US Fidelis quits paying refunds

US Fidelis, the beleaguered Wentzville-based seller of extended auto service contracts, has stopped paying refunds to consumers who cancel such protection plans, according to executives at two companies that administer the contracts. The change means tens of thousands of consumers could find it much more difficult to get hundreds of dollars in refunds that are supposed to be guaranteed in Missouri, Illinois and most other states. US Fidelis spokesman Ken Fields, of the Fleishman-Hillard public relations firm, would not say whether the company has stopped contributing to cancellation refunds. When consumers want to cancel coverage, US Fidelis "will work with the customer and the relevant administration company to address that customer's situation," according to a company statement. If regulators force those administration companies to cover US Fidelis' portion of the refunds, the consequences would be "unprecedented" and could threaten to bring down some of those firms, said Paul Stratch, chief financial officer of American Auto Shield, a service contract administrator based in the Denver area that did business with US Fidelis. Extended service contracts are canceled for a variety of reasons. Sometimes, consumers are unhappy with the coverage. Other times, the plans are dropped because the vehicle is about to be sold, gets repossessed or is simply no longer usable. When that happens, consumers get one check for the unused portion of the coverage. But that payment usually comes from two different companies that had made money on the sale of the contract. Most comes from the contract's marketer — companies like US Fidelis that sell the coverage — and the rest comes from the service contract administrator, which pays out claims. Stratch said US Fidelis recently told his company that it would no longer contribute to customer refunds and that it would refer canceling customers to administration firms like American Auto Shield, which was formerly known as Warranty America. Service contract marketers have failed in the past, and when they have, administration firms have often picked up the full cost of cancellation refunds. But US Fidelis' inability to pay refunds is different from those cases, Stratch said, because there never has been a service contract seller as big as US Fidelis. "Nobody else came close to their kind of volume," he said. In its heyday, US Fidelis employed more than 1,100 people and claimed to be the nation's leading seller of the auto service contracts, which were often marketed as "extended warranties." But over the last two years, the company has suffered a stunning collapse. Watchdog groups have said US Fidelis sells coverage that is virtually useless for many of its customers. Automakers accused the company of misusing their trademarks; class-action lawsuits have been filed, claiming deceptive trade practices. And an investigation of the company continues, involving 43 states. Late last year, US Fidelis laid off several hundred workers before announcing it would no longer sell the contracts. The company said it would keep a skeleton crew at its sprawling call center, at Interstate 70 and Highway 40, to provide customer service to the approximately 300,000 vehicle owners who had bought coverage from the firm. Those consumers bought service contracts that typically range in price from $2,000 to $4,000 — depending on the age of the vehicle and the level of coverage. The contract's cost usually is financed over 18 to 24 months, but the coverage period often lasts four years or more. That means many customers canceling a contract are entitled to a pro-rated refund for 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 the cost of the contract. Stratch said American Auto Shield will pay both its share of refunds and US Fidelis' portion. He said his firm won't take a big financial hit because US Fidelis sold fewer than 1,000 service contracts from American Auto Shield. "But this is going to be a huge liability for other companies," Stratch said. "They could try not to pay (US Fidelis' portion), but the states are going to make sure customers get their refunds one way or another." Tim Schuur, president of Houston-based Tier One Warranty Services, said US Fidelis also told his company it would stop paying into customer refunds. Schuur said that his company would continue to pay its portion of refunds owed to canceling US Fidelis consumers but that Tier One alone shouldn't have to cover US Fidelis' obligations to canceling customers. "The lender needs to get involved," he said. "Mepco needs to get involved." That's Chicago-based Mepco Finance Corp., a subsidiary of Independent Bank, of Ionia, Mich., that financed most of the auto service contracts sold by US Fidelis. It's also the company's biggest creditor, and last month it became US Fidelis' landlord. Executives at Mepco did not respond to a request for comment. Travis Ford, a spokesman for the Missouri Department of Insurance, said consumers who cancel their service contracts and can't get the pro-rated refund owed to them should file complaints with the agency.