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Additive warranties big factor in Fidelis indictments

Cory Atkinson, left, and his brother Darain, former owners of U.S. Fidelis, have been indicted on multiple counts of stealing, unlawful merchandising practices, insurance fraud, and operating an unauthorized insurance business.

A large chunk of the criminal indictments against the owners of now-defunct extended service contract seller U.S. Fidelis of Wentzville, Mo., relate to so-called additive warranties, which prosecutors say are designed to circumvent insurance regulations.

Cory C. Atkinson, 41, and his brother Darain E. Atkinson, 46, were founders and co-owners of U.S. Fidelis. They sold the service contracts directly to consumers across the country until the company went bankrupt last year.

A grand jury in the Circuit Court of St. Charles County, Missouri, indicted the Atkinsons on June 10 with multiple counts of stealing, unlawful merchandising practices, insurance fraud, and operating an unauthorized insurance business. They are free on bail after surrendering their passports, according to court records.

Among other things, Missouri Attorney General Chris Koster said U.S. Fidelis kept refunds that were due consumers, charged fees in excess of the amount stated in the contract, told consumers they would get a pro rata refund if they canceled the contract even though the company intended to keep a portion of any refund, and misled consumers into thinking they were affiliated with automakers.

The Service Contract Industry Council, a trade group based in Tallahassee, Fla., that includes captive finance companies, automakers and extended-service contract vendors, is worried that examples like U.S. Fidelis will reflect badly on all extended-service contracts, including those sold by its members at dealerships.

Additive warranties are a particular pet peeve of the council, says its assistant executive director, Stephen McDaniel.

In the U.S. Fidelis indictments, several counts are related to additive warranties. According to prosecutors, additive warranties are a scam designed to exploit a loophole in insurance regulations.

The way it works, according to prosecutors, is that consumers buy what they think is an ordinary extended-service contract over the phone. In one U.S. Fidelis case cited this year in a report from the attorney general's office, a consumer paid $2,175. But she later learned that instead of an extended-service warranty, she had bought an additive warranty, according to the report.

Additives are usually some form of coolant to be added to a vehicle's engine oil or the radiator that supposedly extends the vehicle's life. The state cited one example, without specifying the vendor, in which the additive consisted of "small felt washers designed to be installed on battery posts."

Consumers are instructed to install the additive in order to activate the warranty — often without adequate warning that once they install the additive, they can no longer get a refund. That's because in order to get a refund, they have to return the unused additive.

Additive warranties are misleading in another way because they seek to escape state insurance regulations, according to state officials in Missouri and, in separate interviews, regulators in California.

Companies such as U.S. Fidelis, according to prosecutors, allegedly hide behind the fiction that in the case of additive warranties, they aren't selling extended-service contracts or insurance. Rather, prosecutors say, the companies claim to be selling a product. They use the ruse, prosecutors say, because companies that manufacture a product such as an additive are legally entitled to offer a product warranty. Product warranties aren't regulated as strictly as insurance is.

It's a relatively transparent scam, prosecutors say, since an engine-oil additive obviously does nothing to protect other systems covered by the "warranty." In addition, a legally genuine warranty is part of the cost of the product. A bona fide warranty comes with every unit; it's not sold separately, officials said.

The Missouri state attorney general's office said in a written statement that there are currently no indictments other than the ones against the Atkinsons, but prosecutors continue to investigate U.S. Fidelis and several similar companies in the state.

Nathan Garrett, a Kansas City attorney representing Darain Atkinson, declined to comment. Jeffrey Morris, an attorney representing Cory Atkinson, did not return a call asking for comment.

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