A Guide to Understanding Product Warranties

Many manufacturers offer product warranties without realizing they can be a significant cause for lawsuits from both consumers and consumer protection agencies. A warranty is a legally binding promise from a manufacturer or seller to stand behind their product. It is a statement about the integrity of their product and their commitment to correct problems when the product fails. If your company offers a product warranty, it's important to know what to include and what the law requires.

What Should Be Included?

The Magnuson-Moss Warranty Act and the Federal Trade Commission Rules establish that, as a warrantor, a businessperson must state certain information about the coverage of their warranty in a single and easy-to-read document. The warranty must answer the following questions to follow the Act and Rules:

• What parts of the product or what types of problems does the warranty cover? It may also be important to state what parts or problems it does not cover.
• What is the period of coverage?
• What will the warrantor do to correct problems? It may also be important to state what the warrantor will not do.
• How does the customer get warranty service?
• How does state law affect certain provisions of the warranty? All consumer product warranties need this information since warranty rights vary by state. To avoid a long list of regulations, the FTC allows the use of a standard disclosure. The disclosure is often at the end of the warranty. It states: This warranty gives you specific legal rights, and you may also have other rights which vary from state to state.

Be sure to list all conditions, limitations and restrictions. Consider omitting unnecessary ones.

The law also requires a warranty be titled to state whether it is full or limited. If each of the following five statements is true about its terms and conditions, it is a full warranty:

• The warrantor does not limit the duration of implied warranties.
• The warrantor provides warranty service to anyone who owns the product during the warranty period. Coverage is not limited to the original purchaser.
• The warrantor provides warranty service free of charge, including costs such as returning the product, or removing and reinstalling the product when necessary.
• The warrantor provides, at the consumer's choice, either a replacement or a full refund if unable to repair the product after a reasonable number of tries.
• The warrantor does not require consumers to perform any duty as a precondition for receiving service, except notifying the warrantor that service is needed, unless the warrantor can demonstrate that the duty is reasonable.

If any of these statements is not true, then the warranty is limited. A warrantor is not required to make an entire warranty full or limited. If the statements above are true about the coverage on only some parts of the product, or during only one part of the warranty period, then the warranty is a multiple warranty. A multiple warranty is part full and part limited.

Pro Rata Warranties

A pro rata warranty provides for a refund or credit that decreases according to a set formula as the warranty period progresses or as the product is used. Because a pro rata warranty offers a complicated legal remedy, it should include detailed information to help customers understand what the company will do if the product malfunctions. A pro rata warranty should specify the following:

• The formula that the company will use to calculate a refund, or how much the credit will be at any time during coverage.
• What the consumer will get—a credit, a refund, a choice of a credit or a refund, or a credit toward an identical product.
• What price the company will use as a basis to calculate the refund or credit. For example, the price the customer originally paid and the price at the time of the malfunction, may be different.
  Consult an attorney to make sure the warranty meets all requirements of federal and state warranty laws.