St. Louis Post-Dispatch, Savvy Consumer > Matthew Hathaway column: Auto service coverage continues if marketer fails; refunds might not [St. Louis Post-Dispatch]

Dec. 19--Consumers who have bought extended auto service contracts from US Fidelis might have been alarmed to learn this week that one of the biggest players in the so-called "extended warranty" industry has hit a rough patch.

US Fidelis says sales are down and cancellations are way up. After this week's mass layoffs, the Wentzville-based company that boasted 1,100 employees in April has shrunk to fewer than 500. (We don't know how many fewer, because the company won't say how many people still work there.)

US Fidelis has tried to reassure its customers that its financial woes won't affect the coverage provided to its 300,000 customers. Some consumers, however, might be skeptical. And they might be wondering what happens if the company's problems worsen.

It's not just US Fidelis customers that need to know. Several service contract sellers have been targeted in lawsuits and government investigations; Missouri Attorney General Chris Koster said his office plans to step up its efforts.

So, with that in mind, let's review a contract holder's exposure if the company that sold the product -- called a contract marketer -- goes south.

Coverage should be unaffected. That's because the marketer isn't the firm that's supposed to pay out claims. That firm -- called the contract administrator -- is a separate company, and it's supposed to be stable, secure and built to last.

Administrators still fail from time to time, but it's rare. And even then, there's usually a safeguard.

That's because most states require administrators to prove that they can pay out claims. One form of proof is insurance, and most administrators carry a lot of it.

Sometimes, however, administrators and their insurance underwriter both fail -- as about 140,000 consumers learned the hard way in 2007, when an Ohio administrator called Ultimate Warranty bit the dust.

Sometimes, a failing administrator can bring down the marketers that sell their products. That happened in 2003 to Consumer Automotive Consultants -- a St. Louis marketer, and a pioneer in the big business of selling of service contracts -- after one of its administrators and the administrator's insurer folded.

In a statement released this week, US Fidelis said customers' "vehicle service contracts are not affected by US Fidelis' staffing adjustments."

Those contracts, the company statement said, are underwritten by "high-quality administration companies and top-rated insurance companies we represent."

And, the statement continued, US Fidelis customers "still have the same coverage and the same rights to have vehicle service claims paid."

The company's reassurances are completely true, but they aren't the whole truth.

Remember how US Fidelis said cancellations are increasing? That's important because consumers who cancel often have a right to get some of their money refunded.

Consumers cancel all the time. Sometimes it's because they're unhappy with their coverage, but often it's because they plan to sell the covered vehicle or the car is repossessed, totaled or stops working.

It's normal for even the best-run marketers to have cancellation rates as high as 18 percent, said Bill Rosenbach of Moscow Mills, who once ran a subsidiary of US Fidelis and now works as a consultant for service contract marketers. At companies that rely on misleading sales tactics, more than a quarter of their customers end up canceling coverage, he said.

When those customers cancel, they're entitled to a pro-rated refund of the unused part of the service contract. Customers who have driven only half the maximum miles over half of the calendar life of the protection, for instance, are entitled to a refund of half of what they paid for the contract.

Most of that refund is paid by the service contract marketer. And, if that company declares bankruptcy or shuts down, consumers could have a problem collecting what they're owed, said Michelle Corey, president of the St. Louis Better Business Bureau.

Consumer Automotive, the St. Louis company that eventually was pulled down by its failing administrator, left behind a lot of unhappy customers. Not only were their service contracts worthless, but most customers who tried to cancel found that they couldn't get any of their money back.

Corey said that Consumer Automotive initially indicated that they'd pay refunds, "but they didn't keep up with that." After the company declared bankruptcy, those promises went out the window.

As a result, consumers who are considering canceling their service contracts anyway ought to act quickly to get money from the marketer. "Especially if they suspect that company is not financially stable," Corey said.

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