Warranty Basics 101

Most every sale of a motor vehicle by a dealer (or, for that matter, any other consumer product) has warranty implications that must be considered and addressed by the either or both the product manufacturer or seller. Therefore, it is important for dealers, warranty administrators and others to have a basic understanding of warranties and the regulatory scheme that applies to them.

In one way or another, warranties are regulated by one or more of the following:

• The Magnuson-Moss Warranty Act (MMWA)
• Federal Trade Commission (FTC) Act and Regulations
• State Warranty and Vehicle Service Contract Acts and Regulations
• State Insurance Regulations
• State Unfair and Deceptive Acts and Practices (UDAP) Acts
• State Lemon Laws
• State Uniform Commercial Codes (UCC)

Addressing the various state laws and regulations that govern warranties is beyond the scope of this discussion. As such, the discussion below will focus mainly on the regulations and requirements imposed by federal law.

Warranty vs. Service Contract

First, it is important to understand the distinction between a warranty and a service contract.

A warranty is included in the price when you purchase a product and traditionally comes from the manufacturer or the seller of the product. A warranty can not be sold separately from the product. A warranty can be either full or limited and is regulated by the MMWA.

On the other hand, a service contract is purchased separately from the product itself and is usually administered by a third party. A service contract is in addition to any warranty on the product and only covers those items outlined in the contact. Most states regulate service contracts to varying degrees.

Warranties can either be “express” or “implied.”

Express warranties are promises, representations and statements (including a product description or sample) made about the product that forms the basis of the bargain and is relied upon by buyer. Express warranties can be either written or oral.

On the other hand, implied warranties are unwritten or unspoken promises that are created by state statute and automatically apply to the goods when they are sold. The two types of implied warranties are the warranty of merchantability and the warranty of fitness for a particular purpose. The implied warranty of merchantability is the promise that the goods will do what they are supposed to do. The warranty of fitness for a particular purpose is a promise that the product is suited for purpose or proposed use the buyer has identified to seller. If the seller does not offer a written warranty, in most instances, the seller can disclaim these implied warranties so long as the buyer is informed in a conspicuous and specific manner.

Magnuson-Moss Warranty Act

On the federal level, warranties are governed by the MMWA that was enacted by Congress in 1975 and regulated by the FTC. Under the MMWA, manufacturers and sellers are required to provide consumers with detailed information about the warranty coverage provided on the product purchased and the rights and obligations of the consumer and the warrantor.

The MMWA does not require a business to provide a written warranty and does not apply to oral warranties, however, if the warranty offered is in writing it must comply with MMWA. MMWA only applies to consumer goods (not products sold for resale or commercial purposes) and not to services a business may provide. Lastly, where there is a conflict between federal and state warranty law, MMWA will preempt the state law and prevail.

Warranty Requirements under MMWA

The MMWA and related regulations specify three requirements that a warranty must meet:

• The warranty must indicate that the warranty is either “Full” or “Limited”
• The required coverage terms of the warranty must be in a single, easy to read document
• The warranty must be available so that the consumer can read the warranty before buying and where goods are sold

For a warranty to be considered a full warranty under the MMWA, it must meet the minimum standards for warranties. Full warranties must meet all of the following five requirements; otherwise, it is a limited warranty:

• No limit on the duration of implied warranties
• Warranty coverage is not limited to original purchaser
• Warranty service is provided without charge
• Warranty provides, at consumer’s choice, replacement or full refund if unable to repair product after a reasonable number of attempts
• No unreasonable duties are required to receive service

Under applicable regulations, written warranties must describe the coverage under the warranty by addressing the following items:

• What does the warranty cover and/or not cover
• Coverage period of the warranty
• What will and/or will not be done by the warrantor to correct or remedy the problem
• How the consumer goes about getting warranty service
• How state law affects rights under warranty by including the standard disclosure language

Prohibited Warranty Provisions under MMWA

Under the MMWA there are restrictions on implied warranties, “tie-in sales” provisions and deceptive or misleading warranty terms:

• The MMWA prevents the warrantor from eliminating or limiting implied warranties
• Tie-in sales provisions that require the consumer to buy an item or service from a particular company in order to keep the warranty in force are prohibited unless the product or service is required to make product work, the FTC has given prior approval or the required item or service is provided free of charge
• Warranties that contain deceptive and misleading terms are prohibited

MMWA and FTC Used Car Rule

Most dealers who sell used vehicles must also comply with the FTC’s Used Car Rule regarding the Buyers Guide requirements. As a result, the requirements of the MMWA and the Used Car Rule are interrelated in that they both address important warranty disclosure requirements. Under the Used Car Rule, the Buyers Guide must contain the following warranty disclosures:

• Whether the vehicle is being sold “AS IS” or with a warranty
• If a warranty is offered, what percentage of the repair costs the dealer will pay under warranty
• If the manufacturer’s warranty has not expired this must be disclosed along with the required safe harbor language regarding the remainder of the manufacturer warranty
• An outline of the warranty coverage must be listed on the Buyers Guide and the dealer must also provide a written warranty that complies with MMWA