Maybe I'm a bit simplistic but it seems to me that an extended warranty from an outside insurer protects against two basic risks: One is the likelihood that the contractor will be out of business at some point down the road and won't be there to take care of the customer.

Another risk is that the contractor won't be financially able to take care of the customer.

I suppose an argument could also be made that warranties could be seen by bean counters as a liability if a contractor were to sell his business.

If I'm on the right track, then let's examine each of these ideas.

What about the "out of business" scenario. The most common reason for business failure is lack of profits. If a contractor is responsible enough to provide excellent materials and workmanship and savvy enough to profit by doing so then it's unlikely he'd need warranty coverage from an outside source, regardless of the length of the warranty. Any way you slice it, a savvy contractor would be profiting from the increased value of the longer warranty. How else could he justify offering it?

What about the "can't afford to take care of the warranty" scenario? First of all, if anyone's margins are that slim, please get out of the business so someone who cares about customer service can take over.

Let's say you're spending $50 to give a few extra years warranty coverage on a water heater. The warranty company knows the odds of having to pay out on that warranty and they have hardly any control over the quality of workmanship, quality of materials or even the truthfulness of the claims made against them. Yet, they figure they can make money off that $50 when facing that level of risk. Don't you think the odds are more in your favor since you have control over the quality of the installation? Keep your money and you're ahead of the game.

Let's take this a step further: I've often said the best warranty is the one you never have to use. Instead of sending money to some paper shuffler, why not spend a little more on the quality of the installation? Make sure the parts are the best and make sure the workmanship is top tier. This actually gives your customer a better value in the long run.

Of course, you need to charge accordingly. A good place to start would be the amount you'd be charging for the extra warranty anyway. The best part of this is that you would be doing this on every job, not just the ones where customers wanted the longer warranty. This means you're spreading your risk even thinner than the insurer does.

So, what about warranties as a liability in the event of a sale? For one thing, any buyer with any savvy would know that these longer warranties mean better customers. That should make your business worth more, not less. Let's say the buyer plays hardball. So what if it reduces the selling price a bit. Its doubtful the reduction would be nearly as much as what you collected in profits while you had the business. If you were sending money to an insurer, that's money gone bye bye, no matter how you look at it.

By the way, let's say you get to collect on an insured job. It's doubtful you'll collect enough to make you happy and it's almost assured that you won't collect as much as you've sent in. Remember, those guys in the extended warranty business aren't there for charity.