A Good Auto Extended Warranty Company?

How can you tell if an automobile extended warranty business is a potential bankruptcy risk? As this article explains, it's not easy. The article looks back at previous bankruptcies of auto extended warranty companies. One of them was 1SourceAutoWarranty that I mentioned in my previous post. This was just one of three extended warranty administrators with the underwriter PrimeGuard Insurance Company Inc. The other administrators were First Assured Warranty Corp. and Warrantee Wise Inc. When PrimeGuard was shut down last December 21 by the Insurance Commissioner of the State of Hawaii, it also resulted in the shut down of these administrators. Customers of these companies are now left with worthless warranty policies.

One thing to be careful about are web advice sites like CarBuyingTips.com. You can see how this site endorsed 1SourceAutoWarranty before the collapse with the help of the Internet Archive. Here is an archived page from April 2005. It considered 1SourceAutoWarranty and Warranty Direct as two companies that will be there to cover your claims.

What concerned me last September was that PrimeGuard, Inc. was not rated by A.M. Best. But there was suppose to be a backup, the reinsurer. In the case of 1SourceAutoWarranty, the reinsurer was United Insurance which had a A- rating. My question is why didn't the reinsurer step in and cover the policies? One interesting thing about United Insurance is that their address is in the Cayman Islands. As the article mentions, this is not a good sign for an insurance company.

My present concern is with Warranty Direct because they are currently insured by a company that's not rated by A.M. Best (National Service Contract Ins Co RRG). An A.M. Best press release back in December of 2003 reports on the downgrade of rating. The effective date of the non-rating is April 1, 2004. After almost 2 years, why hasn't Warranty Direct acquired a new insurer?

Here's a quote from Warranty Direct's website:

In addition to our financial stability, all our extended warranties are insured. For even greater protection, they are reinsured by an "A' rated A.M. Best insurance company with over $1 billion in assets. Insurance provides peace of mind but most important is the financial stability of the administrator, as they pay for your vehicle repairs.

Note how it doesn't mention the name of their primary insurer nor their rating. It only mentions the reinsurer. But as we learned from 1SourceAutoWarranty, the reinsurer may be of little consequence.