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Consumer Warranty Law: 20.7.1 Introduction

The service contract owner is primarily responsible for paying claims, so it will be the prime defendant in any litigation for breach of the service contract. When the contract owner is insolvent, consumers can explore alternative parties to hold liable. Even if the contract owner is not insolvent, consumers may wish to raise their service contract-related claims against the holder of their installment sales contract, who will often not be the service contract owner. This section examines the liability of various parties other than the service contract owner.

Consumer Warranty Law: 20.7.2 Insurance Coverage When Contract Owner Is Insolvent

When a service contract is regulated as insurance or offered by an insurance company, a state insurance insolvency fund may be available to pay out claims when that insurance company is insolvent.91 When a service contract is not regulated as insurance, a number of state statutes require that the service contract obligor take out reimbursement insurance or a bond that will pay out claims in case the obligor becomes insolvent.92

Consumer Warranty Law: 20.7.3 Service Contract Administrator Liability

Service contract owners often employ a third party to process and approve claims, called the service contract administrator. The administrator may also offer advice to the service contractor on how to set up the service contract program, but the service contract typically will state that the administrator has no liability to the consumer.

Consumer Warranty Law: 20.7.4 Retailer Liability

A retailer typically sells another company’s service contract in conjunction with its sale of the product protected by the service contract, retains a large portion of the price, and may even perform the promised repairs. In some cases, the retailer or a company related to the retailer reinsures the contract, so that as a practical matter the retailer retains all the benefit and risk from the contract, and the service contract “owner” does little more than participate in a legal fiction, for a fee.

Consumer Warranty Law: 20.7.5 Liability of Other Parties

In addition to the reimbursement insurer, administrator and retailer, other parties aiding and abetting the scheme may be liable for a service contract owner’s failure to pay out on a claim. For example, the Nevada Supreme Court allowed a potential class action to go forward against an accounting firm regarding its participation in the undercapitalization of a service contract insurance company.108

Consumer Warranty Law: 20.7.6 Liability of Holder of Installment Sales Contract

In many consumer transactions, it is more practical to raise claims and defenses against the holder of the consumer’s loan obligation related to the covered product than it is to bring an affirmative suit against a third party. When the retailer is liable for the failure to pay on a service contract claim,109 the retailer’s assignee (or a third party lender referred by the retailer) is also liable pursuant to the Federal Trade Commission’s Holder Rule.110

Consumer Warranty Law: 20.8 Refunds upon Service Contract Cancellation

Consumers cancel service contracts before their expiration for any number of reasons: the consumer sells or trades the product, the product is repossessed, or the consumer realizes that the contract is a bad deal. The question then is how to compute a refund on a prepaid service contract.

Consumer Warranty Law: 20.9 Automatic Renewal

Typically service contracts are for a fixed number of years. Some contracts have the added feature of automatically renewing for additional years after the term has expired unless the consumer cancels before the renewal date.

Consumer Warranty Law: 20.10 Service Contract Rights of Product’s Subsequent Purchaser

When a consumer purchases a service contract and transfers the covered product to another consumer, can the subsequent owner enforce the service contract? The first place to look is the service contract agreement to see what it states as to its assignability. Silence should be interpreted as allowing assignment, because ambiguous contracts are to be construed against the drafter.

Consumer Warranty Law: 6.1 Introduction

While the consumer may purchase goods from a retailer, it is the manufacturer that may provide the written warranty or make advertising claims concerning the product. In addition, sometimes the final product from the manufacturer may include components from other manufacturers. In general, each business in the distribution chain is a separate entity with separate rules of warranty liability. For example, an express warranty from the retail seller will not bind the manufacturer, without special facts.

Consumer Warranty Law: 6.2.1 Reasons to Bring a Warranty Claim Against the Manufacturer

There are many reasons why the buyer will want to pursue a warranty claim against the manufacturer or other indirect seller.6 Often it is the manufacturer who provides the written, express warranty, and the retailer will disclaim its warranty obligations. Moreover, when the manufacturer has provided a written warranty, the Magnuson-Moss Warranty Act prohibits the manufacturer from disclaiming implied warranties.

Consumer Warranty Law: 6.2.2 Manufacturers Liable to Consumers Under Their “Written Warranties”

The federal Magnuson-Moss Warranty Act eliminates vertical privity requirements when a consumer wishes to sue a manufacturer or other supplier based on a “written warranty” on consumer goods. In such cases, the Act gives the consumer the right to sue the entity that issued the written warranty, whether or not the consumer dealt directly with that supplier.9 The Act does not allow suit for personal injury, however.10

Consumer Warranty Law: 6.2.3.2 Even States That Have Not Unequivocally Abolished Privity Requirements for Implied Warranties Usually Do So for Express Warranties

Even when a state has not abolished the privity requirement for implied warranties, or when the law in that state is still unclear, courts generally will not require privity for express warranties. The policies supporting implied warranty liability for an indirect seller apply even more forcefully to claims based on express warranties made by the manufacturer to buyers or made to the general public through representations in advertisements or sales brochures.

Consumer Warranty Law: 6.2.4.2.1 Issues in analyzing state law

In analyzing a state’s privity requirements, several points need to be kept in mind. First, courts and statutes may take different positions about whether a consumer can sue a manufacturer depending on whether the suit is for personal injury or property damage or whether it is for economic damage to the product itself—that the product purchased is worth less because it is defective.

Consumer Warranty Law: 6.2.4.2.3 State law surveyed

Whether a state has abolished vertical privity for implied warranty claims seeking economic damages requires a review of both statutory and case law in that state. There is more variation on this issue among the states than on almost any other UCC Article 2 warranty issue.

Consumer Warranty Law: 6.2.5.1 Consumer As Third-Party Beneficiary of Manufacturer’s Warranty

Lack of privity is not a defense when the retail buyer is a third-party beneficiary of the warranty in the sales contract between the manufacturer and the retail seller.211 This theory is one of the many grounds on which courts hold manufacturers responsible for breaching express warranties that are intended to protect the retail buyer, but are delivered through intermediaries,212 or created by samples provided to the retailer to use in the sales presentation.

Consumer Warranty Law: 6.2.5.2 Dealer As Manufacturer’s Agent

The manufacturer may also be liable to the retail buyer on an agency theory. Privity of contract will exist between the ultimate purchaser and the manufacturer when the dealer is found to be the agent of the manufacturer.222 Vertical privity may also exist if the intermediate buyer is the agent of the ultimate consumer.223

Consumer Warranty Law: 6.2.5.4 Manufacturer’s Issuance of Express Warranty As Creating Privity for Implied Warranties; Manufacturer Rebate Programs

Some courts hold that merely issuing an express warranty is sufficient to create privity between a buyer and a remote manufacturer, thus allowing the buyer to sue for implied as well as express warranties.233 The manufacturer may also have a direct enough relationship with the buyer to obviate privity concerns when the dealer has a warranty from the manufacturer and assigns that warranty to the buyer.234 It is also possible that a manufacturer’s relationship with the buyer through a manufacturer

Consumer Warranty Law: 6.2.5.5 Manufacturer’s Liability Based on Equitable Estoppel

The manufacturer may be liable under principles of equitable estoppel. Under this theory, the manufacturer is estopped from asserting lack of privity as a defense to a claim for breach of the manufacturer’s express warranty.235 For example, equitable estoppel has been applied when the manufacturer had given the dealer a warranty for delivery to the buyer, had initially made repairs under the warranty, and had voluntarily extended it.