the vendor directly for the costs of repairs and preventative maintenance on covered equipment.

An Equipment Maintenance Program:

Saves Money

  • In most cases it can save you 15-50% in hard dollars compared to your current vendor maintenance contract costs

Expands Coverage

  • It covers your equipment seven days a week, 24 hours a day.
  • It includes reimbursement for covered repair costs and scheduled preventive equipment maintenance work.
  • It exceeds most equipment maintenance agreements – reimbursing for losses associated with:
    • Power Surges
    • Air Conditioning Failure
    • Human Error or Negligence
    • Vendor Overtime Charges
    • In-House Reimbursement for Repairs
    • Rental of Substitute Equipment
    • Labor
    • Parts
    • Preventive Maintenance Inspections
    • Consequential damage caused by the environment

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Other advantages

  • Budgets an expense that is currently difficult to manage or self-insured.
  • One policy vs. multiple contracts and hassles.
  • Periodic reports on losses and expenses.
  • Gives you the ability to manage your maintenance costs.

Insurers can also provide assistance with:

  • Parts Acquisition
  • Capital Equipment Replacement Recommendations
  • Repair Cost Review
  • Vendor Service Provider Negotiations
  • Competitive Service Providers
  • Program Implementation and Cost-Control Training
  • Loss History Analysis
  • Supports your ongoing, in-house predictive and preventive maintenance activities, including reimbursement for expenses incurred when repairs are performed by your own staff. This feature provides a powerful argument for investing in advanced technical training for staff members.

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Protects vital equipment:

  • Elevators
  • Boilers & Machinery
  • Chillers
  • HVAC systems
  • Computer systems
  • Any electrical or mechanical equipment with annual maintenance requirements

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Warranty Insurance Sources

(General – Not necessarily accessible by TCIM)

Equipment Maintenance Insurance Sources

(General – Not necessarily accessible by TCIM)

  • The Remi Group – U.S.
  • SU Group – Canada – exclusive agent for CNA’s equipment maintenance insurance program.

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Other Resources

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