A new report says Canadians don’t understand how extended warranties work and that governments must do more to protect those who buy them.
The year-long study by the Consumers Council of Canada said Canadians are buying extended warranties without reading the contracts or knowing what they’re purchasing.
“They don’t understand how it’s being sold, they don’t understand the complex agreement, they don’t understand how the agreements are financed and secured,” said Ken Whitehurst. the executive director of the non-profit group that advocates for consumers.
The report, based in part on a web survey of 2,000 Canadians, found only about 30 per cent of consumers buy the warranties, mostly for major appliances, home electronics and cell phones.
The results show a quarter of those who filed warranty claims said there was major inconvenience or they did not have the matter resolved to their satisfaction.
What customers don’t know about extended warranties is that the retailer makes a big profit.
The report said industry sources agree that there could be a 100 per cent markup. It adds that the margins on the contracts “may incent some sales staff to exaggerate or misstate protections.”
Customers are frequently offered the extended warranty at the checkout without any opportunity for review. The report said even then it is “often presented at length and in small type that discourages reading.”
“The salesperson assured me I was covered, but it turns out I wasn’t,” was a common complaint from warranty holders, according to the report.
In Quebec, retailers are required by law to explain the manufacturer’s warranty, and any other warranty attached to the product, before offering an extended warranty.
The report points out the sale of extended warranties lacks competition. Most stores offer only one warranty, or variations of it, but the report said more competition would likely result in lower costs to consumers.
Who owns it?
When Sears Canada closed its doors in 2017, extended warranty holders were told they would have to continue paying for their warranties, even though the company would not honour them.
“Because Sears Protection Plans were only backed by the retailer, when Sears liquidated, the protections vaporized too,” the report said.
Most major retailers in Canada do not operate on the Sears model. Instead, they sell extended warranties provided and serviced by other another company, meaning if the retailer shuts down the warranty would not be affected.
Whitehurst said the council believes that when people prepay for a service the value should be preserved so they either get the service or receive compensation.
“There should be segregation and accountability for these funds,” he said. “To the extent it can be segregated, it should be.”
Fine print matters
While the extended warranties may be presented as added protection, what that means may vary from one plan to another. Each has its own terms, limits on coverage, rules of replacement and delivery costs.
Some will replace defective products, but once that is done the warranty ends.
Some have deductibles, some have exclusions, some require customers to pay shipping charges for new parts and some require customers to pay for periodic maintenance in order for the warranty to be honoured.
Should you buy it?
The council’s position is “that many, if not most of them, are of questionable value, but there are some that are of value in some circumstances,” Whitehurst said.
There are products in the marketplace that are worthwhile, he said. “They’re just very hard to find.”
Right now, extended warranty holders have few options, other than court, when it comes to pursuing a complaint.
The report calls extended warranties “a regulatory orphan” and notes there is no consistency in how they’re regulated from province-to-province.
Whitehurst says in addition to each province’s regulations, there are several federal departments that deal with consumer issues.
“We think all of the regulators involved need to up their game around misleading sales practices,” Whitehurst said.
The report recommends that government consider in-store competition and mandatory disclosure of warranty protections prior to sale.
One person who is disputing paying for his Sears extended warranty, and is facing collections because of it, said consumers need more protections when it comes to extended warranties.
Mike Albani, of Richmond Hill, Ont., said governments need to ensure warranties are honoured or allow customers to stop paying for them when companies fail.