Within China’s emerging legal system the question of whether an extended warranty (extended service contract ) will be subject to increased regulation under the Insurance law of China remains unanswered.

For those who are interested in undertaking a venture of this nature within the Chinese market the answer is of fundamental importance. From an entrepreneurial stance, treating the contract as a non-insurance contract will optimize business efficacy, allowing potential investors ease of market access. It would not appear practical to subject such contracts to the rigors of insurance law. On the contrary, Consumer advocates often propose and lobby for such contractual agreements to be subject to the extensive regulation surrounding insurance contracts in order to protect consumer welfare. The basis of these arguments is premised upon an extended warranty being in the interest of the contracting company and not the consumer. Such groups often argue extended warranties (extended service contract) are simply an additional mean in which to profit from an existing product.

Article 2 of Insurance Law of the People’s Republic of China defines the scope of insurance under Chinese law. According to leading Chinese scholars an insurance transactions should incur a large number of policy holders, an insurable unexpected risk which is identical to each policy holder within the grouping and the payment of a premium. On this basis an extended warranty may then be classified within the scope of article 2 of the Insurance Law and subject to increased regulation and scrutiny. Though, this is simply academic opinion and the true position of extended warranties (extended service contract) in China is uncertain.

Interestingly, some light has been shed on the issue after the CIRC recently published (January 5th, 2009) formal reply No. (2008)36. The reply was published for SIAC and provides clarity on the position of extended warranties (extended service contract) in China as they relate to appliances sold at Chinese supermarkets. In short and as per the formal reply, extended warranties sold in conjunction with appliances at supermarkets in China are not subject to increased regulation as a conventional Chinese insurance contract would.

The basis of the decision was premised on the fact that traditional forms of insurance cover damage caused by accidents. In this case, the extended warranty would cover natural wear and tear. Therefore, it seems the two are inherently different under Chinese law. Furthermore, it has been suggested an insurable risk must be “unexpected” and there exists sound argument stating an extended warranty does not protect against “unexpected risk” as accident insurance would. The foundation of such argument is premised upon an extended warranty being linked with the normal wear and tear of a consumer product and not an unexpected accident resulting in damage.

However, the decision does not mean all forms of extended warranties and service contracts will be freed from the hold of conventional Chinese insurance regulation; domestic and foreign investors must proceed with caution. Leading Chinese lawyers and experts lack consensus as to the appropriate regulatory place of an extended warranty in China and the same question regarding a different consumer product, for example an extended warranty covering car radios, will likely be required to go before the CIRC in the future.

What will the future hold? Leading experts and Chinese lawyers remain divided. However, in the purest form, an extended warranty for the purchase of a Chinese supermarket appliance is not inherently different from an extended warranty purchased for any other standard consumer product. Thus, there is tremendous potential for extended warranty contracts to be freed from the regulatory burden of Chinese insurance contracts.

Regardless, the legal position of an extended warranty remains largely uncertain under Chinese law. Strong argument exists stating the CIRC will not classify an extended warranty as an insurance contract. Though, due to the ever changing nature of Chinese law, real potential exists for an extended warranty, outside the realm of conventional household appliances, to be subject to the regulatory requirements of conventional insurance contracts in the future. As in any business transaction, risk is inherent. However, market entrants may take steps to reduce potential risk and presently the establishment of a venture whose primary focus concerns extended warranties not subject to insurance regulation remains real. Regardless, due to the absence of legislation and the emerging nature of these questions within China, domestic and foreign investors should proceed with prudence.