Lincoln insurer must liquidate

National Warranty fell into financial trouble late last year and early this year.

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Published Aug. 2, 2003

Dick Piersol

More questions arose than were answered Friday as Madam Justice Priya Levers of the Grand Court of the Caymans ordered National Warranty Insurance Group of Lincoln into liquidation.

The financially insolvent insurer of automotive service contracts will be "wound up" under the court's order, leaving creditors, including an estimated 900,000 U.S. owners of millions of dollars in vehicle service contracts, unlikely to collect more than a fraction of their worth in a Cayman's legal process similar to bankruptcy, according to KPMG Caymans, which had been the provisional liquidator.

Attorneys for the Cayman Islands Monetary Authority, which licensed National Warranty, and the DeltaGroup, a group of National Warranty's members with whom it had a fatal business relationship, supported the liquidation. But the struggle for a share of the assets of National Warranty and its business associates is just beginning, and it's spreading into other venues.

National Warranty fell into financial trouble late last year and early this year in what court documents and reports by KPMG Caymans have shown to be a lucrative business relationship gone sour.

National Warranty got into a dispute over vehicle service contract liabilities with the DeltaGroup, marketing companies owned by Yamagata Enterprises of Las Vegas, according to a report by KPMG.

When claims on business covering high-mileage vehicles exceeded expectations, National Warranty tried to sell off the liability and income in a deal that didn't pan out. National Warranty and Delta Group couldn't resolve their dispute over liabilities, so National Warranty quit paying claims on the disputed business.

The enterprise deteriorated as National Warranty's insurance ratings fell, and lenders quit lending money on vehicles and contracts. Finances became so uncertain National Warranty's officers and directors wouldn't even certify the company's financial statements.

In June, the company asked for the protection of the court in the Caymans, where the company is domiciled for regulatory purposes.

The implications of Madam Justice Levers' decision remained uncertain for an estimated 100 employees as well as hundreds of thousands of owners of service contracts, financially stressed business associates who are members of the risk retention group and the reputation of the risk retention and service contract industries.

Representatives of National Warranty, which has operated in Lincoln since the mid-1980s, have refused to talk for two months and officials of KPMG Caymans, now appointed joint final liquidators, could not be reached to comment Friday.

Risk retention groups are specialized insurers authorized by federal law in the 1980s to help businesses with liability difficulties to insure themselves. As such, they are exempt from state insurance rate regulation and capital requirements equal to those that "admitted" insurers face. Each risk retention group is regulated by only one state, instead of 50, but they are usually required to file financial documents in any state where they do business.

Their clients have no protection from the state insurance guaranty funds that back most insurers. National Warranty, because of a "grandfather clause" in federal enabling law, was allowed to maintain its domicile in the Caymans.

National Warranty was the fifth-largest of 117 risk retention groups in the United States, measured by written premiums in 2002, said Karen Cutts, publisher of Risk Retention Reporter, an online industry publication. National Warranty was the largest of the 13 risk retention groups that specialized in vehicle service contracts, Cutts said.

The rate of insolvencies among risk retention groups is only slightly higher than that of admitted insurers, according to an unpublished A.M. Best study quoted by Cutts.

National Warranty's days in court continue next week. The U.S. bankruptcy court in Omaha will hear arguments to extend or to deny its temporary restraining order protecting National Warranty and the Caymans liquidation proceedings from lawsuits in the United States.

Jay Ehrhart assisted in reporting this story from George Town, Grand Cayman.

Reach Dick Piersol at 473-7241 or at dpiersol@;journalstar.com