Warranty fraud occurs when an individual or organization exploits warranty policies for their own benefit. This form of fraud can be complex and occur in any company that offers warranties for its products.

Early last year, fitness tracker creator Fitbit found itself at the center of a complicated warranty fraud scheme. When the company’s customer service department noted an unusually high volume of warranty claims, it began investigating the source of these claims. The company found that detailed customer data had been posted online and subsequently used by hackers to take control over customer accounts. Using these stolen accounts, the perpetrators were able to file false warranty claims to take advantage of the company’s defective product replacement policy. Fortunately for Fitbit, the company was able to recognize this as warranty fraud and has since implemented systems to prevent similar activity.

This example demonstrates that warranty fraud can pose a genuine threat to organizations. It is important to recognize the types of warranties that exist and the people who may be involved to prevent this kind of fraud.

Types of Warranties

Recognizing the types of warranties that exist in a transaction can help your organization avoid potential fraud. The Federal Trade Commission has outlined two basic kinds of warranties: written and implied.

Written Warranties

These warranties often accompany products when they are sold to consumers. They outline the following information:

1. Time period covered by the warranty
2. Procedures for filing a claim
3. Issues covered by the warranty
4. Limitations on the warranty

Some organizations offer different types of written warranties. A base warranty, also called the manufacturing warranty, outlines the most basic form of coverage and will often automatically be provided when a product is purchased. The price of this warranty is included in the price of the product.

An extended warranty is a form of coverage that can offer greater protection for customers in the event that they encounter a problem. Extended warranties, sometimes referred to as service contracts, are usually paid for separately. In certain cases, a base warranty may be offered by the manufacturer of the product, while the extended warranty or service contract is offered by the retailer.

Implied Warranties

Unlike written warranties, implied warranties are not provided at the time of purchase. Instead, they are outlined in the local legislation of states and provinces to protect customers when written warranties are not provided.

A common implied warranty in the United States is the “warranty of merchantability”, which ensures that products will perform as expected. In Canada, this implied warranty exists under the condition that products are all of “merchantable quality”. These types of warranties can vary greatly in terms of length of coverage and type of coverage. Therefore, it is important that companies be familiar with local warranty laws.

Potential Actors in Warranty Fraud Schemes

Warranty fraud is often associated with customers deceiving companies by filing false claims. These false claims may be used to take advantage of written warranties and receive refunds or replacements for goods that are functioning normally. However, customers are only one group of people who can commit warranty fraud.

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Warranty providers themselves may participate in this form of deception by breaching the conditions of their written or implied warranties in an effort to save costs. Warranty providers and sales channel employees may also engage in warranty fraud by selling extended warranties that do not truly offer any additional protection – increasing revenues without providing any service. This may occur if the extended warranty being sold offers the same coverage as the base warranty.

Though customers, warranty providers, and sales agents are more often the perpetrators of warranty fraud, anyone can commit this type of fraud. If you are concerned about warranty fraud, consider implementing controls to ensure that warranty policies are followed by employees and partners, in addition to introducing systems that can assess the authenticity of customer warranty claims.