If a disappointing holiday season worsens liquidity problems for Sears in the United States, the consequences for its customers will already be familiar to Canadian consumers.
Canadian consumers recall the demise of Sears Canada in the fall of 2017, and the unique consequences for a particular set of consumers – those who had purchased Sears Protection Plan coverage for their appliances.
One particular point of interest will be to see whether default by the U.S. parent could change Canadian consumer protection in a way that the Sears Canada's failure did not.
Consumers Council of Canada’s 2018 report Consumers and Product Insurance Purchase Decisions used the Sears Canada story to highlight the many gaps in consumer protection and consumer understanding. That report included three findings that could become particularly relevant, should the troubled U.S. retailer, which went through a bankruptcy in 2018, ultimately liquidate.
First, the vast majority of Canadian consumers did not understand how extended warranties and service programs such as the Sears Protection Plan worked. Some retailers, including Sears, self-fund their extended warranties. So when the retailer liquidates, the amounts consumers have prepaid to provide for future repairs and replacements are simply an asset in the retailer's bankruptcy case, and provide no actual protection. Most major retailers in Canada and the United States use third-party providers, so that protections should continue to be in place if the retailer or manufacturer go out of business.
Second, Canadian practices are strongly shaped by U.S. practices. Many of the largest retailers in North America use the same third-party protection providers in Canada that they do in the United States. The report showed how little Canadian protection contracts differ from U.S. contracts. U.S. policy changes would likely be reflected in Canadian practices.
Third, U.S. policy changes often follow cataclysmic events. A suite of consumer complains led to an initial wave of consumer protection laws in the 1970s. The report describes the questionable sales practices that led to updated state-by-state laws through the 1980s and 1990s. The default of a large national retailer with considerable prepaid consumer money could easily trigger another set of policy changes.
You have finally decided on a refrigerator. Compared prices, sizes, energy efficiency and other features. It seems like all the decisions have been made, until you get to the checkout, and you have to make one more decision – whether to purchase additional product protection.
These additional programs – sometimes called extended warranty, or service plus or protection programs – aim to reduce the buyer’s worry that the products may fail after the manufacturer’s warranty expires but before the buyer has enjoyed all the benefits expected from that new refrigerator, computer or other major household item.
Consumers may view that all protection plans are essentially the same. But there are significant differences between coverages offered. The important points of differentiation are described in the Consumers Council of Canada’s 2018 report Consumers and Product Insurance Purchase Decisions.
The report compared the coverages offered by numerous leading Canadian retailers in 2017-18. Comparisons across retailers showed there were many similarities. Items almost universally found in service contracts included:
• language that the contract was the entire agreement
• information about how to file a claim or arrange service
• rules about transferability and cancellation
• limits on liability to the purchase price of the product
• language that allows them to fulfill the contract by issuing a cheque or gift card for the value of the original purchase
• an articulation of what is covered, and not covered. “Not covered” commonly includes items that have had unauthorized service, accessories, peripherals, components with limited life (batteries and bulbs), cosmetic or superficial damage that does not affect a product’s operation, damage caused by natural or man-made disasters, loss or theft, wear and tear caused by normal aging, and abuse, misuse or deliberate damage.
While those were the areas almost always included, there were a number of areas where programs studied showed significant variance:
• Protection on replacement units. Most contracts clearly state that the contract terminates when a replacement item is issued to the buyer, but a few specifically extend the protection to also cover replacement items issued.
• Technical assistance to help with installation or troubleshooting is sometimes provided, sometimes not.
• The location of service – and whether the buyer has to pay for delivery to a specific service depot – also varies between plans. Some plans provide for in-home service.
• Some plans begin coverage only after the expiration of the manufacturers warranty, while others begin with the date of purchase.
• Some contracts provide for temporary replacements (“loaners”) while damaged items are repaired
• Language around coverage of damage is particularly varied, and important. Except for computers and smartphones, most contracts specifically exclude coverage for accidental damage. However, the popularity of handheld items that can be easily dropped has led to some offerings of protection for accidental damage from handling. This is commonly optional coverage – consumers can choose to pay extra for it. Furniture coverage may also include optional coverages for certain accidental spillage. Intent is also crucial in determining whether a claim is covered. Coverage on a dropped telephone is different from coverage of a telephone hurled in anger, and coverage of spilled drink on a sofa may be different from coverage of a toddler’s Sharpie drawings on a sofa (which may not be considered “accidental” by the service provider.)
• Optional damage coverage is one example of choice. Some providers offer different levels of service so that consumers can choose to pay higher amounts to have service performed in their home, levels of technical support above product defect or to choose different durations of the coverage.
• Another differential element of some programs are terms that allowed unused premium payments to be used as a discount on future purchases.
• Coverages can differ by province, though few consumers can choose the province in which an item is purchased.
Though the contract print is often exceptionally small, consumers should read it before making a purchase decision. The research found that misunderstandings about what was covered (1st) and misleading statements by sales representatives (3rd) were among the most commonly cited sources of consumer unhappiness.
A specific segment of consumers buy most of the extended product protection plans sold on major household durables, a just-released Consumers Council of Canada research report found.
The report, Consumers and Product Insurance Purchase Decisions, identifies that while type of product, its price and the cost of protection all affect the purchase decision, the minority of consumers who buy extended protection appear to have a distinct predilection to do so.
About 30 per cent of consumers have purchased extended protection on a major durable in the past three years, while more than half say they never purchase it.
"Consumers are frequently at an information disadvantage when they decide whether they need an extended warranty," said Consumers Council of Canada President Don Mercer. "Vendors have much better knowledge of the risk of product failure and repair costs than consumers.
"Also, consumers don’t do themselves any favour when they fail to read terms and conditions before they sign a contract, often presented at length and in small type that discourages reading."
Major appliances and home electronics (including phones) are the most frequently protected products. Consumers who purchased protection on one product were about three times more likely than other consumers to purchase protection on another product, the research found.
The results are based on a web panel survey conducted by Environics Research of 2,000 Canadians who had purchased a major household item in the past three years.
The report also includes a review of legislation, current industry practices and interviews with industry participants. The study aimed to evaluate consumer attitudes and behaviours towards the suite of offerings -- protection programs, extended warranties, service plans -- designed to provide additional guarantees about products beyond the manufacturer’s standard warranty.
Among the report’s other key findings:
In general, extended protections are not well understood by consumers, who misunderstand terms and conditions, neglect to read the contracts and show little appreciation of the different regulatory structures and business models associated with different products.
Most major retailers use third-party service providers, who have adopted U.S. practices to serve Canadian consumers, and do not follow the extended service model operated by Sears Canada, which resulted in a loss of protection for consumers due to its bankruptcy.
Better informed consumers are generally less likely to purchase extended protections.
About one-quarter of claims for service are resolved unsatisfactorily or with substantial consumer inconvenience.
Legislation and regulation concerning warranty and extended warranties is inconsistent among Canada’s provinces. In particular, it is not consistent province to province whether extended warranties are considered insurance .
The necessity of relying on courts for redress likely discourages some consumers from pursuing their legal rights to warranty and extended warranty claims.
The report makes numerous recommendations for public policy, consumers, merchants and third-party service providers.
"The report shows that Quebec consumers in general are more knowledgeable about extended protections," said Mercer. "That’s likely because Quebec law requires sellers to disclose information about basic warranties before offering additional warranties for sale. That’s one obvious way to better protect consumers."
Consumers Council of Canada has received funding from Innovation, Science and Economic Development Canada’s Contributions Program for Non-profit Consumer and Voluntary Organizations. The views expressed in this report are not necessarily those of Innovation, Science and Economic Development Canada or the Government of Canada.