Warrantech Corporation, a provider for providing service contracts and aftermarket warranties has entered into a letter of intent with its current insurance company for a financial arrangement that will allow Warrantech Automotive, Inc., a wholly owned subsidiary of Warrantech, to begin paying certain claims arising under service contracts insured by Reliance Insurance Company.
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.
As previously announced, the Pennsylvania Insurance Department informed Warrantech that Reliance had been placed in liquidation, largely as a result of the tragic events of Sept. 11, and would cease paying claims arising under service contracts administered by Warrantech Auto.
Reliance underwrote nearly 48 percent 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 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 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 per share subject to certain adjustments.