Failed Insurer Liquidated

National Warranty Risk Retention Group (NWIC) was placed into liquidation in the Grand Court on 1 August, but the winding up order has not eliminated the difficulties for those who had dealings with the insolvent insurer.

A temporary restraining order designed to freeze NWIC's assets has caught some other companies in the fallout of the failure, some say unfairly.

NWIC, which had been incorporated in the Cayman Islands but operated out of Lincoln, Nebraska, stopped paying claims and writing new business on 9 June, 2003, which has given rise to liabilities in the US amounting to what one party present at the hearing termed "catastrophic."

Mr. Mark Albert, of Commonwealth Dealers Insurance, a company affected by the temporary restraining order, expressed his concern over the situation. "There are two facets to this liquidation," he said. "Firstly, the cash money and balance sheets show that NWIC is insolvent. But there are other aspects, too. Some cell phone dealers and reinsurance companies have had their accounts frozen, and they have nothing to do with this insolvency. Their accounts have been frozen to pay claims for NWIC."

Explaining that one of the companies affected by the restraining order, which was made by the US Bankruptcy Court on 20 June, 2003, was his own, Mr. Albert asked that the Court identify and unfreeze the accounts so that he would be able to pay the claims of his clients. "A lot of ordinary people are suffering," he said, "because they can't get their claims paid."

Mr. Andrew Jones, Q.C., of Maples and Calder, the attorneys acting for the joint provisional liquidators (JPL), said that his clients were not laying claim to the frozen funds, but added: "The JPL's do have a number of questions that remain unanswered. There are matters under investigation that need further investigation before a result can be achieved."

Taking this into account, as well as the fact that the issue of the restraining order was not directly relevant to the matter before the court in relation to winding up NWIC, Madam Justice Levers declined to identify or unfreeze any of the affected accounts.

According to the report by the joint provisional liquidators, Theo Bullmore and Simon Whicker, both partners of KPMG in the Cayman Islands, the restraining order granted by the US Bankruptcy Court under section 304 of the US Bankruptcy Code was of a temporary nature only, and is set for review by the US court on 5 August, 2003, at which time a hearing will be held to determine whether such relief should be made permanent. The report also states that interested parties will have the opportunity at that time to object to or request a modification of such relief.

Mention was also made of a creditor who was seeking to launch a class action making the erroneous assumption that audit work had been done for NWIC by KPMG in Cayman. However, this was clearly stated by counsel not to have been the case. "As far as KPMG is concerned, they have not done any audit work for this company," said Andrew Jones, Q.C.

It is not known at this stage if NWIC's auditors have any potential exposure for negligence in carrying out their work.

In the meantime, vehicle owners and dealers in the US are continuing to struggle with an increasingly difficult situation.

Caught in the bankruptcy are not only customers who have the warranties, but also the dealers who have to choose between paying for repairs at their own expense, or risk alienating loyal customers by not honouring the contracts they sold.

Doug Krieger, owner of several dealerships in Iowa and Illinois, said the bankruptcy has already cost his business more than $100,000 and the figure will undoubtedly go higher. "However it's worked out, it's going to cost us a ton of money,'' Krieger said.

According to Jim Rohden, vice president of marketing and services for the Iowa Automobile Dealers Association, "It's a Catch-22 situation for everyone concerned with the exception of the company that filed bankruptcy. It's a horrible situation for everyone.

"People bought the agreements in good faith, and they were sold in good faith. Now you have a situation where the dealer may not be honouring the service agreement he sold,'' Mr. Rohden said.