Unclear rules on warranty services complicate Japanese insurance market
The distinction between warranty and insurance services in Japan is far from clear - but it can be crucial for players in the market to understand the issues around it.
When selling goods to a buyer (e.g. an iPhone, iPad or another electronic device), it is common for the seller to offer a warranty – a promise to repair or replace the goods if they are faulty. Recently in Japan, an increasing number of companies are offering warranty services. In particular, a large number of foreign warranty and (re)insurance companies seem interested in providing warranty services in Japan, believing they can use the substantial knowledge and experience they have built up in this field in their own countries.
A warranty operates in a similar way to insurance. However, although in Japan (and many other countries), a party cannot usually provide insurance services without a license, anybody can provide warranties, whether they have a license or not. That is why if you are interested in providing warranty services in Japan, the distinction between insurance and warranties is so important. Unfortunately, whilst the Financial Services Agency of the Japanese Government (the “JFSA”) has set out some rules on this point (described below), they are not easy to understand and the position is far from settled.
The Insurance Business Act (the “Act”) defines the term "Insurance Business" as the business of underwriting risks (which are also listed in the Act) with insurance. The Act says that as part of this insurance, premiums are received through contracts to compensate for damage arising in certain circumstances. Whilst compensation for damages is usually provided by the payment of insurance money, the Act does not preclude compensation being provided by the fixing or replacement of the goods. As a result, it appears that the provision of warranty services could be classified as an “Insurance Business” under the Act.
In the Comprehensive Guidelines for Supervision of Small Amount and Short Term Insurance Providers (the “Guidelines”), the JFSA sets out a rule for determining whether a business is an “Insurance Business”. In short, the rule states the JFSA will need to consider whether a business which offers services after an accident in return for premiums paid in advance is an “Insurance Business” by analysing five factors:
- the contract used to offer the relevant service
- the nature of the party providing the relevant service
- how the relevant service is offered
- whether the relevant service has ever been regarded as different to an insurance transaction
- the aims of the regulations under the Act.
This suggests that some warranty service providers may not be considered as an “Insurance Business” under the Act.
Responses to enquiries
The JSFA’s previous statements provide us with an additional source of information. The JFSA operates a No Action Letter System under which individuals and entities planning to introduce new products and services can make formal enquiries about the applicability of the laws and regulations. These are made public, as are the JFSA’s responses. Since 2009, six enquiries and responses in relation to warranty services and “Insurance Business” have been made. Whilst the responses are not binding on either the JSFA or a court, they are viewed as having substantial persuasive force.
Perhaps the most important JFSA response was in 2012, as it had a large impact on warranty services in Japan. The response said that a company which did not sell goods could not generally be a party to a warranty contract. Consequently, many warranty service providers felt it necessary to change their business operations. In a typical case, instead of the warranty provider, the seller of the goods becomes the party to the warranty contract, and as such it asks the provider to fix or replace the goods which were at fault. On the other hand, some companies believe that they could continue to offer warranty services as a contracting party provided that they set a limit on the maximum amount needed to fix or replace the goods.
These companies believed this because the JFSA’s response mentioned that some special circumstances could lead to exceptions where regulation is not required. Examples of these exceptions are the sums of money concerned and the personal and social relationship between parties; imposing a maximum limit could meet these criteria and qualify as an exception. Since the JFSA response has left this point extremely unclear, it is difficult to evaluate the strength of this argument.
In conclusion, a company looking to operate in this area must keep in mind that the distinction between warranties and insurance is far from settled and that the JFSA’s rules relating to the provision of warranty services are difficult to understand. If you are interested in providing warranty services in Japan, we would recommend that you consult with local experts.
Authors: Kosuke Inada and Michael Camilleri – lawyers at Chuo Sogo, part of the Globalaw legal network.
Kosuke Inada is a lawyer with special fields in (re)insurance and aviation. Michael Camilleri is a registered foreign lawyer and assists clients with a range of cross-border matters.
 The Japanese Ministry of Justice provides an unofficial translation of the Insurance Business Act at http://www.japaneselawtranslation.go.jp/law/detail/?id=2054&vm=04&re=02.
 Unfortunately, the JFSA does not provide a translated version of these guidelines. The Japanese version can be found here: http://www.fsa.go.jp/common/law/guide/syougaku/index.html.
 See Note (1), Part III-1-1 of the Guidelines.
 The No Action Letter system is described in more detail here: http://www.fsa.go.jp/en/refer/noact/index_menu.html#01a.
 Unfortunately, copies of the inquiries and the responses are only available in Japanese. A complete listing is available here: http://www.fsa.go.jp/common/noact/kaitou/index.html. The authors believe there have been many more enquiries made to the JFSA informally relating to this topic