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Consumer Reports


National Warranty liquidation leaves customers without protection

http://www.jewishworldreview.com | (KRT) Like thousands across the country, JoAnn and David Hungness thought they were buying peace of mind when they bought extended service contracts for their two used cars.

The factory warranties on their cars were about to end.

Yet when the Round Lake Beach, Ill., couple recently submitted a claim to fix an oil leak, they were told the company underwriting the contracts - National Warranty Insurance Co. - was insolvent.

"Not only are we out the $2,880 (for the contracts), we're going to be out another $1,200 for the oil leak," says a frustrated JoAnn Hungness.

National Warranty's troubles mean that hundreds of thousands of U.S. consumers who hold its contracts can't get reimbursed for repairs on their autos or refunds while the company is being liquidated, a process that will take months.

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The underwriter is based in Lincoln, Neb., but incorporated in the Cayman Islands as a "risk retention group" that administers several brands of service contracts or extended warranties sold by auto dealers and over the Internet.

Among affected brands sold by dealers are SmartChoice, OmniCare and Encore. Manufacturer-backed warranties are not affected.

Accounting firm KPMG, which is handling the liquidation of the company, declined comment, but warnings about the privately held company's finances began surfacing last year, court documents show. That's when the company told warranty sellers it was paying out more for claims than it was collecting.

It filed for liquidation in late May.

Documents also estimate that National Warranty covered 950,000 existing service contracts and its underwriting losses this year were running between $58 million and $74 million before it pulled the plug. The Hungnesses had never heard of National Warranty, whose name appears in the fine print on service contracts, until their dealer told them their claim wouldn't be paid.

The couple bought their policy through an Austin, Texas, based company called Warranty Gold, which markets such contracts nationwide over the Internet.

The couple put $800 down on their warranties in February and was paying $200 per month. In July, they asked, and said they were told, they could pay off their balance.

JoAnn Hungness says Warranty Gold deposited their check July 28 without mentioning that it had stopped honoring warranties covered by National Warranty.

"They took my money anyway, fully knowing that none of my claims would be paid," she said. "That's criminal."

Kurt Nelson, Warranty Gold's general manager, says that should not have happened.

"That would seem highly unlikely. After June 8, when customers called, they were being informed of the situation," he said.

The Illinois Attorney General's office said it has received about a dozen complaints about National Warranty and the service contracts it administers but has not found any grounds for action.

"It's obviously an extremely complicated situation, and we're still working on it," said Gil Fergus, chief of the consumer fraud bureau.

Extended warranty contracts have grown increasingly popular in the last decade. Consumers bought such contracts on nearly 30 percent of new vehicles sold last year and more than one-third of used vehicles.

By law, though they are often referred to as "extended warranties," the policies are "service contracts" and not subject to federal regulation, said David Robertson, executive director of the Association of Finance and Insurance Professionals.

States can set financial regulations governing insurance companies, but Robertson said as a risk retention group, National Warranty is not a bona fide insurance company, and it falls beyond the purview of state insurance requirements, he said.

The distinctions, however, mean little to consumers.

David "Frankie" Cooper, a Chicago personal fitness trainer, said he'd just like to see Warranty Gold honor the contract it sold to him.

Cooper paid $1,200 last year for a three-year contract with "almost bumper-to-bumper coverage on his 1998 Hyundai Elantra wagon. But when his transmission began shifting sluggishly in July, he found out Warranty Gold wasn't paying claims.

Because he didn't have $1,100 for the repair, Cooper parked his car in front of his North Side house and started taking buses and trains.

"I just couldn't afford to get it fixed, so I don't drive," he said.

That was more than a month ago, and Cooper has yet to receive a notice from Warranty Gold.

"You would think they would send me some information. I only found out because I had a problem with my car," he said. "There are thousands of other people who won't find out unless something goes wrong with their car, and then they won't be able to get it fixed. They're leaving them in the lurch."

What really peeves Cooper is the second time he called Warranty Gold to complain, a sales representative pitched him to buy a new contract.

"He was ready, willing and able to sell me a new policy. I asked how can you do this when you know you can't make good on the ones they sold. Their credibility with me is zero," he said.

Warranty Gold's Nelson says the company hired a new underwriter and administrator that covers contracts issued since June 9. Claims are being paid on those contracts, but Nelson says Warranty Gold cannot pay claims on contracts issued before then until the liquidators release funds held by National Warranty.

He also said Warranty Gold didn't learn of National Warranty's financial plight until June 6, although a report from KPMG, the accounting firm handling the liquidation, says National Warranty warned Warranty Gold late in 2002 that it might not have enough money to cover its service contracts.

Nelson would not comment on the KPMG report Friday.

National Warranty was supposed to hold money in reserve to cover future claims from Warranty Gold and others companies, and Nelson says that money still exists, though he wouldn't say how much.

"The reserve funds are frozen right now, but our intention is to make our customers whole," Nelson said, adding that the reserves are for "tens of thousands" of contracts. "I'm positive that money exists. Warranty Gold will do everything in its power to make everyone whole."

Others doubt there is enough money to satisfy all of National Warranty's creditors. And Cooper, for one, doesn't expect to get any money back.

"I've written it off already," he says. "I've really soured on the whole idea of extended warranties. It is smarter to just put some money aside in case you need repairs."

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