A Nebraska administrative ruling designed to protect dealers and consumers from shaky insurers could prompt some service plan providers to leave the state.
The Nebraska Department of Insurance has published a notice requiring vehicle service contracts to be backed by a licensed insurer with so-called "first-dollar" coverage with its reinsurance companies.
Some expect the Nebraska rule to spread to other states.
Nebraska's reinterpretation of state law aims to bring stability after the collapse of National Warranty Insurance Co., of Lincoln, Neb., last year. It would end a common insurance arrangement that can stick dealers with claims if the insurance company fails to set aside enough money to cover losses.
Dollar-one coverage begins after the insurer is unable to pay claims. If National Warranty would have had dollar-one coverage with its reinsurance companies, the claims would continue to be paid.
"We could live with the dollar-one coverage," says Jim Smith, president of Southwest Reinsure Inc., of Albuquerque, N.M., which sets up service contract plans for dealers. "But there will be a higher cost of operation."
Luis Nieves, president of service contract provider AUL Corp., of Napa, Calif., thinks the notice will drive some programs out of Nebraska. "This will require a substantially different financial relationship between insurer and administrator that currently exists within the majority of the industry."
National Warranty, which did not have first-dollar coverage, is in liquidation proceedings. Many of the 5,000 dealers nationwide who sold contracts backed by National Warranty were stuck with claims the insurer refused to pay when it ran into trouble.
National Warranty, once one of the industry's largest independent service contract insurers, offered what is known as "stop-loss" coverage. The coverage kicked in only after its losses reached a set level.
National Warranty got into trouble in the 1990s. As contract volume began to rise rapidly, the insurer could not keep up with incoming claims.
Ann Frohman, an attorney for the Nebraska Department of Insurance, says she thinks other states will take the same approach to prevent insurance disasters.
Says Frohman: "We don't want the dealer or the administrator to bear the risk."