US Fidelis was illegally selling insurance when it tried to avoid consumer-protection laws and other state regulations by peddling vehicle additives under the guise of more traditional, regulated aftermarket coverage, according to the Missouri Department of Insurance, which this week joined the state's suit against the Wentzville-based company.
The move won't have any significant impact on US Fidelis, which once led the nation in the sale of extended auto-service contracts. The company stopped selling its controversial aftermarket coverage in December, and it filed for bankruptcy protection on March 1.
But the decision by Missouri regulators could have broader implications for the cluster of service-coverage telemarketing companies based in the St. Louis area, a national hub for the industry.
These companies' widespread sale of warranted additives - referred to in industry circles as "product warranties," and by Missouri Attorney General Chris Koster as "the additive scam" - was first reported by the Post-Dispatch in August 2009.
Most of the area's biggest marketers of service contract also sold the product warranties. At the time of purchase, consumers often didn't know they were buying a warranted product, not a service contract, and that it comes with far fewer consumer protections.
State laws require service contracts to be insured, so that the coverage isn't worthless if the company that pays claims goes under. There's no such requirement for product warranties.
Most states also give consumers the right to cancel service contracts at any time and receive a pro-rated refund that is equal to the unused portion of the coverage. Product warranties couldn't be refunded, provided the consumer used the auto elixirs as instructed - a requirement to get coverage started.
Critics - including some inside the industry - have said the marketing of these product warranties confuses many consumers, leaving them trapped in coverage they no longer want. The warranted additives also allow service-contract brokers to sell in California, where they're otherwise prohibited from doing business.
John Huff, director of Missouri's insurance department, said in a statement released today that companies selling the product warranties are, in fact, selling insurance. And that means they need to be licensed as such.
"These additive products may seem different, but if it looks and feels like insurance, it's insurance, and Missouri law requires licensing or registration and oversight," Huff said.
Although several area companies sold product warranties last year, many stopped selling them after Koster used the coverage plans as a basis for lawsuit against about a dozen companies late last year.
The insurance department's appearance in the US Fidelis suit comes too late to make any difference in that company's practices.
At a trial scheduled for Sept. 15, the company - now led by an independent management team - will try to recover more than $100 million it accuses owner Darain and Cory Atkinson of fraudulently stripping from the firm.
A company lawyer said at a recent hearing that the US Fidelis management team hopes to cease ongoing customer-service operations, or sell the company, as soon as possible.
