The collapse of National Warranty Insurance Group raises new questions for consumers about the reliability of extended warranties, a big business with limited regulation.
By BENITA D. NEWTON
Published October 12, 2003
Having three major car repairs within a month is just plain bad luck. But Lisa Deptula of Odessa didn't sweat it because she had spent $2,500 for insurance against such misfortune.
When she showed her Warranty Gold contract to her repairman at the end of July, however, she found her luck had run out. The company that bills itself as "the No. 1 online marketer of affordable extended warranties for your car, truck or sport utility vehicle" was no longer paying repair bills as promised for thousands of vehicle owners.
By the end of August, Lisa and her husband were out $2,250 in repairs for their 1999 Daewoo Leganza and 2000 Ford Windstar.
"They basically said, "That's too bad. If and when this gets straightened out, you might get your money back,' " Deptula said. "We weren't taking any more chances. We traded both cars in."
The mess Warranty Gold says it's trying to straighten out was the collapse in June of National Warranty Insurance Group, a company in the Cayman Islands with U.S. headquarters in Nebraska. Over 20 years, National Warranty, which is now in liquidation, has insured up to 1-million warranties through about a dozen warranty companies, including Warranty Gold of Austin, Texas. Analyst company A.M. Best estimated that unpaid claims by National Warranty could exceed $60-million.
The case raises new questions for consumers about the reliability of extended warranties, a big business with limited regulation. The $10-billion auto service warranty industry sells more than 8.7-million contracts a year, according to Universal Underwriters Group.
Consumer advocates say to check carefully before buying an auto warranty that doesn't come directly from the vehicle's manufacturer. Some say to stay away from such policies altogether.
Warranty Gold, which has sold more than 65,000 warranties since 1996, says it, too, was a victim of National Warranty's collapse.
"We're talking about a company that has been in business for 20 years," Warranty Gold general manager Kurt Nelson said. "In March, they were given an A- rating by A.M. Best. All of a sudden, 60 days later, they're in liquidation. We just think that's very unusual."
On June 9, two days after Warranty Gold learned National Warranty was headed for liquidation, it switched to a different insurer and went right on selling policies. (The company says it's not selling currently in Florida, though, until the company confirms that its new insurance administrator meets the state's standards.)
Warranty Gold manager Nelson said it has raised prices by 25 to 30 percent to put more into reserves. Warranty Gold's Web site tells new buyers that it now insures policies through two separate administrators to guarantee claims.
"The warranty is only as good as the financial status of the company that issues it," the marketer's Web site assures new customers. "Warranty Gold doesn't gamble with our customer's money."
That's little solace for Warranty Gold's past customers. The company has just begun informing those customers that their warranties aren't still as good as gold. "In hindsight," Nelson said, "we should have done a better job of communicating to our consumers."
Its advice to them now: Hold the policies, file the claims for necessary repairs and hope to be reimbursed. Or cancel the policies and wait for a prorated refund if funds held by National Warranty become available through the courts.
But paying for an expensive fix-it job is not an option for everyone. When a bad oil pump led to engine failure and a $5,000 repair bill for Frank Pirillo's 2000 Bonneville, the Lakeland resident left it sitting it at the dealership.
"This is after I paid for a $1,000 repair a week earlier with the hopes of one day getting reimbursed," said Pirillo, who spent $1,354 for a seven-year, 100,000-mile Warranty Gold contract in July 2000. "I will not pay upfront on this repair."
Warranty Gold recently started a Web site, www.WarrantyNews.com to state its case. The company maintains its lawyers are fighting hard to get back as much of its customers' money as possible.
"We're working diligently every day to get a portion of those funds to make sure our customers will be taken care of," Nelson said. "But at this point, we just honestly don't know."
While a judge in the Cayman Islands released an undisclosed amount from a National Warranty escrow account in a Sept. 5 ruling, Nelson said that money is still tied up.
Las Vegas lawyer Robert Gerard has filed a class action lawsuit against a number of organizations that were connected with National Warranty, including A.M. Best, legal and financial services company KPMG and international accounting firm Deloitte Touche and Tohmatsu. Gerard said he thinks National Warranty has $75-million in reserves, enough money to honor the pending contracts. Gerard said more than 600 warranty holders have contacted him about the lawsuit. Warranty Gold is not named as a defendant in the suit.
As the legal maneuvering drags on, those who feel duped or abandoned by Warranty Gold are flooding automotive Web sites with complaints. Since June 6, there have been more than 450 messages posted to the Warranty Gold discussion board at Edmunds.com, an automotive information Web site.
Those who are posting messages commiserate about their plight and share stories about how little progress they made in complaining to the company, regulators and consumer groups. One frustrated participant wrote: "If anyone is ever ever ever considering a third party warranty again, please call your shrink and get some meds. NO OFFENSE! I will never get one again."
Not all of the Warranty Gold's old customers are that disillusioned with extended warranties or with the company.
Steve Miller of Madeira Beach, a retired computer analyst, was so pleased with the service he got from the five-year warranty he bought for his 1996 Chrysler convertible that he paid $1,428 for another three years with Warranty Gold.
"I collected way more from the first warranty than I paid for it," Miller said. "When I bought the second one, I asked the salesman if they were making any money on the things."
Now that he's waiting to be reimbursed for an $800 oil leak repair, he's trying to be understanding.
"Although the contracts read as though Warranty Gold is responsible for my warranty, I don't think they're an evil company," Miller said. "They simply don't have the money because they gave it to these other guys. I don't want to see them go out of business, but I will do what I can to get my money back."
J. Robert Hunter's advice for buying extended auto warranties: Don't.
The director of insurance for the Consumer Federation of America said the industry is not well-regulated, and there's not enough solid data available to judge the strength of the warranty companies.
"It's too hard to tell the good ones from the bad ones," said Hunter, who recommends simply saving money to pay for unexpected repairs. "It's just sort of a big mess."
Automotive Web site Edmunds.com recommends checking the reliability record of a car before buying it, then considering a manufacturer's warranty first, if one is available, even though extended warranties backed by major automakers are usually more expensive.
The site advises consumers to check the financial strength of third-party warranties through analysts such as A.M. Best or Standard & Poor. But A.M. Best awarded one of its highest ratings to National Warranty Insurance Group only months before that leading backer of extended warranties went into liquidation.
- BENITA D. NEWTON[Last modified October 12, 2003, 01:18:30]
