A breach of warranty clause helps ensure that your company is protected against claims or lawsuits made by clients for not guaranteeing that your products or services are not of proper quality.

In general, a breach of warranty is less severe than a breach of contract. In a breach of contract case, because one party did not meet the terms of the contract, the complainants can sue for damages and invalidate the contract entirely. However, because a warranty isn't a determining factor of contract validity, a complainant can only sue for damages in a breach of warranty case, but can't invalidate the contract.

Types of Warranties

The main types of warranties are:

  • An express (i.e., expressly stated) warranty is clearly stated in writing or verbal, and guarantees that a company will repair its products if they become defective within a defined period of time. For example, an appliance manufacturer might guarantee that their oven won't have any defects for the first year of purchase or the manufacturer will repair or replace it.
  • An implicit warranty does not have to be written or oral, but guarantees that a product will be able to perform its intended purpose. For example, an appliance manufacturer can guarantee that their oven will be able to cook food.
  • A lifetime warranty has no expiration date and typically applies only to the lifetime of the original buyer, not the lifetime of a product itself. For example, if a grandparent bequeaths a watch with a lifetime warranty to you upon their death, the lifetime warranty is no longer valid once the grandparent has passed away.
  • An extended warranty has a time limit that generally expands beyond the express warranty and may only cover certain components of the product. For example, certain parts of a car may be covered beyond the initial purchase period.

The Uniform Commercial Code

Warranties are covered by the Uniform Commercial Code (UCC), which has been adopted throughout the United States. According to this code, in a breach of warranty case, the amount of damages a company is liable for is the difference in value between the product the buyer thought they were receiving and the product they actually received.

What Should Be Included in a Warranty?

As with many clauses included in contracts, warranty clauses should be as specific and detailed as possible. Some elements to include are:

  • The amount of time covered by the warranty, such as one year from the date of purchase.
  • The steps the customer should take to obtain any warranty services, such as mailing a product to the manufacturer.
  • The information the customer should provide to obtain warranty services, such as a receipt or purchase order.
  • The services supported by the warranty, such as repairs or replacement.
  • Any exceptions to the warranty, such as using the product for a purpose other than the manufacturer intended.

Insurance and Breach of Warranty

Commercial general liability (CGL) insurance protects an organization against claims for bodily insurance and property damage caused by the company's operations or products. This insurance doesn't typically cover breaches of contract, but there have been recent cases that debated the role of CGL insurance coverage in breach of warranty lawsuits. If your company is at risk for a lawsuit due to a breach of warranty, you should review your CGL insurance policy and find out whether these claims are covered.

Some CGL insurance providers have claimed that they are not responsible for defending or indemnifying the insured parties in breach of warranty cases. These insurers argue that due to certain contract liability exclusions within the policies, they are not responsible for covering claims arising from liability assumed by the insured party's contracts, such as when a company includes a product guarantee in their contract. Each case is different and the court's finding on the arguments have varied, with some courts finding in favor of the insurance companies and others finding in favor of the insured parties.

If your company is faced with a breach of warranty claim and your insurer says that your coverage doesn't cover this type of claim, you may want to consult an attorney and determine if there is any case law to substantiate your side.

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