National Warranty Insurance Bankrupt

Smart Choice Extended Warranties Sold to Millions in U.S.

More about ... Extended warranties

August 12, 2003
Hundreds of thousands of American motorists are holding worthless extended warranty policies following the bankruptcy of National Warranty Insurance Co.

The question now is what the dealers who sold them the Smart Choice extended warranties do when consumers seek service under the extended warranty. If they fix the vehicle, they will have to eat the cost; if they tell the consumer the warranty is worthless, they risk angering customers, setting off a public relations nightmare and possibly facing a rash of small claims court actions.

The Grand Court of the Cayman Islands declared the large insurer of independent service contracts for auto dealers insolvent earlier this month. The court decided that the company could not survive its financial troubles and that its assets should be liquidated.

According to court-appointed auditors, National Warranty has almost a million contracts outstanding. The auditors' report estimates that losses could exceed $100 million. National Warranty is based in Lincoln, Neb., but is incorporated in the Cayman Islands. The company insured vehicle service contracts sold through about 5,000 dealerships nationwide.

The company began offering the Smart Choice extended warranties in 1984. Sales recently were around 15,000 policies per month.

Coverages range from one to 10 years under the contracts, which cover repairs and parts for vehicles out of factory warranty. Dealers say they sell an average three- to five-year service contract for $800 to $1,500.

Exactly how the outstanding contracts will be resolved had been undecided since June 6, when National Warranty requested and obtained a Cayman Islands court order protecting it from creditors.

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