Thursday, June 30, 2011

Warranty Exclusions For Product Damage

Exclusions to warranties are important as they can dramatically impact your coverage and cost. For example, some suppliers may want to provide a “parts only” warranty when the real cost of a problem is the labor it takes to correct it. Other exclusions can be so broad that almost anything will negate the warranty. I have certain rules on warranty exclusions:
1.     Any exclusion needs to be capable of being objectively measured.
2.     Exclusions should be limited to only those damages that have been caused by parties other than the supplier, such as buyer or buyer’s customer’s abuse or mishandling of the product.
3.     Exclusions should be for damage that occurs outside what would be the ordinary or expected use for the product.
4.     The last rule, and this is important, is the only warranties that should be excluded are those that would be directly impacted. For example, if the Buyer improperly installed the product, that may excuse the warranty against defects in material and workmanship. It shouldn’t exclude all other warranties in your warranty section.
The following are some fairly common warranty exclusions that suppliers try to include:
·       Limit the warranty to the Buyer
·       Improper use
·       Operation beyond capabilities
·       Failure to report defect in warranty period
·       Substitution of parts
·       Damage due to misapplication
·       Lack of proper maintenance
·       Abuse
·       Improper installation
·       Abnormal operating conditions – temperature, humidity, corrosive elements
·       Repair by others
·       Improper packaging and shipping.
Let’s look at each is these.

The exclusion limiting the warranty to the buyer may or may not be acceptable. It the goal is to only have the buyer perform warranty redemption rather than all of buyer’s customers that probably is acceptable. If it’s to have the warranty end if there is a transfer of ownership that probably isn’t acceptable as it would dramatically reduce the value of the product. Many products are purchased with the intent of reselling them as part of another product. If you purchased a major piece of capital equipment, the exclusion of the warranty transferring to the new buyer would reduce the value of the sale adding to your life cycle cost of the purchase.

The exclusion of “improper use” is an entirely subjective measurement. I would want the supplier to either define what proper use is in their specifications or would want them to specifically identify what constitutes improper use. Without either of those a supplier could determine almost anything to be improper use.

The exclusion of operation beyond capabilities would be acceptable if those capabilities are spelled out in the supplier’s specifications that are made part of the contract. If not the measure is entirely subjective and open to abuse.

I wouldn’t agree to the exclusion for the failure to report the defect during the warranty period. That presumes that there would be instantaneous action of notifying the supplier of a defect. Many times a customer will return the defective product to a buyer service depot. The service depot will then investigate the cause of the defect. If they determine the cause is supplier’s product, only then will they seek to return it to the supplier under warranty redemption. As suppliers want buyers to perform that screening type of activity, the time it takes to do that shouldn’t reduce the effective warranty period. As a minimum I would want a reasonable period after the end of the warranty period for any returns to make their way to the supplier.

The exclusion for substitution of parts on its own wouldn’t be acceptable. The key is whether the substitution of parts caused the defect. If it didn’t, why should the supplier be excused from providing the warranty?

The exclusion for damage due to misapplication is subjective.  Before agreeing to this I would want the supplier to show me where and how the correct application is defined if we need to manage against misapplication.

The exclusion for improper maintenance is also subjective. Before agreeing to this I would want the supplier to show me where and how proper maintenance is specified in their specification.

The exclusion for abuse is totally subjective.  In the example below the supplier attempts to describe visual conditions noted to the product that would void warranty rather than simply have the open ended “abuse” measurement. If a supplier wants to exclude warranty obligations for “abuse” have them define what constitutes abuse.

The exclusion for “improper Installation’ is subjective. Before agreeing to this I would want the supplier to show me where instructions on correct installation are defined in their specification. I would also want to make sure that improper installation was the cause of the defective product.

For the exclusions of “abnormal operating conditions” I would ask to see where the operating parameters are spelled out in their specification. I would also want to ensure that the abnormal operating conditions caused or contributed to the defect.

Repair by others should not automatically void a warranty. Many buyers or buyer’s customers may routinely do self-maintenance. The key is whether the repair caused or contributed to the defect. If it didn’t why would you excuse the supplier from the warranty obligation?

The exclusion for improper packaging or shipping is a funny one.  I could potentially see it applying if the improper packaging caused additional damage to the product, but the reason you were returning it in the first place was because it was defective. Improper packaging and shipping shouldn’t excuse them from their responsibility for the original defect. Have them provide you with what they consider proper packaging. Only agree to that where the cause of the defect was the improper packaging or where it caused additional damage to the product. I would never agree to exclusions for improper shipping.  If they were concerned about shipping I would have them specify and pay for the carrier to return the product.

The best way to narrow down discussions on warranty exclusions is to use the “show me” tactic. Everywhere they want to be excused for something they consider wrong, ask them to show you where in their specification it describes how to do it correctly. Everywhere they want to be excused for any form of misuse, ask them to show you where proper use is described in their specification. So they don’t use things as an excuse to avoid their warranty obligation, when you agree to something that would excuse warranty obligations, always require that whatever action you may have taken was either the cause of the defect or contributed to the defect. Never let an exclusion be based on a subjective opinion of the supplier. 

Example from the Internet:
Here’s an example of a simple set of warranty exclusions along with the supplier’s attempt to define circumstances that constitutes the exclusions. 
SUPPLIER does not warranty Products that have been received in any of the following conditions:
  • Improperly packaged and shipped
  • Altered
  • Physically damaged
Upon receipt of product, the SUPPLIER Repair Center will use the following criteria in determining warranty eligibility. If a product as received exhibits any of the following, the warranty will be voided and product returned at Customers expense.
Product received was not packaged and shipped per SUPPLIER packaging and shipping guidelines.
  • Labels are missing.
  • Labels exhibit tampering such as being lifted or reseated.
  • Counterfeit labels.
  • Labels that have been switched and do not match the Product.
    Examples include, but not limited to:
    • supplier label on non-supplier product.
    • supplier label for model placed on a different model.
  • Labels exhibiting damage beyond that caused by normal wear and tear.
    Examples include, but not limited to:
    • Labels that have been defaced such that the model number, serial number, part number, or manufacture date is not readable.
    • Labels with bar codes that cannot be scanned.
    • Seal labels (commonly called pivot seals) that are torn, punctured, lifted or otherwise modified such that the item being sealed is or has been exposed.
Examples of a Product being altered of physically damaged are:
  • There are deep scratches inconsistent with normal wear or tear.
  • There are nicks, dents, bends, or other damage to the cover or base.
  • There are indications that the Product has been exposed to liquid or other foreign substance.
  • There is rust or corrosion on the product.
  • Screws are missing, loose, or cross-threaded.
  • Mounting holes contain broken screws or show thread damage.
  • There have been unauthorized alterations made to the cover or base.
    Examples include, but not limited to:
    • Extra holes drilled
    • Cut-outs added
    • Extra pieces attached
  • Parts of the Product are missing. 
  • Alterations or unauthorized repairs have been made to the PRODUCT.
  • Missing or damaged connector.
    Examples include, but is not limited to:
      • Cracked or broken plastic parts
      • Broken solder joints
      • Pushed pins
      • Broken or bent pins
  • The PRODUCT exhibits damage that is not considered to be a result of component failure or normal wear and tear.
    • Examples include, but is not limited to:
      • Damaged, broken, or missing components
      • Cuts, breaks, gouges to the PRODUCT
      • Scorched or burned PRODUCT
      • The flexible printed circuits are not connected to their respective connectors or are missing/damaged.

In looking through this some of these are good examples of conditions that should probably excuse the supplier from its warranty obligation.  For example a scorched or burned product is probably a good example.  The Buyer may not have caused some of the conditions. For example, a missing label could have been caused by a defect in the adhesive used by the supplier. Just because they supplier can’t scan a bar code may not mean that they can’t identify the product. The key is the condition really a sign of abuse by the buyer that should void the warranty?

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