According to the limited warranty, “Microsoft warrants that the Microsoft Product will not malfunction due to a defect in materials or workmanship under Normal Use Conditions." To clarify, the limited warranty only covers manufacturing defects, not accidental damage or other forms of damage. So, if you drop the console or spill water on it, the limited warranty becomes void, and you’ll have to pay for the repairs out of pocket.
The limited warranty’s fine print also lays out what happens after you submit a claim. It says, “Microsoft will (at its option) repair or replace it or the defective part, or refund the purchase price in exchange for the return of the Microsoft Product.” It also states that the repair may use refurbished parts from a similar model.