Companies that offer warranties as part of their product and services packages may be surprised to learn that they are actually selling insurance, as that term is broadly defined in British Columbia’s Financial Institutions Act.
This is particularly alarming when one considers that it is an offence under the act to sell insurance without authorization – an offence that can lead to fines of up to $200,000.
Therefore, it is crucial to fully consider any warranty offering to determine whether it falls within a permitted exception under the act and, if not, to consider the potential consequences of failing to obtain the appropriate authorizations and licences required for the sale of “insurance.”
The act contains a broad definition of “insurance business,” which includes “undertaking … to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed.”
It is easy to see how a warranty might be caught by this definition since, in essence, a warranty is an assurance to replace or repair a good, or to indemnify in the case that goods or services result in some loss to the purchaser. While one does not commonly think of warranties and insurance as interchangeable, the act treats them that way in many circumstances.
Under Section 75 of the act, in order to carry on “insurance business,” a company must be an “insurance company” (usually meaning a corporation incorporated for the purpose of carrying on insurance business).
Further, Section 59 provides that an “insurance company must not carry on insurance business unless authorized to do so by a business authorization” issued to it under the act.
The requirement to obtain a business authorization to carry on insurance business applies to companies located in British Columbia, as well as companies from other provinces that offer warranties in British Columbia.
The process of obtaining the necessary business authorization to carry on “insurance business” is likely more involved and restrictive than those in which most companies offering warranties would be willing to engage.
For instance, the act requires that insurance companies maintain both adequate liquid assets and capital base. What constitutes “adequate” is determined by reference to “the class of business that it proposes to carry on, the expected volume of its business and the restrictions on its business.”
Further, the Insurance Company Reserves Valuation Regulation contains certain reserves requirements that not all warranty-offering companies may be willing or able to meet. Finally, it may also be important to remember that the Financial Institutions Commission may order in-depth investigation and disclosure, further complicating the process.
Thankfully, the Insurer Exemption Regulation contains exemptions that provide relief, but only in certain circumstances. The two most important exemptions apply to “product warranty insurance” and “vehicle warranty insurance.”
Under the act, “product warranty insurance” is defined as “insurance … against loss of or damage to personal property, other than a motor vehicle, that is contracted between the purchaser of the property and an insurer whereby the insurer undertakes for a specific period to assume the cost of repairs or replacement.”
“Vehicle warranty insurance” is defined as “insurance … against loss of or damage to a motor vehicle arising from mechanical failure, that is contracted between the purchaser of the motor vehicle and an insurer whereby the insurer undertakes for a specific period to assume the cost of repairs or replacement, towing fees, car rentals and accommodation as a result of a covered mechanical failure.”
The first main limitation on these exemptions is that the sale of the warranty must be “solely incidental to the sale of the vehicle or product by the manufacturer or retailer” (see Section 4 of the regulation). This prevents a third party from offering warranties on products or vehicles without first obtaining a business authorization to do so.
Second, both definitions limit potential recovery to replacement or repairs respecting the product or vehicle sold to the customer. Therefore, any offer to indemnify for damage caused to or by anything other than what the company sold is “insurance.”
Third, but perhaps least harmful, is that both definitions require the warranty to last only for a “specific period,” essentially preventing lifetime warranties.
In this competitive economic climate, it is important for companies to differentiate themselves in any way they can, and a common technique to do this is to offer a warranty to pay for damage caused to or by its products and services.
However, companies must be wary of the pitfalls of offering warranties because of the broad scope of the Financial Institutions Act and the limited scope of the exemptions. Because of the potentially onerous fines, it is prudent for any company considering offering a warranty to consult with the regulator or seek legal advice to ensure compliance with the act.
Karl E. Gustafson, QC*, is a partner at McMillan LLP’s Vancouver office. This article was prepared with contributions from Lorway Gosse Jr., an associate in McMillan’s Calgary office. * - Law Corporation