Warrantech Corporation , a provider of service contracts and aftermarket warranties, has entered into a letter of intent to allow it to begin paying claims under service contracts insured by the now-defunct Reliance Insurance Company.
The financial arrangement will allow Warrantech Automotive, Inc., a wholly owned subsidiary of Warrantech, to begin paying the claims. Although definitive documentation has not been finalized, the parties have agreed that the plan will be implemented and payment of claims will begin effective Nov. 19, 2001.
The Pennsylvania Insurance Department informed Warrantech previously that Reliance had been placed in liquidation, largely as a result of the events of September 11, and would cease paying claims arising under service contracts administered by Warrantech Auto.
Reliance underwrote approximately 48% of the automotive service contracts sold during an 18-month period ending in November 2000. Service contracts sold before or after that period are insured by other carriers, and are not affected by the Reliance liquidation.
The agreement that has been reached between Warrantech and its insurer provides for payment of Reliance claims from a fund to be created solely for that purpose. Warrantech Auto will make an initial interest-bearing loan of $1 million U.S. to establish the fund and thereafter it will make specified contributions for each new service contract administered by Warrantech Auto.
The insurer will make designated funds available on an “as needed” basis in the event the fund balance is inadequate to make the requisite claims payments. In addition to providing financial support for the claims fund, the insurer has extended a $3 million U.S. line of credit to Warrantech to fund unanticipated cash needs outside of the ordinary operating budget. Interest will be paid on monies made available for either purpose.
As part of the agreed transaction, the insurer will receive options to purchase up to 1,650,000 shares of Warrantech common stock at a price of $2.00 per share subject to certain adjustments.
Joel San Antonio, chairman and chief executive officer of Warrantech, said: “Warrantech and its insurer have developed an excellent relationship over the past two years as evidenced by the outstanding cooperation that has been extended during this difficult time. We view the signing of this letter as an important expansion of that relationship and a strong demonstration of our commitment to our customers and our loyalty to our agents and dealers.”
Warrantech Corporation administers and markets service contracts and aftermarket warranties on automobiles, automotive components, recreational vehicles, appliances, consumer electronics, homes, computer and computer peripherals for retailers, distributors and manufacturers. The provides its services in the United States, Canada, Mexico, Puerto Rico and Latin America.
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