A boiler warranty, like all product warranties, demonstrates to buyers that a manufacturer will stand behind its product in the event of a breakdown. It gives confidence to buyers, strengthening the reputation of the manufacturer and allowing the manufacturer to gather valuable information for product-design improvement.

There is, however, a down side to manufacturer warranties. Standard warranty wording is limited in scope, covering only errors in manufacturing and workmanship. The main causes of breakdown — and the most costly components of breakdown events — are operator error, parts and trim, labor, and transportation. These are not covered under standard warranties. When confronted with these costs, manufacturers find themselves either losing face denying the claim or paying uncovered events on a discretionary basis to retain customers. Furthermore, warranties typically are limited to one year. To the extent they last longer, the limited scope of cover means the frustration of scanty cover simply is prolonged. Another disadvantage of the standard-warranty model is that it commits a large component of manufacturer resources to service and repair. Manufacturers prefer to devote their talent to marketing, product development, and manufacturing, rather than repair.

An enhancement of the standard manufacturer-warranty model is extended-warranty protection insured by a specialty-insurance company. Specialty-insurance companies can help protect owners and manufacturers from unexpected losses, such as equipment-breakdown claims. Insurance companies can structure coverage in flexible ways to meet warranty-buyer needs. The synergies and advantages of a manufacturer partnering with an insurance company go beyond simply a transfer of risk. Insurance companies have efficient claims operations and loss-data-analysis capabilities and can offer services to benefit both the buyer and manufacturer.

An extended-warranty program provided through partnership with an insurance company offers significant value to both a manufacturer and its customers. It can differentiate the manufacturer's product, influence equipment dealers, and give customers more confidence in their purchases.

At a time of increased global competition and rising costs, extended warranties can help provide an edge to boiler manufacturers. Servicing an extended-warranty program through a specialty-insurance company can provide advantages without the resource and expense burden of in-house handling.

About the Author

A director of underwriting for The Hartford Steam Boiler Inspection and Insurance Co. (HSB), Jerry Theodorou manages HSB's warranty programs. He can be contacted at jerry_theodorou@hsb.com.