Dealers, agents and finance companies could be on the hook for an expected $48 million in claims with the recent demise of the Ohio-based Ultimate Warranty Corp.
South Carolina regulators – which discovered in October the company only had a reported $15,000 in its loss reserve fund to cover some 137,000 warranties sold to people across the United States and Canada – confirmed the company is no longer active.
“We’re using the company’s systems to be able to respond to consumers’ inquiries, and informing consumers and repair shops that we can’t cut checks, but we can control the cost of claims in doing what is covered under service contracts,” explained Doug Hartz, deputy receiver of the South Carolina Department of Insurance (Department). “Consumers should know whether their claims are within the terms of coverage or not. Some consumers will call and find out that either their repair is not covered or their service contract is expired. We’re trying to administer aid in accordance to the terms of the service contracts to the greatest extent that is possible.”
The case is being handled by the South Carolina Department of Insurance because Ultimate Warranty’s insurer, Capital Assurance Risk Retention Group (CARRG), is based in that state.
Hartz said Ultimate Warranty’s situation became known during a routine check in late September of the company's loss reserve fund. The company then filed a claim with CARRG on Oct. 2 to cover sold warranties, some of which run into 2017.
In a release, regulators stated that the order of receivership was entered “because the financial condition of Ultimate Warranty Corporation, CARRG’s primary owner-member, has impacted CARRG such that any future transaction of their business would be hazardous to CARRG’s policyholders and the public.”
Capital Assurance’s projected claims liability was estimated to be less than $2 million, but since the policy states that CARRG pays claims in the event Ultimate Warranty is unable to, the department placed the group in receivership.
Regulators are currently sending letters to dealers, agents, master agents and management companies who have unexpired service contracts sold by Ultimate Warranty, alerting them of the situation and looking for information about what kind of arrangements each can make to fund the sold service contracts.
In a letter, regulators warned: “A current estimate of the cost of paying all of Ultimate's warranty repair claims is over $48 million; and, if the contracts were cancelled, the liability would be over $100 million, much of which would be paid by you or charged back to you, the dealers and agents involved in the original placement of the contracts.”
Hartz said dealers should be held responsible since they earn commissions of one-tenth to more than half of every premium they sell. The bulk of Ultimate Warranty’s business is used-car extended warranties, which cost up to $2,000.
Ultimate Warranty was banned from doing business in several states, but ignored those prohibitions and continued operation. One such state was Minnesota, which denied the company a license for lack of adequate capital.
More than 1,800 dealers could be impacted by Ultimate Warranty’s demise, although a majority of those service contracts are set to expire in the next three to four years. Some 10-year service contracts were issued as late as 2007, however.
“We’ll make some report to the receivership court around late January on whether we believe some type of restructuring plan can really be affected here,” said Hartz. “The plan would entail dealers, agents and master agents committed to getting consumers’ repairs done and paid for.”