Reduced Accruals

Some of the top U.S.-based warranty providers managed to reduce their warranty costs last year.

The chart at the right compares the warranty accruals of the 50 biggest U.S.-based warranty providers in 2008 and 2009.

Warranty accruals are the amounts set aside as products are sold, in order to pay warranty claims in the future. They are measured in both millions of dollars and as a percentage of product sales.

Biggest Reductions

The companies at the top of the list have cut their accrual rates the most. Those at the bottom have increased their accrual rates by the most. Last year, 17 cut their accrual rates, 32 raised it, and one kept it the same.

In 2009, the total amount of warranty accruals reported by all warranty providers fell by 22.3% to $21.1 billion, while the amount of claims paid fell by 12.2% to $25.2 billion. Warranted product sales fell by 20%.

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1. Among the top warranty providers of 2008, several are missing from this 2009 report, including General Motors Co.; Sun Microsystems; Nortel Networks; Exide Technologies; Delphi Corp.; and Fleetwood Enterprises Inc. GM, Nortel, Delphi and Fleetwood are in bankruptcy; Sun has been acquired; and Exide has discontinued reporting its warranty costs.

Extended warranties generate in the vicinity of $15 billion per year in premiums paid by consumers. Only half of that total goes to the actual administrators and underwriters of the policies, however. Roughly half is kept by retailers and dealers as sales commissions.

In the tangled world of extended warranties, however,some of the market participants are seller, administrator, and underwriter wrapped all into one. Others are both administrator and underwriter. And still others are underwriters only, or administrators only. In fact, as the pie chart at right shows, some of the largest players are the product manufacturers themselves.

In the good old days, the airlines and aviation parts manufacturers already swamped by regulatory paperwork had little time for the additional bother of warranty claims. But in an era of falling revenue and rising costs, warranty has suddenly become very important to both operators and their suppliers.

As with so many facets of life, in aviation there is the era before Sept. 11, and then there is the downturn and recovery that followed. Commercial airlines have always veered from booms to busts, and the manufacturers have seen tough times too. But the one-two-three combination punches the aviation industry suffered in the past few years from terrorism, epidemics and war produced the sharpest downturn in the hundred-year history of their industry. Cutting costs became a matter of survival, which put the spotlight on the cost of repairs and spare parts, and ultimately, warranty.

Unlike the airlines, the owners of corporate jets expect the white glove treatment from manufacturers. While they'll gladly bring their jets to an authorized service center for warranty work, they'll never try to do their own repairs. And while they expect their planes to be fixed fast, they'll almost never have their own spare parts on hand.

Warranty work in the corporate jet world is completely different from warranty work within the airlines. Corporate jet owners are not expected to keep their own set of spare parts; airlines are. Corporate jet owners rarely fix their own planes; airlines typically run their own service center.

Whether they're made of steel, plywood, plastic, or paper, the ramps and rails installed in skateboard parks are sold with a warranty. But whether the warranty lasts for a year or 20 years seems to have more to do with marketing than the strength of the materials used.

Skateboard parks, like the patrons who use them, push materials such as steel, plastic and wood to the very edge of their abilities. What passes for normal wear and tear in the skatepark industry would elsewhere be called product abuse. Yet many manufacturers in the industry are able to warrant their products for 15 or 20 years.

Like any other large construction project, sports stadiums come with product warranties. Just because there's no warranty registration card in the box doesn't mean that the builders don't face warranty claims from stadium owners.

One reason product warranties might not be commonly associated with sports stadiums is the fact that most of the buildings are so old that they're now well past their warranty periods. But in the past decade numerous U.S. cities have opened brand new baseball or football stadiums.

In some of North America's largest sports stadiums, the grass is always greener, thanks to AstroTurf and its successors. Unlike the sods it replaces, an artificial sports surface comes with an eight-year warranty.

Back in the 1960s, when outdoor sports such as American football and baseball first began moving indoors into domed stadiums, who would have predicted that artificial sports surfaces would become big business not only for their makers, but also for their lawyers?

Yet here we are, almost 38 years after the first game played upon AstroTurf, and the top two companies in the artificial turf industry are fighting just as hard in the courtroom as they do on the field of play.

On Feb. 13, SRI Sports Inc., also known as Southwest Recreational Industries Inc., filed for bankruptcy protection from its creditors, throwing the AstroTurf market into turmoil. A Canadian company called FieldTurf Inc., which has traded lawsuits with SRI for years, now looks to take over as market leader.

Only two other manufacturers have a toe-hold in the major leagues. A small company called Sportfield LLC provided the RealGrass Synthetic Turf System used by the Dallas Cowboys, and a Canadian company called Sportexe provided the new Momentum Turf System used at M&T Bank Stadium, home of the Baltimore Ravens.

All told, 12 NFL football teams play in 11 stadiums covered with an artificial surface. Four MLB baseball teams play on artificial turf.

The remaining 20 professional football teams play on natural grass, as do 26 of the 30 professional baseball teams.

Our old estimates had Dell beginning 2004 with a basic product warranty reserve of $1.669 billion and $1.025 billion in deferred extended warranty revenue (a ratio of 62% to 38% on a combined balance of $2.694 billion).

By early 2006, we had estimated that the ratio had swung the other way, with 48% of $4.572 billion held as product warranty accruals and 52% as extended warranty deferred revenue. For the fiscal year ended Feb. 2, 2007, we estimated 44% of $5.179 billion was held for product warranty and 56% for extended warranty:

But we were wrong. When Dell released its restated financials on Oct. 30, 2007, it eliminated the need to estimate the separations. Now we know them for sure. Below are the corrected fund balances held for product warranty and extended warranty.

As of Jan. 30, 2004, the ratio was 24% to 76%. By Feb. 2, 2007 it was 18% to 82%. In other words, it was never near 50/50. It was never even close. Instead, the extended warranty fund went from merely three times larger to more than four times larger.

The combined balances had also changed in the restatements, but only slightly. As of Jan. 30, 2004, the combined balances decreased by $8 million to $2.686 billion. The combined balances a year later were revised up by $32 million. As of Feb. 3, 2006, the combined balances had increased by $86 million. The combined balances as of Feb. 2, 2007 had never before been announced, so there was no revision required.

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Has anyone ever written an advice column against basic manufacturer's warranties? Have they ever advised the buyer to beware, that written warranties are only issued for products that tend to break? Would anyone ever tell you to avoid products that come with warranties, or not to accept a warranty if one is offered?

Extended warranties, on the other hand, are written about all the time. But there always seems to be a hidden agenda. Advice columns that don't warn against them are frequently affiliated with the sellers in some way. Others relate their own unhappy experiences with extended warranty service providers. Many times, one gets the impression the author is "getting even" with the extended warranty service provider by posting their tale on a Web page.

That seems to be the function of the rants on a site called BestBuySux, devoted to unhappy customers of Best Buy Inc. They publish their anecdotes and see if they can hurt the company's business. And if not, well, at least they vented.

There are many other Web sites that specialize in the posting of uncorroborated consumer complaints, which in turn are scanned by the search engines and are then found by consumers doing research before shopping. Some give the accused a chance to respond, but others take sides and add in their own comments and links.

The Big Question

In other online advice columns, one can find numerous good ideas. They all agree that whether it's an automobile or consumer electronics extended warranty, always read the fine print. Know what's covered and what's not. But they frequently miss the most essential question to ask the seller: who insures your plan in the event of your bankruptcy?

An extended warranty or a service plan is essentially an insurance product. It's the price paid for elimination of a risk. Medical insurance eliminates the risk of having to pay for health care out of your own pocket. An extended warranty eliminates the risk of having to pay for repair or replacement. It's like medical insurance for your purchases.

The UK's Competition Commission delivered an 89-page "issues letter" in late February, detailing its preliminary investigation of the market for extended warranties in the electrical products retail channel. The investigation was referred to the Competition Commission last July by the Office of Fair Trading, a British government agency that works on behalf of consumers.

The OFT found that the effectiveness of competition is limited, that the retailer's point-of-sale advantage is a significant barrier to entry for competitors, and that industry self-regulation generally had not worked. Regulators now will probe a possible monopoly situation, zeroing in on Dixons Group, which some say writes upwards of 25% of the UK's extended warranty contracts.

By all accounts, the market for automobile extended warranties is hotly contested, with everyone in search of a competitive advantage over their peers. But at least one company and one of its affiliates have gone way above and beyond the call of duty, creating a web of deceptive content, false claims, misleading addresses, and misused trademarks designed to ensnare innocent World Wide Web users in search of honest advice.

WarrantyByNet Inc. of Brick NJ is the company, and KayeTech Systems of Apopka FL is the affiliate. At least we assume it is an affiliate.

When Warranty Week asked Evan Gartenberg, WarrantyByNet's director of business development, whether he was aware of what KayeTech Systems and/or its owner David Kaye were doing in his company's name, he replied, "I don't really know anything about those."

Was there any contractual relationship between David Kaye and WarrantyByNet? "Not as far as I know," Gartenberg asserted, although he conceded there might be something going on that he didn't know about. "I'm just one person here. So I don't know who does what here. I could check. I don't know everything here."

He then suddenly remembered he was late for a meeting, and promised to call us back soon with the correct information. We're still waiting.

Efforts to elicit comments from David Kaye proved to be equally unproductive.

Deceptive URLs & Keywords

What KayeTech and WarrantyByNet have done is to each create a family of identical and interwoven Web pages that ensnare the user in their trap.

WarrantyByNet's family of 12 mirror sites each combine the trademarked brand name of an automobile with the word warranty, as in audiwarranty or fordwarranty. What's on each page is a sales pitch designed to entice the reader into offering personal information in return for a free extended warranty rate quote.

KayeTech's family of 20 "auto buying advice" sites includes false statements and unsupported claims designed to deceive the reader, plus a long list of keywords and invisible links designed to deceive a search engine.

When the National Warranty Insurance Risk Retention Group filed for bankruptcy in June 2003, it set off a chain of events that keeps growing. Almost immediately, Warranty Gold Ltd. stopped paying claims on some 67,000 NWIG-backed policies. On Nov. 11, Warranty Gold itself filed for bankruptcy protection.

Industry executives were astonished at the speed at which the NWIG situation went from good to bad.

Though there is as of yet no extended warranty industry association, the Service Contract Industry Council has in the past 16 years done an effective job on behalf of its members, making sure that the legal environment for extended warranties and extended service contracts is somewhat consistent from state to state.

While the SCIC may not be as well-known among consumers as perhaps the Better Business Bureau or Consumer Reports/Consumers Union, it nevertheless has probably done more to shape the regulatory landscape of the extended warranty business than any other entity.

By planning for industry regulation back when there still was no regulation, the SCIC was in a position to assist lawmakers in states such as Illinois, New York, and Texas as they drafted their extended warranty laws. And while providing that assistance, the SCIC was able to prevent the passage of laws that could have regulated the industry too tightly.

Forming a Trade Association

Fred Schaufeld, chairman and CEO of N.E.W. Customer Service Companies Inc., said the SCIC formed in the mid 1980s as a roundtable discussion group. After that roundtable wore out its usefulness, the group began talking about forming a trade association.

By 1986, Schaufeld and a few others had decided on the name SCIC. They designed a logo for themselves and started to think of the SCIC as the trade association for companies selling, insuring, and administering extended warranties and extended service plans.

"We determined that our mission back then was to create an industry which was going to be sustainable over time," Schaufeld said. "That was a pretty tall task, because the industry at the time was a completely unregulated financial services business. Anybody who had a copy machine could get in, and sell their paper for a lot of value."

He observed that other financial paper issuers were highly regulated on the state and/or federal level. So it seemed unlikely that extended warranties would remain unregulated for very long, especially if any issuers went out of business, leaving bad paper in their wake. Shaping the form of the inevitable regulation became the SCIC's top priority.

"When we started the SCIC, I was in favor of regulation, because I wanted to see us prevent the kind of knee-jerk reaction which I thought could make this business terrible," he said. "A lot of other guys just hated all regulation. Ultimately, I was able to prevail."