Auto Service Plan Promises Refunds, Then Goes Bankrupt
If you asked us, we would recommend that you not buy a third-party extended warranty for your car. If the main selling point for said warranty were that you would receive a full refund if you never filed a claim...we'd suspect that something might go wrong with this plan.
As it turns out, offering refunds to lowest-risk part of the risk pool is not a wise business strategy. (Otherwise, health insurance companies would refund your premiums if you didn't get sick.) While this may not be the direct cause, the company that offered this exciting deal, Automotive Professionals, Inc., filed for bankruptcy in 2007.
One upstate New York woman bought such a warranty for her Subaru Forester, and true to the terms of her contract, drove her car less than 85,000 during the period she was covered and never filed a claim. Her refund may be a long time coming, though, or never come at all, learned a reporter who tried to help her obtain her refund.
It is unlikely that [the customer] will get a full refund, and she probably will have a lot of company from other consumers across the country in this wait, said Frances Gecker, the Chicago attorney appointed as API's bankruptcy trustee. She said hundreds of thousands of the API service agreements were sold.
For the last two years, it has been Gecker's mission to liquidate the assets of API and litigate with the various insurers, dealerships, states and others holding funds that can be used to settle claims.
"There is now about $6 million in the estate, but I continue to litigate with parties that could increase that amount," she said Thursday.Until now, the bulk of the progress for consumers has been toward fulfilling vehicle repair claims under current contracts.
We suppose it's good that the focus has been on paying out claims, but let's hope that the company is also able to pay all of its creditors.
Service contract refund is stalled by bankruptcy case [Times Union]
API Chapter 11 Case Administration [Official Site]
Extended warranties: A high-priced gamble
(Photo: Cranky Media Guy)
Post a comment
Comments:
@GearheadGeek: But auto service plans can cover not just usual maintenance, but also repair in case of damage to the car.
This case underscores the need for a Truth-in-Warranty disclosure. Consumers need to know what they are purchasing and how it works up front, as well as the likelihood that claims will be paid out (based on actual figures divulged by the warrantor or insurer.
offering refunds to lowest-risk part of the risk pool is not a wise business strategy
But the FDIC does something comparable to this and look at... oh yeah.
Ugh. When we bought our current vehicle the husband was insistent that we buy one of these craptastic car warranties. The only way I talked him out of it was the option that we could still buy one up to a year later and he eventually forgot about it.
The warranty on our newer Gateway laptop was sold to a company called MPC that promptly went out of business leaving everyone who had one of these screwed. We now own a very expensive door stop.
I have also noticed many of these warranties cost almost as much as the item. Under the concept of insurance that seems like a suckers bet.
I actually bought my car with one of these warranties that have a buy-back provision. I exercised it once I ran out the mileage on it and it took three months, but I *did* get my money back.
We need a change in law. Consumers should get paid back first. Then creditors can fight it out for what is left. It's basically theft when a company can go under and use money paid for an undelivered service to pay off creditors.
But insurance doesn't cover repairs not related to damage. If you are out of the manufacturer's warranty period and your transmission goes, you'll turn to your 3rd party service contract for this. I've never heard of an auto insurance policy covering non-damage repairs.
They did receive a service - API was essentially insuring against risk of a repair.
Both the people who are looking to get their money back, and people who are looking to get repair bills paid are creditors. API owes them both money.
That's a great objection to something I never said.
Regardless, aftermarket warranties are pretty much a scam. It is often hard to get them to pay out for ANYTHING, regardless of what they SAY they cover, and they usually cost more than you'd ever spend repairing the car when it breaks. The only time they make sense is if you go with a company with a good reputation, AND you're driving some piece of shit transmission-eating Caravan or something.
New car warranties don't make much sense, either. They tend to be a lot more reliable and honest (but even then not 100 percent...and that can either be the dealer, the manufacturer, or the dealer having a disagreement with the manufacturer), but the price of a new car versus a late model (or not-late-model) used car is so large that you'd need to go through multiple major repairs to make up the difference.
A warranty is never a BAD thing to have, but it is a bad thing to pay extra for, and it should NEVER be a primary criterion for what car you buy. (Even in the cases where it would make sense to have one, because in those cases you should be buying a different car.)
@statgrad: But the FDIC is not trying to make a profit, it's trying to avoid financial collapse. It's done it's job on that account.
@Corporate_guy: But that's what they're doing - first paying for covered repairs, then sending consumer refunds, and everyone else after that. They just haven't found enough money to do all that yet.
Companies that offer any kind of future promised benefit in writing should have to post a performance bond equal to that promise or face felony theft by deception charges in criminal court. That would stop a lot of this stuff cold. Some people would move offshore , but that would just make it easier to spot the crooked schemes.
Look for MANY other warranty providers to go bankrupt in the coming years as the average age of cars on the road creeps ever higher (recessions do that when the unemployed are out of the new car market for any length of time).
Dead pool on the next warranty scheme to collapse anyone ?
I bought a warranty from Ford for my brand new Mercury Cougar. After the engine, transmission, and air conditioning compressor were replaced ( at different times ), the guys at the Ford place cringed whenever I showed up.
Speedometer broke and was not covered by the warranty, so I drove the car for 6 years and it only had 30k on the odometer when I sold it.
Never buy a used Ford either.
When you think of cars by their brand in terms of reliability, you are falling into a trap set for you by marketers.
Platforms are a better predictor of reliability than the nameplate. If this was recent, your Cougar was probably either on the same platform as the Ford Thunderbird (which is really pretty good, but not if you get a V6) or the same platform as the Ford Contour, which isn't pretty good no matter what engine you get.
It's like people going on about how great Buick is vs. other GM brands...that's because Buicks were all based on GM's good platforms (W, mostly). Or people buying Grand Ams because the Grand Prix was so good, not realizing the cars (named similarly under the same brand) have nothing to do with each other.
They've got you thinking in columns when you should be thinking in rows.
Oh, and don't think buying a Honda makes you safe...if you aren't careful you could end up buying an Isuzu without knowing it (okay, they're not TERRIBLE, but still)
@bohemian: Most warranties do not cost almost as much as the item, only a very few would be over 20%. My used truck's aftermarket warranty was less than 10% of the vehicle total cost and I've got a very good coverage for a 4x4 vehicle that could have very costly repairs if the drivetrain has issues. Sure, I could lose my 10% either by going out of mileage or warranty period, and I could lose it by the company going bankrupt before then... but if a blow out a transfer case that alone will cost more than the warranty to replace (before even paying the labor).
When you shop warranties knowing what the potential losses might cost you CAN make good decisions on them. Just assuming they are all bad warranties is just gambling (not taking calculated risks).
@Corporate_guy: How do you figure it is theft one way and not the other? That is the most ridiculous comment I've read today. "Creditors" have loaned the company money -- some of those creditors may be main street investors, mutual fund buyers, or owners of the auto dealerships that use those warranty companies (owning a piece of the business you're referring business to is smart). Those creditors deserve every bit of their money back just as much as the consumers do... unless the creditors were 1) angel investors, 2) venture capitalists.
@zacox: Even if they gave you a likelihood that the claim will be paid it will be a useless number that gives you nothing but misinformation. The likelihood that any one claim will be paid must depend on many details, and if they tried to give you a pile of data that large your eyes would roll back in your head anyway. Frankly, I have no interest in reading a 1000 page document on how likely my claim will be paid based on every possible scenario of failure for my vehicle.
@NightSteel: My Credit Union offers buy back as well. One car was in an accident and total, and I got all of the money back on that one, and another car, they said they won't cover a problem with the exhaust, so I got the money back on THAT one. So it is possible.
@Snarkysnake:"Companies that offer any kind of future promised benefit in writing should have to post a performance bond equal to that promise or face felony theft by deception charges in criminal court."
That's insanely excessive. How would any investment be done? In certain circumstances, maybe it'd make sense to insist on a bond for a percentage of a promised payout ... but 'any kind of future promised benefit'... sheeeeet.
On the argument that customers have more rights than other creditors here - if the creditors were making investments with assumed possible risks and profits, they should come after customers who bought a cut-and-dry service, imho.
This deal does sound impossibly good to be true; anyone considering it must have thought "how does the company makes money if it pays out on all bets?" but in a fair system it should be the company's problem how it makes profits, not the consumer's.
I think this is a good example of the uses free market vs. legislation: the legislation here has obviously been inadequate to ensure the consumer safety necessary for good competition.
If the creditors were making investments with assumed possible risks and profits, they should come after customers who bought a cut-and-dry service, imho.
This deal does sound impossibly good to be true; anyone considering it must have thought "how does the company makes money if it pays out on all bets?" but in a fair system it should be the company's problem how it makes profits, not the consumer's.
I think this is a good example of the uses free market vs. legislation: the legislation here has obviously been inadequate to ensure the consumer safety necessary for good competition.
I've bought extended auto warranties twice, and both times they have paid off for me, though (the first time) not without hassles.
I had a Chevy Sprint, first year they were made, and the Suzuki-built transmissions were craptastic and lasted about 50,000 miles. The warranty, unfortunately, was 12,000. The extended warranty company did all sorts of tapdancing to try and avoid paying the claim, but after I started doing some investigation and discovered that the "independent insurance company" that supposedly underwrote the policy was actually part of the same company, and promised to take this information to state regulators, magically the claim got paid.
The second extended warranty was on a Honda Civic... but it still paid off. It was a 6 year/100,000 mile warranty, and at 99,950 miles, I took the car into the dealer with a long list of complaints and problems. They did about $1500 worth of work, including replacing the air conditioner compressor, something in the transaxle, and I don't remember what else. The warranty did send someone out to inspect the car, but that took less than 24 hours, and the claim was paid out immediately. Oh, and the warranty originally cost about $550, so I made out pretty well.
So they aren't always bad deals. But these days, I wouldnt' be surprised if the companies have rigged them to make it nearly impossible to collect.
@nofelix:
"How would any investment be done?"
They're not investing now. The game is to get some start up capital ,advertise heavily ,Take in a LOT of naive (mostly poor) folks and then blithely go bankrupt when the math starts running against them. Then , start up another company with the same principals and a different name. It's organized theft.
BTW ,a bond IS the free market solution.The company that is the guaranty will scrutinize the promissory to make sure that it is adequately capitalized and that it can fulfill its obligations to the purchasers and vendors or it will not issue the bond.Of course ,it has to be paid for its part. Another cost of doing business. Reputable companies could use their purchase of a bond as a selling point to re assure purchasers that they are on the up and up.
That said , I am fed up with giant rip-offs being labeled "the free market at work" and the owners making out like bandits when things go ducky. When they collapse (a much more likely occurrence) everybody else gets stuck with the bill.
@Dondegroovily: If by the FDIC helping us avoid a financial collapse you mean the Treasury and Congress are the ones who saved the system while the FDIC only could handle the not-too-big-to-fail banks, then I'll agree with you. Had the too big to fail banks actually failed (had the Treasury and Congress let them), the FDIC would have been out of funds a long time ago. In other words, it would have failed as an insurance entity since the FDIC would have needed a bailout from taxpayers.
90% of banks, including the biggest ones, have been insured at little or no cost each year over the last decade since the FDIC fund was at its artificial ceiling set by Congress. This is why the FDIC is comparable to this failed auto insurance company. If an insurance entity insures 90% of its clients for free, of course it won't be able to weather the storm when it arrives.
@Snarkysnake: Companies like API may not be investing, but there are many sensible ones that are, but would be completely hamstrung by forcing them to put a bond up for "any kind of future promised benefit".
Also, your idea would tie up a lot of capital that would sit around doing nothing. Unless you allow the bond company to invest a proportion of the money which would defeat the object of the whole exercise.
I bought an extended warranty years ago on a car I've long since sold. The warranty company went out of business. I am not sure who paid me (the auto dealer perhaps), but I got most of my money back, but it wasn't a fast process.
Most of the complaints (and the story) are about third-party warranties. What about extended warranties provided by the auto manufacturer? Only one commenter I've noticed here appears to be talking about that (I think) and seems happy with that. Anyone else want to weigh in on those? I've always been curious about the difference.
Repeat: Do not pay for promises in the future. Seldom is it worth wile for consumers to pay for future promises of service. Look at insurance companies. Sure they will pay out on occasion, but most of the time you end up battling them over the claim. Best Buy promise: LMAO! Sears promise: LMAO, used car warranties: LOL, Medical insurance: (I won't even go there). In short, consider promises of future payout very carefully. Do it only when you have no other viable choice. Consider past performance of promises from that provider of promises. P. T. Barnum was right.
@lordmorgul: I think I expressed that wrong. By likelihood of claim payout, I really meant the ratio of dollars paid out vs. the number collected in premiums. Truth-In-Lending disclosures have a percentage of loans sold to other institutions after funding, so I was thinking of something similar.
@subtlefrog: I bought an extended warranty from Chrysler for my Pacifica since it was the first year of the model and sometimes things go wrong. It was more for peace of mind than anything else. It's expired now and I never had to use it. The car never had a problem that required warranty repair. Yeah, I know. It's an American car although a lot of the parts were Daimler.
I'd love it if insurers had to write their percentage of claims paid out on all ads. Of course, they'd probably find a way of making a claim only count as a claim if it was paid out, or some such bs.
@vastrightwing: FWIW, I've had homeowner's insurance forever and every time there's been a problem, I've been paid in full immediately. I've had car insurance since I've owned a car and every time there's been a claim, I've been paid immediately. I've had life insurance since I had a family to protect and I expect it will be paid, although I won't be the one filing the claim. And I have health insurance because one long hospital stay would bankrupt me. I think the premiums are high but I've shopped the policy to a lot of carriers and I'm convinced the one I have is the best for the price. Every time we've filed a claim, or seen a medical provider, the claim has been paid in accordance with the contract. So, extended warranties on consumer electronics? Probably a waste of money. Extended or aftermarket car warranties? Proceed with caution; that is, know the financial strength of the carrier.
@H3ion: Missed a sentence at the end. Everything else, do the research but some insurance makes a lot of sense unless you have no assets to speak of and are willing to file bankruptcy if you have a loss.
There are life insurance companies that do the same thing with term insurance. If you don't die during the term you get your premiums back in full. Meantime, they're earning interest on your money.
@nofelix:
"tie up a lot of capital that would sit around doing nothing."
Oh , I forgot. The money that companies like API take fom customers is being used to build hospitals and feed hungry third world orphans.
I hope that you are not involved in any meaningful way in the decision making process(es) of any public enterprise.
How hard id it for you to grasp the concept that companies like the above referenced are CROOKS and CRIMINALS ? There is no free market philosophy at work with these people. They prey on the weak and trusting and sadly ,they can always find an apologist like yourself to rationalize their crimes.
Typically, and insurance company will make money in two ways, first by taking in more in premiums than it pays out in claims, and second, by investing the "float". That having been said, are these warranty companies regulated by state insurance commissions, and if not, why?
It's too bad for the people they pulled in with this... their refund offer promised to reduce the biggest reason NOT to buy service policies... the likelihood that you'll never need one. So the smart-but-paranoid people could still buy this policy and expect to get their premium repaid if they ended up with a reliable car. I don't know HOW they suckered in a Subaru owner, though... our cars are renowned for being low-maintenance. Maybe it was her first Subaru?