Dealer-Owned Warranty Companies
Dealer-Owned Warranty Companies
A Dealer Owned Warranty Company is typically formed as a US corporation, and although it acts much like a primary insurance company (it is the obligor for the contract), It is not regulated as an insurance company. Dealer Owned Warranty Company programs are typically formed by a third-party administrator (TPA) that administers the pricing, contracting, collection of premiums, cancellations, and claims related to the underwritten contracts.
The Dealer Owned Warranty Company usually purchases a “failure to perform” contractual liability insurance policy (“CLIP”) from an insurance company, which shares the risk of the underwritten agreements and reduces the amount of cash needed by the Dealer Owned Warranty Company to cover its potential liabilities. The CLIP provides more access to cash than a reinsurance program and represents a good source of additional investment capital for dealership growth. Unlike other arrangements, this setup allows the dealer to have more control over its entire program and completely integrate it into the dealer’s brand identity.
Dealer Owned Warranty Company arrangements represent an attractive option for larger dealer groups (typically five to 100 plus stores) that are looking for:
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- More access to cash in order to fund dealer growth, offset floorplan cost, or invest in other assets (i.e. remodels)
- A large pool of assets that can be utilized during challenging economic times
- Significant control over customer experience
- Maximum F&I returns
- A branded program
- Fewer redundant and extraneous fees from their program
Once a dealer is underwriting its own risk, there is usually no need to revisit previous structures; however, not all Dealer Owned Warranty Companies are created equal, as some TPA’s (Third Party Administrators) will essentially take their reinsurance program and copy it for the Dealer Owned Warranty Company, which short-circuits some of the advantages of a Dealer Owned Warranty Company to begin with. A properly run Dealer Owned Warranty Company program should give the dealer maximum flexibility and control over every aspect of its program.
For example, a Dealer Owned Warranty Company set up by NationsGuard is a service contract company owned by the dealer, with NationsGuard handling daily operations. NationsGuard will create your Dealer Owned Warranty Company, customize product offerings, perform all product filings with states and lenders, and provide a turnkey experience for the dealer. The dealer selects their program’s branding and the F&I product mix they want to offer. It is the dealer’s program where they have control and total visibility into its performance.
As vehicle gross profits continue to erode, F&I becomes a key revenue source for building a dealer principal’s wealth. All dealers have F&I products, but not everyone has ownership. NationsGuard provides a full suite of financial and administrative services to help our dealers take control.
Additional Thoughts
- Dealer-Owned Warranty Company is a type of provider of vehicle service contracts that is typically owned and operated by an automotive dealership or dealer group. Dealer Owned Warranty Companies offer extended warranty coverage and other service contracts to customers who purchase new or used vehicles from the dealership.
Compared to third-party service contract providers, a Dealer Owned Warranty Company is controlled and owned by the dealership, which allows for more flexibility in pricing and coverage options. In addition, Dealer Owned Warranty Companies can be better integrated with the dealership’s service department, resulting in a smoother customer experience when it comes to submitting and processing claims.
Dealerships may choose to transition to a Dealer Owned Warranty Company if they want to have more control over their warranty program and potentially increase their profitability. With a Dealer Owned Warranty Company, the dealer owns the warranty company and can customize coverage, pricing, and claims processing.
There are potential tax benefits associated with Dealer Owned Warranty Companies. For example, the dealership may be able to deduct the cost of warranty claims as a business expense, which can help to reduce their taxable income. Additionally, the dealership may be able to depreciate the cost of the warranty over time, which can also help to reduce their taxable income.
Moreover, Dealer Owned Warranty Companies may be eligible for certain tax credits, such as research and development tax credits, which can offset the cost of offering the warranty and provide a financial benefit to the dealership.
It is worth noting that the tax benefits of Dealer Owned Warranty Companies can vary based on the individual circumstances of the dealership and the warranty program. As a result, dealerships should seek the advice of a tax professional to determine the potential tax benefits of a Dealer Owned Warranty Company for their specific situation.
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NationsGuard handles setup and all daily operations of the program. Full-service turn-key Dealer Owned Warranty Company operation (no full-time dealer staff needed).