Whatever good image Phyllis Hoffman had of the insurance industry has evaporated, like the puddles of water she found last May beneath her used pickup truck. It was the water that triggered her anger and a lawsuit, filed on behalf of Hoffman and other plaintiffs in a class-action lawsuit aimed at recovering millions of dollars from financially troubled National Warranty Insurance Co., of Lincoln, Neb., according to the Omaha World-Herald.

Hoffman, of Las Vegas, especially doesn't care for National Warranty, a company with headquarters in Lincoln but which is incorporated in the Cayman Islands, according to the World-Herald story by John Taylor. The group of three islands in the Caribbean traditionally has served as a tax haven for American corporations.

National Warranty's affairs currently are in the hands of "joint official liquidators" in the Caymans, appointed to preside over what is now a disposition of the company's assets, the World-Herald said.

Hoffman is among hundreds of thousands of people -- perhaps up to a million -- who hold vehicle service contracts that were insured by National Warranty. Some, like Hoffman, haven't been able to collect on their claims. Others may not be able to collect if their vehicles develop mechanical problems which were supposed to be covered by the contracts, the World-Herald said.

In August, the liquidators declared National Warranty insolvent. They are now trying to determine not only how to apportion the company's assets to creditors, but to identify the creditors.

Because the company was one of the first in the United States to be incorporated outside the country under a Reagan-era 1981 federal law, it has escaped regulation by the Nebraska Department of Insurance, as well as other states' insurance departments, according to Taylor's story in the World-Herald. Spokeswomen for the Nebraska department said the agency doesn't have the names of the company's officers or directors on file.

Meanwhile, there are indications that those who hold -- and have paid for -- the service contracts aren't likely to receive much, if anything, from the company. Their best chance may be to go after companies and dealers that sold the service contracts that were insured by National Warranty, according to a spokesman for the liquidators. So National Warranty has, in effect, left dealers holding the bag.

The reason has not only to do with the fact that liquidators have said the company's liabilities may exceed its assets by more than $100 million, but also with the confusing way in which vehicle service contracts are sold, administered and insured, according to the World-Herald.

The company is no longer taking on new business or paying any claims, and the remaining employees -- fewer than 100 -- are simply taking calls from irate customers and others, the World-Herald said.

One of those irate customers is Hoffman, and her experience may be typical of that of many vehicle service contract buyers, according to the paper.

On Sept. 15, 2001, Hoffman purchased a 1998 Chevrolet Silverado pickup truck from a Las Vegas dealer. Because of the vehicle's age, she also bought a service contract under a program called Smart Choice, covering repairs for such items as the water pump, oil pan, transmission and other key components.

She paid $1,500 for a 72-month warranty.

One day last May she drove her pickup to work and, she said, noticed there was "a lot of liquid that came out of it."

On May 19, she took the vehicle to a Chevrolet dealer, who told her the water pump and some other items needed repairing. The repair bill was about $1,000.

"We told them to go ahead and fix it, knowing the warranty would cover fixing it, and a rental car and towing," she told the World-Herald from Las Vegas.

When she called three days later the dealer said the vehicle had been repaired but that he hand't been paid by Smart Choice. Hoffman couldn't pick up the vehicle until the bill was paid, the dealer said. Smart Choice, the dealer told her, was involved in some kind of legal trouble.

"This continued at least a couple of weeks," Hoffman said. "We were paying for a rental car over the Memorial Day holiday, which was more expensive."

Hoffman finally gave up, paying the bill to recover her vehicle. "But the more I thought about it, the more I thought this was wrong," she told the World-Herald. "We're buying a warranty and we're still paying for it because it was included in the financing of our truck. They weren't holding up their end of the bargain."

She sought legal help and found it at a Las Vegas law firm, which on Aug. 1 filed a lawsuit on behalf of Hoffman and other motorists who were faced with the same situation.

Robert Gerard, one of her attorneys, told the World-Herald, "There could be a million policyholders out there with similar policies." Based on documents filed in the Cayman Islands and in United States Bankruptcy Court in Nebraska, damaged could exceed $150 million, according to Gerard.

The class-action lawsuit and other documents filed during the liquidation process have brought attention to a formerly obscure Nebraska company headed by Donald Erway of Lincoln, a past employee of the Nebraska Department of Insurance.

Erway, who is still chairman of National Warranty Insurance Co., did not return phone calls made by the World-Herald to his Lincoln home, according to the newspaper.

The company Erway created may contain the word "insurance" in its title, but it is not an insurance company, according to a report by the liquidators. It is a "risk retention group," created by a 1981 federal law, and was permitted to issue policies only to its members.

In National Warranty's case, the members, for the most part, were about 580 marketing companies that sold vehicle service contracts to more than 5,000 car dealers. The comnpany was registered to do business in 49 states, according to the World-Herald.

Since 1984, National Warranty has insured about $880 million worth of business, according to Barry Lake, former president, in a deposition given as part of the class-action lawsuit.

About 40 percent of the contracts were written through Delta Group, which isn't a company but sximply the name of a number of different companies, some of which were members of National Warranty's risk retention group, the World-Herald reported.

The dispute arose late last year, the liquidators said in a July 16 report, when National Warranty "anticipated it was not going to be able to meet all of its liabilities in connection with the (service contracts) that had been written by the Delta Group companies."

In an Aug. 19 ruling in U.S. Bankruptcy Court, Judge Timothy Mahoney wrote: "The disputes became so significant that certain members/marketing groups refused to allow their reserve accounts to be used to pay claims, and National Warranty determined that its reserve accounts were insufficient to permit it to pay claims for which it was directly liable."

After that determination, National Warranty filed a document in the Cayman Islands that was similar to a Chapter 11 bankruptcy case in the United States. The company was later declared insolvent, and it's now up to the Cayman liquidators to allocate its assets, according to the World-Herald.

The company also has contracts for reinsurance, but it is not clear how far that will go in satisfying creditors, the World-Herald said. "There is plenty of money out there," Gerard told the World-Herald. "Assuming that the money is available to pay claims and reinsurance kicks in, there may be sufficient money for everyone to have their policies enforced."

Customers like Hoffman, though, may not be able to get much help directly from the Cayman Islands, according to the World-Herald.

Keith Blake, head of the corporate recovery department of the accounting firm KPMG in the Caymans, which is acting as a kind of trustee, was asked where consumers rank in the list of creditors. "There has been no final determination on that," he told the World-Herald. "But the current thinking is this: The end consumer, the person who bought the vehicle service contract, purchased that from either a dealer or an agent or a marketing company. The end user did not buy the contract from National Warranty. In terms of National Warranty's liabilities, the current thinking is there is no direct liability to the holder of these contracts. If someone has a vehicle service contract their first port of call really should be the dealer who sold it to them, or the agent who sold it to them."

Which, again, of course, leaves dealers holding the bag unless and until they are paid by National Warranty.

Both the Nebraska Department of Insurance and the Iowa Insurance Division have fielded complaints from contract buyers, according to the World-Herald. Ann Frohman, general counsel of the Nebraska department, said she and other agency officials met with National Warranty executives and threatened to get a court order shutting down the company. But officials in the Cayman Islands acted first, so that wasn't necessary, she said, according to the World-Herald.

The Iowa division said in July that most auto dealers are not doing repairs under the warranties and are requiring full payment by consumers.

There are some exceptions, according to the World-Herald. In an affidavit filed in bankruptcy court in Lincoln on Aug. 27, Sidney B. DeBoer, CEO of Lithia Motors, Inc., said that as of Aug. 25 his company had repaired 641 vehicles covered by Smart Choice service contracts. The cost of those repairs exceeded $267,000, according to DeBoer.

"No customer was required to pay the costs of repair, and we continue to be unreimbursed for those amounts," he said.

Lithia operates 77 dealerships in 12 states.

DeBoer's comments were made as part of a request that Judge Mahoney free about $52 million held in reserve accounts in the United States by dealer-owned reinsurance accounts. "We are entitled to payment from the reserve account," DeBoer said.

Earlier this month the judge released those funds, but what happens to them is still unclear.

Some dealers haven't escaped criticism, according to the World-Herald. "The commissions to the car dealers were unbelievable," Gerard said. "If you sold a policy for $1,500, the commission to the dealer could be as high as $1,000."