January 21, 2010 by Canadian Underwriter
An extended warranty is not an insurance contract, the Court of Queen’s Bench of Alberta has decided.
“In my 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 flaw 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,” Court of Queen’s Bench of Alberta Justice J.J. Gill wrote for the court in Brick Protection Corporation v. Alberta (Provincial Treasurer).
‘The Brick’ is a warehouse offering extended warranties to cover any defects in the furniture, appliances and electronic devices that it sells. It went to court to dispute the provincial treasurer’s claim that it owed an “insurance corporation tax” amounting to more than $706,000 —$1.15 million including penalties and interest — for the taxation years between 1987 to 1993.
The treasurer took the position that The Brick’s extended warranties were included within the provincial Insurance Act’s definition of “insurance,” and hence the warehouse owed the insurance tax.
The Brick countered that its extended warranties were not insurance, since insurance provides indemnity for an occurrence unrelated to product defect or failure, whereas protection from product defect or failure is the purpose of a warranty.