Biggest Concern about Auto Extended Warranties

The most worrisome issue about auto extended warranty contracts is the possibility that the company will go out of business leaving you with a worthless contract. This is why Clark Howard (nationally renowned consumer advocate) recommends against any contract other than one from the manufacturer or from your car's insurance company (like Geico). He's usually against all extended warranties but is neutral on auto extended warranties due to the fact some people may not be able to afford a costly repair.

Warranty Direct's Insurer Strength

The auto extended warranty companies try to ease our concern over this by advertising that their plans are insured and reinsured by financially strong insurance companies. For example Warranty Direct says all of its contracts are insured by National Service Contract Insurance Company (this is based on an email they sent me in response to my insurance question.) It claims that this company has a financial stability rating of A (exceptional).

I did a check at A.M. Best on this company. Currently this company (National Service Contract Ins Co RPG) has a NR-4 rating which took effect on April 1, 2004. NR-4 means that the company has requested a non-rating. This non-rating seems to be a way for companies to hide their true rating. A.M. Best had a press release dated December 23, 2003 which stated:

A.M. Best Co. has downgraded the financial strength rating to B++ (Very Good) from A- (Excellent) of National Service Contract, RRG (NSC) (Honolulu, Hawaii).

Warranty Direct says its contracts are reinsured with Hannover Reinsurance Ltd., (A Excellent rating). The current A.M. Best rating seems to corroborate this. I've heard stories about Warranty Gold having a reinsurer with good financial strength, and this proved not to help when Warranty Gold's insurer went out of business.

1SourceAutoWarranty Insurer Strength

I also checked on the insurance status of another popular auto extended warranty provider, 1SourceAutoWarranty. At least Warranty Direct responded to my email question (in less than a day). I never received a response from 1SourceAutoWarranty regarding its insurance. The site carbuyingtips.com claims 1SourceAutoWarranty is insured by PrimeGuard, Inc. A.M. Best has a NR-1 rating on this company. This is a non-rating based on insufficient data. It's interesting that carbuyingtips.com doesn't discuss these issues in its review of 1SourceAutoWarranty or Warranty Direct. Since it's an affiliate with these companies, there's no incentive to say anything bad.

Auto Extended Warranty Plans from Manufacturers

Another interest claim I read was from sites that are advertising auto extended warranties from the auto manufacturers. The claim is as follows:

The 10 leading independent providers 10 years ago are all out of business today. That means a large number of customers who had valid claims were not paid or received only partial reimbursement.

I wonder where they got this from. Of course these sites have a bias to make the independent auto extended warranty providers look bad. Searching for this quote led me to the following sites:

• Honda Care Extended Warranty
• Ford Extended Warranty
• Subaru Extended Service Plans

All of the above sites offer extended warrany plans backed by the manufacturer. These are probably more expensive the what you could get at independent providers, but you know they'll be around when you need them.