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The Jewish Ethicist: Unwarranted Warranty

The Jewish Ethicist: Unwarranted Warranty

Is it ethical to market pricey extended warranties that most people don't need?

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Q. Markups on home appliances are not so high lately, so our employer is encouraging the salesmen to make up some of the slack by pushing "extended service warranties." The problem is that these warranties are very expensive and most customers don't really need them.

A. The fact that something is very expensive and may not suit every customer does not automatically mean that it is unethical to offer it. But it is true that selling such a service involves many ethical pitfalls.

According to Jewish law, it is not unethical to sell something with a very high markup. If you provide a valuable service which the informed customer is willing to pay for, you don't have to suffer because your outlays are low. However, there are two things to watch out for.

First, the customer has the right to assume that your prices are "in the ballpark." Some price variation among merchants is normal, due to differences in service, location, and specialty items of each place of business. (Businesses often have low prices on high volume items and high prices on less popular ones; but different merchants will do their volume business in different products.) But if your place of business charges a price which is well beyond what competitors charge for a virtually identical product, the customer should be informed. We learn this from the Biblical verse, "And when you sell to your fellow or buy from your fellow, let not each man take advantage of his brother" (Leviticus 25:14).

Anyway, ethics aside, charging way beyond what others get is a surefire way to alienate your customers.

Second, while it is not improper to sell something for a high markup, it is wrong to describe an overpriced item as a bargain or as "low-priced." When you call something a bargain, you are clearly signaling the consumer that your price is especially low; you should stand by your word.

What about the fact that such warranties are not really advantageous for most customers? That doesn't prevent you from pointing out the benefits of this service for those customers who may really benefit. There are always a few worriers out there who greatly value the peace of mind knowing that they are free from repair bills for a period of years. But here again there are two pitfalls.

A salesperson is permitted to give a sales pitch that emphasizes the positive aspects of his or her merchandise. If the merchandise just doesn't suit everyone, then it is up to the salesperson to make out the best case for the attractiveness of the item and up to the customer to decide if the pitch is convincing. (Of course if the merchandise suffers some actual defect, then the salesperson must reveal this to the customer. A defective product is different than one which is of good quality but may not fit the needs of every buyer.)

But a salesperson is not permitted to give partial advice. A salesperson is not expected to be objective and impartial, and the customer knows that the description he or she is receiving, while accurate, will also be one-sided. But when the salesperson uses words like "I advise you to take out this plan" or "I see this plan really suits your needs," then he or she is putting on the hat of the expert advisor; such advice needs to be completely objective. We learn this from the verse, "Don't put a stumbling block before the blind" (Vayikra 19:14). Rashi explains that this refers to someone who is "blind" to the bias of the advisor: "Don't advise someone to sell his field and buy a donkey, if your true intention is to acquire the field for yourself."

In generally, it is quite problematic for salespeople to give advice. Besides the fact that it is almost impossible to maintain the proper objectivity, very often salespeople are not really experts in the merchandise they sell, so they're not truly qualified to provide expert advice.

The second pitfall here is misleading the customer. Even if the price is a bit stiff, there is nothing wrong with pointing out to the customer that paying an extra hundred dollars for a service contract could save him thousands of dollars in future repairs, and so he's really buying peace of mind. But you need to be consistent! For example, if the service contract doesn't cover every possible kind of breakdown, then the customer is not getting peace of mind at all -- only an insurance policy with an inflated price tag and a limited value. Likewise, if some kind of protection is provided by law or by the ordinary warranty, it's forbidden to state or imply that they are included in the extended warranty.

It goes without saying that pressure tactics are always improper, no matter what is being sold.

ADDITIONAL SOURCES: Shulchan Arukh Choshen Mishpat chapters 227, 228.

Send your queries about ethics in the workplace to jewishethicist@aish.com

The Jewish Ethicist presents some general principles of Jewish law. For specific questions and direct application, please consult a qualified Rabbi.

The Jewish Ethicist is a joint project of Aish.com and the Center for Business Ethics, Jerusalem College of Technology. To find out more about business ethics and Jewish values for the workplace, visit the JCT Center for Business Ethics website at www.besr.org.

JCT Center For Business Ethics

Copyright © JCT Center for Business Ethics.

Published: April 27, 2002


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Visitor Comments: 2

(2) Lyle Stanley, May 1, 2002 12:00 AM

good article - poor title

Since I am aware that articles written for the print media are not often entitled by the authors of those pieces I can understand why there might be such a discomnnect in the title and the piece itself. Generally the piece is well written and thought out, covering the various halakhot involved in such business dealings. The author fails, however, to point out the service that insurance products of this sort provide. One gets the feeling that while such products are permissible to sell, at not too high a price, they are more the the "worriers" amongst us. In essence, it would seem, unless we're prone to some unwarrented fear, we should not purchase these products.

Insurance is a pool which pays out when there is a event (breakdown, injury, death, theft, accident, etc) that triggers the provisions for a claim under the agreement. Participation in such pools are priced, as intimated by the author, in a "ballpark", to use his term. That ballpark is set by the market, a nebulous term to most people, but a very defined one for those trained in economics. Markets are generally very savvy and prices are subject to the laws of supply and demand except where markets are tampered with as in the case of government intervention or criminal activity.

Insurance is an often maligned industry. This is so because those who are ignorant of economics don't very often get to see the "service" side of the industry, that is, receive payment on a claim. Many people have come to think of insurance payouts as something akin to winning a lottery. Well, you might ask, doesn't that prove the authors point? Since most people who buy insurance don't get to collect, isn't that product a unnecessary expense? The short answer is, it depends. Some people are fully well informed and are comfortable with risk. Others are merely stingy and try to get something for nothing. How? Well when they've suffered a loss and are upset that they didn't buy the warrenty the unethical amongst them resort to hystrionics and threats against the dealers and manufacturers. They are all too often goaded into such behavior by authors and media outlets trying to sell information on how to "stretch-a-buck" to thrift minded audiences. By making a stink, they effectively circumvent the need to join the pool. As a last resort these people will often run to government for "redress" when in fact they could have protected themselves by participation in the pool.

Insurance companies typically payout large percentages of collected premiums. Life insurance, for example, is so competitive that payouts approach 98% of collected premiums for some companies. These firms make money, not on premiums, but on the investment income they make while holding such funds. Funds collected thereby, and the insurance trusts are quite large, provide a secondary benefit to society, helping the economy through capital formation - making money available for all sorts of things from building homes and schools to erecting factories and paying employee salaries.

But make no mistake, the real benefit of insuarnce and warrenties is their free market, non-coercive approach to meeting the needs of their customers. Individuals who may know they are poor savers will not only feel more comfortable about their purchase but our economy runs more smoothly because of the availabilty of this sequestered monies. When the uninsured amongst us suffer a loss and are without the means to cover the expense, too often society must pay at many levels; such dislocations ripple through society. I have seen people, who failed to provide for themselves and their families, spiral into crushing debt and misery. Yes, we have social agencies that are supposed to help those who have a run of bad mazel but wouldn't it have been better for everyone if they had just chosen to do the less risky thing and participated in the pool. Insurance and warrenties are voluntary, non-coercive, free market ways to meet the needs of their customers. Non-coercion and reponsibility are Torah values.

(1) Anonymous, April 30, 2002 12:00 AM

Praise and appreciation.

These columns are excellently written and are very useful. Thank you.

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