The latest brouhaha over extended warranties

The trade association representing the extended warranty community misinterprets Consumer Reports’ data about product failure rates, painting a misleading picture on why you should buy these costly service plans.

I guess we could have seen it coming. A week after Consumers Union took out a full-page advertisement in USA Today to dissuade Americans from purchasing extended warranties for most household products as largely a waste of money, the Service Contract Industry Council fought back with a similar ad of its own. In the ad, published on Nov. 20, the SCIC, which boasts more than 30 members including Sears, General Motors, Ford, and various companies that market, administer, and underwrite the insurance plans, exhorted consumers to give your loved ones and yourself “the gift that keeps giving” and the peace of mind that goes along with that.

That’s certainly the SCIC’s prerogative; after all, the association owes its very existence to the continued promotion and sale of these protection plans. Peace of mind -- not to mention heavy-handed sales tactics and overzealous salespeople overstating the risks of product failure -- are doubtless reasons people are expected to spend an estimated $1.6 billion on service plans for appliances, home electronics equipment, computers, and the like this holiday season.

But just as the SCIC has its position on the merits of extended warranties, we have an opposing point of view, based on years of surveying tens of thousands of readers about their product repair experiences.

In extolling the virtues of extended service plans, as the warranties are sometimes called, the SCIC cited Consumer Reports product repair data to help prove its case.

“According to a Consumer Reports Product Reliability Survey, 23 of 25 product types tested had double digit failure rates and needed repair within three to four years.”

While this may be true, the SCIC is playing fast and loose with our data. For the first two years of ownership, most products were extremely reliable. That’s an important distinction. And most extended warranties end after three years. If a product breaks in year four, you're out of luck.

Additionally, product breakdowns are not rampant, as the SCIC implies through its use of the words “double-digit failures.” It’s misleading because there’s no context. Product failures ranged from a low of 10 percent (digital cameras) to 43 percent (laptop computers), the latter being much worse than any product other than side-by-side refrigerators with icemakers and water dispensers. Most products had a repair rate of no worse than one in four or one in five, and remember, that’s after three or four years of ownership. You can improve your chances of getting years of dependable service by purchasing brands that have proved reliable in the past. That’s why Consumer Reports publishes Frequency-of-Repair data for big-ticket goods.

All of these details, however, only partly tell the story of why extended warranties don’t make economic sense most of the time. In order to cash in, the moons must be in perfect alignment. When you purchase an extended warranty, you’re placing a long-shot bet that a product is going to break and that it’s going to do so after the manufacturer’s warranty has expired but when the extended warranty is still in effect. Extended warranties don’t last forever; most average around three years (and take effect immediately, overlapping with the original coverage provided by the manufacturer). That’s a fairly narrow window of opportunity. Second, you’re betting that the cost of the repair will exceed the cost of the warranty. Most of the time, the readers we surveyed spent as much on the extended warranty as they did on the repair job.

We understand, of course, that a small percentage of people will get stuck with a lemon or be confronted with an unusually expensive repair job. Statistically speaking, someone is going to draw the short straw. But those are the exceptions rather than the rule. And it simply doesn’t make sense to let the tail wag the dog. Not only that, but think about this: Retailers now offer extended warranties for almost everything under your roof. We’ve seen them for $30 cordless telephones. Does it really make sense to purchase extended warranties for your dishwasher, television, DVD player, washer, dryer, stove, computer, and so on?

Insurance, be it for your car or for your home, is designed to protect you from catastrophic losses you can’t easily cover out of pocket. Product repairs simply don’t rise to that level.

If you have a low tolerance for risk, you can take one of two paths. We suggest you set aside the money you would have paid for a warranty and put it into a rainy-day repair fund that you can tap into in the unlikely event something breaks. If you’re still not convinced, you can go the extended warranty route. If you choose the latter, be sure the plan covers things like in-home servicing or pickup for heavy and bulky equipment, and ask whether you can get a loaner if your product is out of commission for a while. Some plans will automatically replace a broken product if they can’t fix it. So ask if there’s a replacement provision. We also advise against paying more than 20 percent of the product’s cost for a warranty. Another tip: Use your credit card to purchase big-ticket items. Many cards, particularly gold and platinum ones, automatically extend the length of the manufacturer’s original warranty for up to one year. Check with your card company for specifics.

Another point to remember: Extended warranties don’t generally cover damage from misuse, abuse, or normal wear and tear. So if you drop your laptop or camcorder, you may be out of luck. Read the fine print before signing, to see exactly what is or isn't covered; don't be intimidated by a salesperson to sign anything before you've had a chance to read it in full.