Editorial: Customers deserve protection

 No comments  
 E-mail Story
 Print Story
  Share

 digg it!
 Facebook
 del.icio.us
Seed Newsvine
Fark It
Reddit

Text Size: 

Tools Sponsor

Last year thousands of auto service contracts that cost millions of dollars turned out to be worthless.

Motorists all across the United States often didn't know they weren't protected until their vehicles were in the shop. And some still don't know. They won't until they try to use that valueless policy they're carrying around in the glove compartment.

A major part of the problem is a misuse of a formerly obscure business concept known as a risk retention group by a Lincoln company known as National Warranty Insurance Group.

Congress needs to tighten federal law on the groups to protect consumers.

As originally envisioned, a risk retention group would spread liability among members of the group. Scaffolding companies or feed manufacturers might join together to protect themselves against lawsuits.

The groups provided a cheaper alternative to regular insurance coverage.

But National Warranty Insurance Group took the concept a step further.

Its members used it to sell a product to consumers.

Requirements on the amount of capital or financial backing for risk retention groups were lower than for regular insurance coverage. And they weren't covered by state insurance guaranty funds.

As Journal Star reporter Dick Piersol has recounted in ongoing coverage of the collapse of National Warranty Insurance Group, the fall of National Warranty was a huge financial setback to some consumers.

Motorists who thought they had taken precautions to protect themselves against hefty repair bills instead found themselves facing a financial double whammy. They were out the thousands they had paid for the service contracts. And they still had to pay their auto repair bills.

In the case of National Warranty, oversight was particularly ineffective because it was domiciled in the Caymans. That option is not available to new risk retention groups.

But regulatory oversight by the states also is spotty and inadequate.

Meanwhile, the number of risk retention groups is soaring. Last year alone the number of groups almost doubled. Fifty-eight new groups were formed, according to industry figures, bringing the total of active groups to 141.

The risk retention groups arguably fill a need by protecting members who know the risks they are taking, and will protect themselves by ensuring that the group has adequate reserves.

But when group members start selling coverage, such as auto service contracts, to unwary consumers, then a line has been crossed.

That's not what Congress intended when it passed the Liability Risk Retention Act back in the mid-1980s.

As recounted in the special report "Breakdown" in last Sunday's Journal Star, National Warranty was not even close to maintaining enough surplus to cover repair claims. Its ratio of net premiums to capital and surplus went from 2 to 1 in 1997 to just less than 4 to 1 in 1999 to 5 to 1 in 2000 and 6 to 1 in 2001.

By June of last year National Warranty had collapsed. Its assets were being liquidated under court supervision.

One scandal such as this ought to be enough to make clear that new federal safeguards are needed.

The role of risk retention groups should be limited to the original concept. Unwary consumers deserve better protection.

Congress should not allow this fiasco to happen again.