National Warranty Insurance Co., a large independent insurer of vehicle service contracts, has obtained legal protection against creditors.
The Lincoln, Neb., company, also known as NWIC, has underwritten as many as 35,000 contracts a month for about 5,000 dealers, competitors and distributors say.
Rex Moats, an attorney representing the company, says NWIC still is in business and continues to pay claims.
But Bruce Ramge, Nebraska's chief of insurance market regulation, says the Nebraska Department of Insurance has received complaints from consumers, dealers and four other state insurance regulators alleging that the company has stopped paying claims.
Unaudited financial records filed with the Nebraska Department of Insurance show NWIC posted a net loss of $4.7 million in 2002 and a net loss of $53,184 in the first quarter of 2003.
The records say NWIC has $7.8 million in capital to pay claims but is engaged in a dispute with another company that NWIC says was supposed to assume the liability for some claims.
"That dispute is not reflected in the numbers," says David Krumm, chief examiner for the Nebraska Department of Insurance. "Theoretically, they should have enough to pay claims, but we have no way of knowing they do."
Moats says a court order, issued June 6, protects NWIC from legal action and allows it to stay in business while it resolves the dispute with the company that he says defaulted on obligations to pay claims. He would not identify the company.
The joint provisional liquidation was approved by the Grand Court of the Cayman Islands, where NWIC is incorporated, and is similar to filing for Chapter 11 reorganization under the U.S. Bankruptcy Code.
"We're just trying to catch our breath," Moats says.
This year, NWIC was rated A- ("excellent") by A.M. Best, an Oldwick, N.J., company that rates the financial strength of insurance companies. But the rating was downgraded three times since March and slipped to C- ("weak") last week.
A.M. Best said it's not certain whether NWIC has set aside enough money to pay future claims because of a dispute over financial obligations, adding that it had particularly high losses on service contracts for vehicles with more than 80,000 miles.