Broke Cayman Insurer

The National Warranty Risk Retention Group (NWIC) insolvency is rapidly becoming a public relations nightmare, not only for the car dealers involved, but also for the Cayman Islands.

The Automotive News reports that the recently announced insolvency of NWIC, which is incorporated and regulated in the Cayman Islands, has left many thousands of US car dealers in a no win situation: Pay for repairs costing thousands of dollars, or refuse to pay and tell angry customers to fight it out with the Cayman insurer.

As its name implies, NWIC is a risk retention group, which is a specialised insurer authorised under US federal law in 1981, amended in 1986, to address the difficulty at that time among some business groups in getting liability insurance.

Under the 1986 amendment, NWIC is the only risk retention group "grandfathered" into its Cayman Islands domicile. Other risk retention groups had to pick a state under whose laws they would be regulated.

When asked to characterise the Cayman Islands' regulation compared with that of a US state regulator, Rod Beery of Heritage Insurance said, "I think the word 'Caymans' carries the characterisation by itself. Do I need to expand on that?"

The NWIC situation has drawn attention all over the US from attorneys, car dealers who can't get reimbursed for fixing vehicles, agents who sold warranties to dealers, people who can't get warranty work done on their cars, and state insurance regulators.

According to DeltaGroup, a Dallas firm that markets extended warranties insured by NWIC, some 5,000 US dealers sold the contracts. Sales started in 1984 and recently were reaching 15,000 per month, DeltaGroup said. The Lincoln Journal-Star reports that there could be as many as half-a-million warranties in force. But even this figure may prove to be conservative in the light of the provisional liquidators' estimate of 900,000 current service contracts, representing liabilities for NWIC in the range of $57.9 million to $73.8 million.

The extended-service contracts, which can range from one-year to 10-year terms, cover repairs and parts for vehicles no longer covered by the manufacturer's warranty. Dealers sell a typical three- to five-year extended-service contract for $800 to $1,500. But dealers and agents suggest that NWIC's contracts were priced $200 to $300 below market, and it may have been too generous in paying for repairs. Some say it could have scrutinized claims more thoroughly.

To protect itself from excess losses, NWIC is understood to have contracted with well-known reinsurers such as Signet Star Reinsurance Co. and American Safety Insurance Group, but it is uncertain whether these reinsurers will contribute significantly towards the outstanding claims.

Dealers have been in limbo since 6 June, when NWIC petitioned the Grand Court for provisional liquidation. On August 1, the court is expected to determine whether the company should be liquidated.

Several car dealers are holding customers' vehicles until they pay for repairs. The customers insist the repairs should be covered, but the dealers insist they are not liable. This has already prompted the filing of a class action suit in Nevada.

"The dealers are holding customers' cars hostage," said Tom Jacobs, a spokesman for the Nevada Department of Motor Vehicles, which regulates vehicle service contracts in that state.

Other dealerships are paying off repair claims, but they aren't happy about it. "I am concerned we are going to be left holding the bag on 700 warranties," said Tom Downer, COO of the Fletcher Jones Management Group.

Chicago dealer Jeff Jacobs said he is paying some $10,000 a week for customer repairs that should have been covered under warranty contracts.

Apart from the obvious damage to the image of the Cayman Islands abroad, there could be more direct financial implications in that NWIC was supposed to be regulated and supervised by the Cayman Islands Monetary Authority (CIMA). There may be a parallel in the case of BCCI, another high profile collapse of a financial institution, where there is an ongoing legal claim against the Bank of England as the primary supervisory authority in respect of alleged inaction by the regulators.

Local attorney, Micki Jafa Bodden, who has extensive experience in this area of the law and the BCCI legal action in particular, said, "Class actions have already been filed in relation to NWIC in the US and, needless to say, there is going to be a lot of finger pointing to attribute blame and financial liability."

"Whether the CIMA has any responsibility in this matter remains to be seen, but I think it's fair to say that its supervisory performance in relation to NWIC will come under the microscope," she added.

Questions posed by Cayman Net News to the CIMA concerning the regulatory scope and performance of the insurance department in relation to NWIC have been referred to their legal department for review. The provisional liquidators have also responded that they cannot comment on similar questions put to them.