Warranty Captives

Dickinson Wright’s Warranty Captives Practice advises all clients that issue warranties how to structure those programs in a more financially advantageous manner. Warranty risks differ significantly from traditional insurance lines and often offer opportunities for companies seeking predictable costs, clearer alignment with product performance, and greater control over long-term exposure.

Unlike workers’ compensation, general liability, and commercial auto—which are driven by liability law and heavy regulation—warranties are contractual obligations. While warranty programs must comply with the Uniform Commercial Code (UCC), the statute allows substantial flexibility in how warranties are drafted and enforced. This flexibility makes warranties particularly well-suited for captive insurance structures.

Warranty captive programs can offer several advantages, including:

• Tailored coverage terms
  Warranty language can be customized to specific products, transactions, or customer relationships, with clearly defined scope, exclusions, and remedies. The use of liquidated damages provisions can further limit and compress potential losses.
• Stable and measurable risk
  Warranty exposure is often supported by extensive historical data drawn from accounting systems, product records, and sales data, allowing for consistent pricing and long-term planning.
• Clear funding mechanics
  Internal accounts can be structured to show a direct and transparent flow of funds from purchasers to the reserves supporting warranty obligations.
• Third-party risk considerations
  Warranty obligations involve third-party risk, which can help support risk distribution for federal income tax purposes. Each unit sold represents a statistically independent risk exposure when properly structured.
• Reduced operational burden
  Warranty captives frequently do not require a fronting insurer or a formal third-party claims administrator, which can lower both startup costs and ongoing administrative expenses.

We guide clients through feasibility analysis, program design, documentation, and implementation. Our process includes reviewing warranty language, sales agreements, product data, and historical performance, as well as working with internal stakeholders to understand how warranty obligations are currently managed and funded. From there, we help design a captive structure that aligns with business operations and applicable legal and tax requirements.

Warranty captives are often overlooked, yet they can be among the most practical captive applications available. For companies with meaningful warranty exposure, these programs can provide greater control, predictability, and transparency in how warranty risk is financed.