Dealers could be held accountable for claims as state regulators try to protect consumers who bought service contracts from financially troubled National Warranty Insurance Co.
The insurer stopped paying claims in June after obtaining a Cayman Islands court order protecting it from creditors. National Warranty is incorporated in the Caymans.
Now some state regulators may try to force dealers to pay repair bills.
Some are advising consumers who bought contracts insured by National Warranty to check the fine print to see whether dealers are liable.
Even if dealers aren't legally responsible, states could insist that they cover claims because they sold the contract and profited from it.
"We would go back to the dealers and push them to pay claims," says April Findley, an insurance policy and compliance analyst in Washington state. "It looks like the dealers have stepped in and paid" when customers have made claims.
Regulators in seven states - California, Colorado, Idaho, Illinois, Iowa, Texas and West Virginia - have blocked National Warranty from doing business. Those states have either revoked the company's registration or listed the insurer as "inactive."
Fourteen more states are considering action against National Warranty.
Agents who sold contracts backed by National Warranty estimate that nearly 1 million contracts are outstanding.
Altogether, 27 states have received complaints or inquiries about the insurer. Most complaints have been concentrated in western states and in the Chicago area, where the contracts were marketed heavily.
Some state regulators have not acted because they say National Warranty is outside their jurisdiction. The insurer is headquartered in Lincoln, Neb.
Others say they have taken no action because the company has stopped writing contracts.
States also have been reluctant to act because of the Cayman Islands court order and the fact that National Warranty is seeking similar protection from a federal bankruptcy court in Omaha.
Meanwhile, dealers have been in limbo, in some cases eating repair bills and in other cases making customers pay.
Lawyers warn that dealers could assume responsibility for future claims if they pay repair bills when they aren't liable to do so under the warranty contract.
Keith Whann, a Dublin, Ohio, dealer attorney and former Ohio assistant attorney general, says dealers should take precautions when covering repairs.
Whann says they should ask customers to sign a form stating that the dealer is not paying the claim under a warranty or service contract.
Says Whann: "If they don't put this in writing, they may be creating an obligation."