Contractual Liability Insurance Policy - Limited Warranty
A Limited Warranty is a warranty that is provided at no additional cost to a buyer of a product and has specific structure and requirements as indicated in the Federal Magnuson-Moss Warranty Act.
A limited warranty is a promise made to the buyer from the Seller or Original Equipment Manufacturer (OEM) and may cover parts or parts and labor, depending on the terms and conditions contained in the written limited warranty.
A Seller or OEM may purchase a Contractual Liability Insurance Policy (CLIP) to back their Limited Warranty for risk transfer and/or to satisfy client requirements for a stronger backing to help ensure future performance.
Solutions for backing a limited warranty are custom designed based on each unique situation. The following is a sample approach:
OEM/Reseller Wishes to offer a 5 Year Limited Warranty
The OEM/Reseller wants to offer a 5 Year Limited Warranty but seeks an alternative to holding the claims liability for the entire 5 year period. The OEM/Reseller wants to define a a one-time cost for the period in excess of a retention period. In the example below the protection covers the warranty after an initial retention period of 30 days and up to 5 years from the date of purchase.
After the 30 days the balance of the 5 years is covered by the additional protection and the OEM has shifted the liability off their books. The retention period is very important and is designed to ensure the coverage isn't covering Dead On Arrival units or units that are improperly installed. Retention periods vary by products and programs and are generally between 30 days and 12 months.
A few examples of products where a manufacturer might use a CLIP to back their Limited Warranty include:
- Appliances and Electronics
- Internet of Things (IoT)
- Sporting Goods/Exercise Equipment
- Musical Instruments
- LED Lighting
- Power Generators
- Commercial Products
- Aftermarket Parts & Accessories
In most cases the OEM continues to manage all aspects of the consumer's experience for the entire length of the Limited Warranty including claims processing, repair, replacement and customer service although some components may be outsourced.