The ripple effect of a number of small problems turned into a tidal wave for a national insurance company. The conditions created what one person described as the perfect storm.

Left in the wake are thousands of consumers and thousands of auto dealers across the country.

And across North Dakota.

Holders of a Smart Choice extended service warranty, insured by National Warranty Insurance Co., are finding that claims aren't being covered by NWIC. In North Dakota, that covers about 2,500 contract holders. Across the country, the number could be as high as a million.

The warranties are no longer valid because the company that wrote the policy has filed for bankruptcy. NWIC, incorporated in the Cayman Islands and headquartered in Nebraska, has been selling and administering automotive service contracts since 1984.

But in June 2003, the company filed for provisional liquidation in the Cayman Islands and bankruptcy protection in the United States. That means NWIC is no longer issuing the Smart Choice policies, paying claims or approving repairs for future claims.

There are 20 franchise dealerships, and five used car dealers, in North Dakota - three in Bismarck-Mandan - that sold the Smart Choice service warranty, which were written for high-mileage vehicles. Legally, the dealers are not obligated to do anything for those holding a Smart Choice contract, but those in North Dakota are doing something for customers who come in for repairs, said Tom Herman, president of Dealer Development Systems Inc. in Bismarck.

Herman, an independent agent, sells such services as extended warranty contracts to auto dealers, which included Smart Choice. There also are a number of types of extended warranties. Smart Choice made up a very small percentage, and the Smart Choice warranties are the only ones affected.

Local dealers Wilhelm Buick Olds, Ressler Chevrolet and Schwan Pontiac GMC sold Smart Choice. Wilhelm had fewer than 100 customers and quit selling the product about three years ago, Herman said. Representatives from Ressler and Schwan said they are taking care of their customers, but did not want to elaborate.

While the downfall of NWIC means consumers may have to pay for repairs that would have been covered by the warranty, the bigger victims to date are the auto dealers. Herman estimates that in the six months since the company filed for bankruptcy, the state's auto dealers who carried Smart Choice have lost about $250,000 in either warranty work already approved and completed, good-will work done for customers and warranty refunds.

In Bismarck, a unique case has some customers getting a double whammy. Bismarck Honda, which changed ownership nearly three years ago, does not carry Smart Choice and did not buy the liabilities of the previous owner, who did carry Smart Choice.

Joseph Norris of Bismarck is one of the customers who bought from the previous owner. He brought his vehicle in on Monday after a "check engine" light came on, and learned his transmission needs either repairs or to be replaced. Then he learned his warranty is no longer valid.

"It was a total surprise to me," he said.

Herman said there are about 25 Smart Choice holders from the previous Honda owner.

The state attorney general's office has received about 10 telephone calls and two complaints regarding Smart Choice. Parrell Grossman, director of the Consumer Protection and Antitrust Division of the AG's office, said the law doesn't speak to one solution, but said it's the attorney general's position that a dealer, at the minimum, either honor the warranty or give customers a refund on the portion of the warranty cost that the dealer kept - usually just a few hundred dollars on a policy that's $1,000 or more.

Grossman said the AG's office would like dealers to notify all who carry Smart Choice about the situation, but Herman said that request isn't reasonable. It's impossible to know, he said, if warranties have expired because of mileage, if a car has been sold or traded or if someone has moved.

Grossman said extended warranties are not regulated as insurance so there are no specific laws that apply to them. Herman said that any extended warranty contract written after Aug. 1, 2001, falls under regulations that state an administrator - in this case NWIC - is obligated to cover claims, not the dealer.

The reason NWIC caught so many off guard is because the company carried an A-rating from A.M. Best, the company that rates insurance firms, up until March of this year. The rating then dropped to a B, and further, before the company folded.

And the companies that underwrote NWIC claim they received no premium payments, so they claim they aren't liable, Herman said. In other words, things quickly unraveled at many levels.

"It's like the perfect storm," he said.

The bankruptcy court hasn't issued any final rulings, so Herman said customers may be eligible for some type of compensation down the road, if they haven't accepted any other buyout, for example, from a dealership.

(Reach reporter Mark Hanson at 250-8264 or mark.hanson@bismarcktribune.com.)