Consumer rights Reforming statutory implied conditions and warranties

Consumers and extended warranties

Consumer awareness

The various types of warranties that exist (statutory, manufacturer’s voluntary and extended warranties) have the potential to create confusion for consumers, as well as for suppliers. If a consumer does not understand their statutory rights and the differences between the different warranties, they might purchase an extended warranty at high cost that offers few benefits.

The CHOICE report found that whilst 95 per cent of consumers surveyed understood the idea of an extended warranty, only half of them understood the idea of a statutory warranty.¹³⁶ This general lack of awareness can be seen as contributing to the growing uptake of extended warranties by consumers.

In addition, a consumer’s lack of awareness of the scope of the manufacturer’s warranty accompanying the product may also influence their decision to purchase an extended warranty even though the existing manufacturer’s voluntary warranty could already provide adequate protection. For instance, the NEIAT study found that 86 per cent of consumers surveyed experienced product faults within the manufacturer’s warranty period.¹³⁷ The CHOICE report also revealed that 74 per cent of consumers surveyed never used the extended warranty they purchased.¹³⁸

The NEIAT study also found that issues of concern for consumers in relation to extended warranties, included uncertainty regarding the identity of the extended warranty provider and the scope of coverage in relation to the exclusions, restrictions and additional charges.¹³⁹ Consumers have little opportunity to understand the precise details of the extended warranty at the point of sale. Some extended warranties that are sold do not provide comprehensive or essential coverage.¹⁴⁰ Consumers are often frustrated when they do not obtain what they expect from an extended warranty.¹⁴¹

Further, the NEIAT study found that consumers are often not informed about the price of an extended warranty until the point of sale, which can also be confusing for consumers when making decisions as to the value of purchasing an extended warranty.¹⁴²

The sale environment

Apart from a lack of awareness of their statutory rights, consumers may feel pressured into purchasing an extended warranty at the point of sale. There is evidence that some consumers feel the sales tactics used by retailers make it hard to refuse to purchase an extended warranty and can create a sense of fear about the reliability of the product if an extended warranty is not purchased.¹⁴³ For instance, the CHOICE survey found that over one third of consumers surveyed who purchased extended warranties felt some pressure to do so¹⁴⁴, whilst 5 per cent felt a lot of pressure.¹⁴⁵

In addition, some comments by retailers may create concerns in consumers that products, and in particular expensive items, could break down and that repair costs may be high. For example, the NEIAT study cites evidence of consumers being informed by retailers that the product could break down after the manufacturer’s warranty expired and incur high repair costs compared with the cost of the extended warranty.¹⁴⁶ Other consumers felt that sales staff were keen to push for the purchase of an extended warranty without setting out what the warranty would and would not cover.¹⁴⁷ The retailer or salesperson may have a financial incentive to ‘push’ for the purchase of an extended warranty, if they receive commission or remuneration from the sale.

Further, a salesperson providing misleading or inadequate information could also affect a consumer’s decision to purchase an extended warranty. For instance, the CHOICE report found 8 out of 14 traders had provided incorrect information about the extended warranty offered to a ‘mystery shadow shopper’.¹⁴⁸

Purchasing extended warranties

Consumers may decide to purchase extended warranties for various reasons, including concerns about the reliability of the product and the potential for high costs of repair. The NEIAT study found that extended warranties are commonly purchased by consumers for ‘peace of mind’, particularly in relation to expensive items.¹⁴⁹ The CHOICE report revealed that of the surveyed respondents who purchased an extended warranty, 69 per cent did so believing that repair costs would be too high, 24 per cent believed the manufacturer’s warranty would not provide enough cover, whilst 6 per cent believed the product was not reliable or that the statutory warranties would not provide sufficient protection.¹⁵⁰

The ‘peace of mind’ offered by extended warranties is particularly attractive for consumers who experience greater vulnerability and may have difficulties enforcing their statutory rights. For instance, the NEIAT study found that consumers from culturally and linguistically diverse communities and those over the age of 65 have a higher uptake of extended warranties than other groups.¹⁵¹

The NEIAT study also found that extended warranties are commonly purchased for whitegoods and large electrical items because these are products which consumers intend to keep for a longer period.¹⁵² Over the past two years, 8.5 million consumers experienced faulty products in relation to whitegoods, electronic goods or mobile phones.¹⁵³

Extended warranties usually provide consumers with a single point of contact when a problem arises, and consumers are not left to decide whether to approach the retailer or manufacturer. This certainty and convenience is another appealing feature of extended warranties. Further, a lack of clear understanding on how statutory implied terms operate may help explain the continued uptake of extended warranties by consumers.

Using extended warranties

There is evidence that consumers who buy extended warranties are satisfied with the purchase. The NEIAT study found that consumers who purchased and successfully used an extended warranty believed they were good value, with their product being replaced or repaired at no cost to them.¹⁵⁴ However, NEIAT also found that 32 per cent of consumers who purchased an extended warranty received no redress.¹⁵⁵

ACCC complaints data reveal that a total of 255 complaints and inquires were made to the ACCC regarding extended warranties between January 2006 and September 2008.¹⁵⁶ Of these, 32 per cent related to inadequate remedies under the extended warranty, where in a number of cases repair and not replacement was offered, even with repeated failures. The next most common complaint type (31 per cent) related to inadequate support and service from the warranty provider, whilst 14 per cent of complaints related to the defects covered by the extended warranty. In several cases the warranty did not cover accidental damage or accessories which came with the product such as batteries and headphones. The least common complaint type (11 per cent) related to potentially misleading or deceptive conduct on the part of a salesperson.

Motor vehicles

The Australian Automotive Aftermarket Association (AAAA) suggested that the terms ‘warranty’ or ‘extended warranty’ are occasionally used by manufacturers and retailers, particularly of motor vehicles, to tie consumers to the their services. The AAAA noted that ‘[s]o called ”extended” warranties … have restrictive provisions on the choice of repairer and parts used, and tie customers to long term service schedules with the car dealer’.¹⁵⁷

It is suggested that the ‘extended warranties’ that are offered for free with the sale of new motor vehicles are not, in fact, warranties at all, but are service contracts binding consumers to particular authorised vehicle servicers. The warranties are expressed in such terms as to make consumers unwilling to seek the services of independent repairers or use generic parts for fear of losing their rights under the service contracts. The AAAA suggests that this might be remedied by prohibiting the use of the term ‘warranty’ to avoid its being used in connection with what are, in effect, insurance policies or service contracts.¹⁵⁸