Meet the SCIC:

"This is how we suggest that states operate, if they're going to allow third party companies to be obligors on service contracts," Cole said. "That act says in order for you to be an obligor company, or to take risk as a third party obligor, you need to be either be owned by a public company that has net assets in excess of $100 million (and the parent has to guarantee the performance of the obligor company), or the obligor company must have insurance."

Insurance Company Influence

Nevertheless, the links between extended warranty sellers and insurance companies remain necessarily strong. One cannot do without the other.

Cole said what both consumers and dealers should be looking for in an extended warranty is a plan that is backed by a sturdy insurance company.

"It is important that there is a good, rated-strong insurance company behind the obligor company to give you the financial balance sheet protection, so you know if anything ever happens to the obligor company or the third party company, that the insurer would be there to honor the claims," Cole said. "At the end of the day, from a dealer standpoint, the end risk taker is the insurance company. As long as it has a good A.M. Best rating, and has good assets, and a good balance sheet, and has performed well over the years, that's really all they should care about."

Schaufeld said consumers have never been burned by the insolvency of an SCIC member. "The number one concern in our business is that there's financial solvency to pay claims. That requires insurance behind the programs."

Overall, Schaufeld said he thinks the SCIC has met its goal: to provide extended warranty companies with a simple, predictable and understandable way to operate nationally.

"We don't have big fancy retreats or an awards banquet or anything like that," he said. Instead, the SCIC makes sure that any new state laws are consistent with those already in force in other states, and that all its members understand what they need to do to remain within those laws.

"Now that you have a bunch of players who are not hiding in the shadows but who want to be out in the sunlight," Schaufeld said, "it's very important that there's a lot of clarity, so they know how to operate, know how to comply, know how to report, and know what's expected of them."

Insurance or Independence?

Aon Corp., the American International Group Inc., and N.E.W. Customer Service Companies Inc., all of whom are members of the Service Contract Industry Council, are competitors as well as partners. Aon and AIG each have extended warranty operations that compete directly with N.E.W.'s main line of business. Yet Aon and AIG also underwrite portions of N.E.W.'s business.

One could almost go through the list of SCIC members and construct a "warranty food chain" -- from the company making the product, to the dealer, the plan administrator, and the insurance underwriter. They're all members of an economic system where the unit of exchange is the risk that a product will malfunction. Some companies wholesale the risk, some retail it, others specialize in processing it, and still others spread it around through the reinsurance business. They cooperate in some areas and they compete in others. But everyone has their place in the chain.

Little Influence Over Automotive?

The SCIC has more impact upon the consumer electronics and home appliance industries than it does upon automotive extended warranties, especially at the dealer level. Some national appliance and consumer electronics chains such as Sears Roebuck and Co., and Circuit City Stores Inc., which sell their own self-insured extended warranty plans, are SCIC members. However, no automobile dealers have ever been SCIC members, although GMAC Financial Services and Fidelity Warranty Services are current members.

At first look, the SCIC's membership ranks seem to be dominated by companies that are part of insurance giants such as CNA, Kemper, AIG, Zurich US, First American, and Aon, although there's also a core of a few independents such as N.E.W. and Warrantech Corp.

David Cole, chairman and CEO of the Aon Warranty Group, said being owned by an insurance company doesn't confer any special advantage within the SCIC, because the group isn't really focused upon the insurance industry. He noted that although the Aon Warranty Group's ultimate parent company is well-known for its reinsurance and risk management operations, the people that actually belong to the SCIC and attend its meetings are representing the Aon Warranty Group.

The same goes for CNA and AIG, which own CNA National Warranty Corp. and AIG WarrantyGuard, their respective extended warranty operations. It's always the extended warranty division, subsidiary, or joint venture that belongs to the SCIC, not the insurance side of the house.

Subtle Advantages

The only advantage a combined insurance/extended warranty company might have over a "pure play" such as N.E.W. or Warrantech, Cole said, might be in the flexibility it has when deciding how to split the profits among the plan administrator and insurance units. A vertically integrated company might also have more latitude when deciding whether or not to honor claims in a "gray area," where the decision could go either way. Obligors that use an outside insurance company have to worry about audits by that insurance company, which might question those "gray area" payments, while those with in-house underwriting would essentially be questioning themselves.

"We have the ability to make a commercial decision about that gray area without having recourse from a third party insurer," he said, "which is beneficial to the dealer and the consumer, quite frankly."

The SCIC's membership list also includes the service plan units of a few major manufacturers such as Thomson Multimedia Inc. and GE Service Management Inc. There's also a number of representatives from the home warranty business -- such as American Home Shield, Cross Country Home Services, and the Assurant Group.

More Responsive to Consumers?

So which is better: a big, vertically integrated insurance company or a narrowly focused independent extended warranty company? It depends who you ask.

"I would say it's good to be focused," Schaufeld said.

He noted that because the typical extended warranty contract is measured in the tens or hundreds of dollars, and because there are typically millions of these little contracts in force, a "pure play" company such as his own is likely to make greater investments in such areas as call center infrastructure, consumer research, and merchandising than a great big insurance company that's accustomed to dealing with vastly fewer contracts that each carry a much higher value.

Then again, even great big insurance companies have shown they can successfully handle contracts with millions of consumers, and migrate those customers if need be from the claims processing facilities of a shuttered dealer to their own call centers.

Going Out of Business

Aon, in fact, has had the misfortune to work with both the Montgomery Ward and the Nobody Beats the Wiz chain stores, which both went out of business in recent years but which both left Aon holding the bag, thanks to their underwriting agreements.

Cole said that almost immediately after the closings hit the news, there's always a flood of concerned calls from consumers, who think their extended warranty contracts are no more good because the retailer closed down.

"You need to put people at ease and let them know," he said, that there's an insurance company backing up those contracts. "People don't read the whole service contract. It's when an event like someone going out of business happens, all of a sudden you start searching for your contract."