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Insurance vs. Warranty

Insurance vs. Warranty

Confused about insurance vs warranty? Well, read right ahead for a clear and precise understanding of each, along with the difference between the two risk management methods!
Ishani Chatterjee Shukla
You must have often come across the terms insurance and warranty in due course of purchasing any product, or acquiring an asset in exchange for a pecuniary consideration. Now, isn't it such a relief to know that the object that you purchased comes with an insurance or a warranty? I mean, most of us associate both these words with risk management with regards to the life and performance of the product, and rightly so. However, do you really know the exact difference vis-à-vis insurance vs warranty? Although they sound similar, both these terms have different approaches towards, and scope of, risk evaluation and mitigation. Therefore, it is incorrect to use these words interchangeably in any context pertaining to pecuniary or commercial transactions. The following segment lays out the basic differences between these two conditions of risk management.

Insurance vs. Warranty - Meaning and Difference

Both insurance and warranty denote methods of minimizing the financial impact of a loss, by either fully or partially compensating the monetary value of the said loss. This can be done by either paying a monetary amount (which can be the total amount of a proportionate part thereof) equivalent to the value of loss or by repairing the damage or replacing the product. The meaning of insurance and warranty as laid out by the Oxford English Dictionary are as follows:-


1. an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium;

2. a thing providing protection against a possible eventuality.


1. a written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary within a specified period of time;

2. (in an insurance contract) an engagement by the insured party that certain statements are true or that certain conditions shall be fulfilled, the breach of which will invalidate the policy.

Now, if you cast a cursory glance, both would seem to mean the same thing - protection against a possible loss of value, and an undertaking by one party to the contract to compensate the other in the event any such loss arises. Now, if you take a closer look, the difference between both types of undertakings will become clearer. Following are some of the chief points of distinction that set insurance and warranty apart:-

Points of Distinction Insurance Warranty
Nature of Agreement Policy Contract
Type of Loss Covered Any natural or unnatural loss or damaged whether caused by a hitch in the quality of the product/ asset or caused by accident or any unintentional mistake/ mishandling on your part. Any damage, usually natural wear and tear, that occurs to the product which the company or dealer claimed, guaranteed, would not happen to the product for a specific amount of time. Damage caused by accident or mishandling is not covered.
Relationship of the Parties Usually provided by a third party who is neither the seller/ dealer nor the buyer. Always provided by the manufacturer of the product who may or may not sell the product directly. Sometimes, franchisees and dealers may also offer warranty schemes of their own.
Mode of Compensation The loss or damage to the property is valued based upon standard methods and formulas and a proportionate monetary compensation is offered by the insurer in lieu of the amount/ magnitude of damage. If the damaged product or property happens to be covered by a warranty, it is always replaced by the manufacturer or dealer if the warranty period of the product has not expired. Also, compensatory replacement will take place only if the damage in question relates to those areas, and fits those conditions, which were covered by the warranty contract.
Regulatory Authority Insurance policies and guidelines are regulated by State legislation. Warranties and related compensatory policies are backed by individual manufacturers.

Whether it should be an insurance or warranty that would cover a particular product or property is determined by the scope of coverage and the magnitude of damage possible. That's why, common household appliances such as air conditioners, television sets, water purifiers, vacuum cleaners, come with a warranty as, under normal circumstances, there is only a limited scope of damage that can possibly happen to them if used according to instructions provided in their user manuals. On the other hand, fixed assets and valuable properties such as real estate, automobiles, valuable jewelry, may be vulnerable to greater possibilities of loss or damage under a lot of accidental or unnatural circumstances, such as fire, earthquakes, robbery, burglary, road accident. Therefore, these properties are always covered by insurance.