The demise of DC Cook and HMG Holdings has highlighted the financial risks to customers of self-insured warranties sold by dealers.
Car owners who bought cars from the two dealer groups, which both went into receivership this year, are finding out that their warranties are worthless. The estimated total of motorists affected is 14,000 for last year alone.
The self-insured warranties were to cover mechanical and electrical failure, parts and labour. But as both dealer groups have gone into receivership, the luckless owners now find their guarantees are no longer valid.
The case highlights the risks that are attached to the self-insured route, which has become popular with many leading vehicle retailers. A safer option for consumers, according to industry experts, is to take out a fully insured warranty where the premium goes directly to an insurance company and remains in force in the event of a dealer being forced to close.
A spokesman for Grant Thornton, joint receivers for both DC Cook and HMG Holdings said: “These customers will be treated in the same way as all other unsecured creditors. If they feel they have a legitimate claim, they must forward full details and copy invoices.”
But the likelihood of customers receiving compensation is understood to be doubtful despite the attempts of the receivers to attract buyers for the dealer sites.
More than 7,500 dealer guarantees alone were sold by the Cook group last year and administered by the AA.
An AA statement says: “These self-insured warranties are commonplace in the used car market and they have evolved from the type of warranty schemes offered by other retail industries. Well-established large companies with a strong trading position and financial reserves would, in the normal course of events, be able to offer this type of warranty with minimal risk to customers.
“However, it is the nature of business that companies can fall foul of changes in the market.
“The used car market has been under considerable pressure from falling prices and less customers. Turning to self-insured warranties has provided dealers with extra income, which they can use to support their business and remain competitive.
“Although the AA has warned about the dangers of self-insured warranties being provided by insubstantial car dealers who may liquidate their businesses and disappear overnight, the risk from companies the size of DC Cook is no more than for any normal large business.
"The AA's role in all this has been to administer the D C Cook scheme with absolutely no influence on the dealership's other business decisions. Our efficient running of such schemes ensures consistency and reliability for customers during normal healthy trading and good audit control, should a company unfortunately go into receivership.”