Alberta court: extended warranty is not insurance
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A recent court case in Alberta tackled the question of whether an extended warranty is insurance.
The defendant in the case – the province of Alberta – had assessed tax against the plaintiff, the Brick Protection Corporation, under the Tax Statutes Amendment Act. It started in July 1994 when the Alberta Treasury, Tax and Revenue Administration issued notices of assessment against Brick Protection for the taxation years 1987 through 1993, assessing "insurance corporation tax" against Brick Protection. The notices of assessment for premium tax, interest and penalties totaled more than $1.1 million.
The province argued that the definition of insurance in the Insurance Act applies to the extended warranties sold by Brick Protection as an "undertaking by one person to indemnify another person against loss … in respect of certain risk or peril to which the object of the insurance might be exposed, or to pay a sum of money or other thing of value on the happening of a certain event."
Brick Protection argued that warranties are not insurance, as insurance provides indemnity for an occurrence unrelated to product defect or failure, while conversely, protection from product defect and failure is the purpose of a warranty.
The Crown, on the other hand, argued that the distinction between insurance and warranties turns on who is offering the protection; if the manufacturer or retailer offers it, it is a warranty, but if anyone else offers it, it is insurance. The issue raised to the court was whether Brick Protection was an insurance company or carrying on the business of insurance. In the case summary, the judge ruled that the plans offered by The Brick are classic manufacturer’s, or distributor’s product warranties and while structurally are very similar to insurance contracts, these types of agreements have historically fallen outside the realm of insurance law.
The judge said in his view the distinction between a warranty and insurance is that a warranty covers the risk that the covered product will fail due to some inherent fault or weakness in the course of normal use, while insurance covers the risk of unforeseen events or perils to the product unrelated to an inherent weakness in the product itself. As such, it was ruled that Brick Protection was not in the business of insurance.
