What is a Warranty and How Do They Work?

When you invest in a product or service, you want a company’s word that you will receive excellent quality. A warranty gives you that assurance. 

Depending on the context, a warranty can guarantee or backup various products or services – cars, homes, household goods, contracts and more. 

While you may be familiar with the term “warranty,” you may not understand how its meaning changes in various contexts. 

What is a warranty? Review common types of warranties and learn what they mean for consumers with Benzinga’s guide.

What is a Warranty?

Simply put, a warranty is a term in a contract that provides a written guarantee from a company to a consumer stating that a good or service has certain qualities. 

In a practical sense, most people relate warranties to the products they buy. For instance, a new car may come with a warranty. New appliances also come with a warranty, even if it is an everyday item you use like a refrigerator or a mobile phone. Large items like a home can come with a warranty, and small delicate items like jewelry can also come with a warranty.

Warranties are represented in contract law. In this case, a warranty represents a promise by a seller that the product they are delivering is exactly as represented. A breach of contract may entitle the buyer to damages, yet it does not discharge the contract. 

Real estate contracts refer to a warranty as well. In this case, the seller of a home or property guarantees they will convey the property listed in the deed to the buyer. 

The term warranty is often used in insurance contracts. Within this context, an insured party guarantees that statements are true or that they will abide by certain conditions of the policy. A breach of the insurance policy will nullify it. 

Warranties may be expressed or implied. An expressed warranty guarantees that a product will meet or perform according to certain expectations and specifications. For instance, the product seller agrees to replace or repair any products that are defective. Sellers typically put their warranties in writing, but a verbal warranty is also valid.

On the other hand, an implied warranty guarantees a product will work in the way it was designed to work. Unless you are buying a product “as is”, the guarantee is implied. 

What is a Warranty Deed?

If you have ever bought or sold property in a real estate transaction, you may have encountered a document called a warranty deed. 

But what is a warranty deed? 

A warranty deed is a document that is used when a buyer is seeking financing for a mortgage or needs title insurance. When you are buying a piece of property, you want to be sure you are the only one who owns it at the time of closing. 

Warranty deeds give buyers of real estate the highest form of protection because the warranty deed guarantees the title to the property is free and clear. A warranty deed makes the following 4 promises:

1. The seller rightfully owns the property and is legally able to transfer the title to someone else. 
2. The property does not have any liens or outstanding claims on it. 
3. The title would be unaffected by third-party claims to other property owners. 
4. The seller will do what they need to do to ensure the buyer gets a title to the property that is free and clear. 

Sellers are legally responsible for any breach of a warranty, and buyers can file a lawsuit against the seller if title problems surface after the completion of a sale. 

Warranty deeds come in 2 forms – general warranty deeds and special warranty deeds. They offer different levels of protection for buyers and different risks to sellers. The benefit of a general warranty deed is it guarantees there are no problems with the property’s title dating back to all prior owners. By contrast, a special warranty deed only guarantees the title is clear as long as the seller has owned the property.

Types of Warranties

There are many different types of warranties, but 2 of the most common are auto and home.

Home

Purchasing a home is an exciting time, even when you are buying an older home. You would like to think everything will function great from the day you move in until the day you move out. But the reality is many systems work together to keep a home comfortable, and at any time, a system or piece of equipment could fail and require you to call a contractor or repairman.

People commonly confuse a homeowners insurance policy with a homeowner’s warranty. However, they are different types of contracts that cover different types of home problems. 

A homeowners insurance policy pays for losses for covered perils such as fire, hail, theft and vandalism that damage your home’s structure or personal property. 

A homeowner’s warranty program is different in that a home warranty company provides a contract with a homeowner who agrees to replace or repair one of the home’s major systems such as a furnace, plumbing, HVAC or electrical system. 

Homeowner’s warranty programs sometimes also cover major appliances such as your washing machine, dryer, refrigerator, or stove. If you have a swimming pool, a home warranty might also cover that, too. 

Home warranty providers contract with approved service providers. When the air conditioning stops working on a hot summer day, a quick call to the home warranty company assures the homeowner that help is on the way. Then, the homeowner only pays a small service fee instead of a huge repair bill. 

Home warranties often become a topic of conversation at the time of a home purchase. Sellers sometimes offer a home warranty to buyers to motivate them to make an offer. 

Overall, a home warranty will not provide quite as much protection as a warranty deed. You have to read the language of the warranty to understand fully what is and is not covered. 

Auto

Separate from car insurance entirely, an auto warranty is much like a home warranty because it pays for specified types of repairs to your car. However, auto warranties are limited to either a certain timeframe or a certain number of miles and what is covered depends on the wording in the contract. 

New cars typically come with a new car warranty from the manufacturer. New car warranties often cover cars for the first 30,000 miles or the first 3 years, whichever comes first. A new car warranty can often tip the scale when deciding whether to purchase a new or used car. 

When buying a new car, you may be able to get a powertrain warranty that covers the car’s propulsion system: engine, driveshaft and transmission. Some manufacturers offer a bumper-to-bumper warranty that covers much more than the powertrain. Be aware that auto warranties do not cover parts of the car that get normal wear and tear such as the seats, windows, floor mats, carpeting and tires. 

An extended warranty is a service contract that can be purchased separately to cover your car after the manufacturer’s warranty is over. Extended warranties can also be effective at the same time as a manufacturer’s warranty. 

Regardless of what kind of auto warranty you have, be aware that auto warranties carry exclusions. They should always be listed in the contract.

Whether you are buying a toaster or making a major purchase like a home or car, a warranty can give you the peace of mind of knowing that if something goes wrong, you will be able to get it fixed. Most often, warranties allow you to get the covered property fixed for little or no cost. 

Warranties generally come with a small monthly or annual fee. If something major goes wrong, warranties can be a worthwhile purchase. 

Frequently Asked Questions