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20 January 2015
Home appliance retailers, wireless carriers and automobile retailers are increasingly promoting extended warranty services to Chinese customers. Some foreign insurers have also sought to take advantage of their experience in overseas markets in developing extended warranty services in China. Extended warranty services provide for repair or replacement of products in addition to the required quality warranty given by product manufacturers. Despite the growing popularity of such services, they raise significant regulatory concerns.
Chinese law and regulations do not explicitly define 'extended warranty services'. In practice, the term refers to a service agreement or contract which extends the customer's warranty. It may be offered to consumers by an extended warranty service company, the retailer or the product manufacturer. As a supplement to the mandatory quality warranty regulated by the Law on the Protection of Consumer Rights and Interests and the Law on Product Quality, extended warranties provide the additional services of replacement or repair of products which fall outside the scope of the manufacturer's quality guarantee.
The authorities seldom issue comprehensive or systematic laws or regulations applicable to extended warranty services. The present standards governing extended warranties are issued by the China Insurance Regulatory Commission (CIRC) based on the inquiries of their subordinates and other authorities. Of these, the primary standards are as follows.
Reply Relating to the Scope of Property Insurance
The CIRC issued the Reply Relating to the Scope of Property Insurance (BaoJianTingHan (2008) 361) on December 18 2008, whereby it clarified whether the extended warranty for an electrical appliance sold by a supermarket in Yueyang City constituted an insurance contract. The reply stated:
"We have received the enquiry from your bureau regarding whether the EWS [extended warranty service] for electrical appliances sold by a supermarket in Yueyang City will be treated as an insurance contract. The loss covered by the property insurance is the damage to the insured property originating by accident, and such loss is caused by an unexpected external force. If losses are caused by natural wear and tear during usage of the insured property due to the nature of the insured property, such losses should not be covered by insurance. In this case, whether the EWS for an electrical appliance sold by a supermarket shall be treated as an insurance contract, should be decided taking into account the forenamed principle and its detailed situation."
Reply on the Issue of Alleged Illegal Operation of Insurance Business
The CIRC issued the Reply on the Issue of Alleged Illegal Operation of Insurance Business (BaoJianTingHan (2012) 62) on February 22 2012. The reply stated:
"In practice, the activities which possess the characteristics of commercial insurance, charging fees in a name other than premiums from the public, promising the obligation to make payment of insurance benefits or other obligation to make payment, or activities which are similar to the provision of risk protection, may be considered an illegal operation of commercial insurance. Whether such activities will be determined an illegal operation will depend on the specific circumstances of the case."
These two replies indicate that extended warranty services have a degree of similarity to insurance products. Such similarities trigger certain risks for extended warranty services regarded as insurance products.
Entities undertaking insurance business in China must seek prior approval from the CIRC and hold a valid special insurance licence issued by the CIRC. Otherwise, the entity will be prohibited from conducting insurance business or will incur CIRC penalties. In light of the time-consuming application procedure for insurance licences, many foreign-registered insurers that do not possess a Chinese insurance licence prefer to promote their products as extended warranty services in order to avoid CIRC regulation.
Despite the similarities between extended warranty services and insurance products, several factors distinguish the two.
According to the CIRC Reply Relating to the Scope of Property Insurance, insurance products normally cover losses caused by unexpected external forces, while extended warranty services cover only losses caused by natural wear and tear arising from use of the covered products.
Normally, extended warranty services are provided to consumers through a professional extended warranty service company, the product retailer or the manufacturer. At present, no special service licence regime exists for such entities to provide extended warranty services. In contrast, insurance products are provided by insurers which must hold a valid insurance business licence.
Indemnification of customer losses
Extended warranty service providers usually indemnify customer losses by repairing or replacing the product in question, whereas insurers indemnify losses through monetary compensation. However, in some cases insurers may repair or replace the damaged insured targets.
Given the surging demand for extended warranties and extended guarantees for products in the Chinese market, extended warranty services are increasingly offered by both foreign and domestic home appliance retailers, wireless carriers and automobile retailers. However, given the similarity between such services and insurance products, the lack of clear regulation in this area deserves greater attention. In light of the growing popularity of extended warranty services, the authorities are expected to issue more detailed regulations in future.
The National Household Electronic Appliances Service and Maintenance Association is organising several household electrical appliance enterprises to revise and improve the extended warranty service standards for household electrical appliances. These revised standards should clarify the distinction between extended warranty services and insurance products and further regulate extended warranty services.
For further information on this topic please contact Hao Zhan at AnJie Law Firm by telephone (+86 10 8567 5988), fax (+86 10 8567 5999) or email (email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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