Scenario. You purchase an extended auto warranty from a mystery warranty company. The contract looks great, the price seems great, and you could not be happier. Fast forward a few months and your car is in the shop and you attempt to put a claim in under your warranty. To your surprise, the company does not exist.

     This scenario is possible, warranty companies can fold and you can be out of your money. It is important that the warranty provider you choose is backed by a strong and solid insurance company. This is backing is especially important when choosing to purchase your warranty from an auto warranty provider that has been in business for a relatively short period of time. Remember, a recently started auto warranty business can be a great place to purchase a warranty, but do your research and make sure they are fully insured. A good gauge of the re-insurer's strength is their A. M. Best rating. A M. Best is the largest and longest established company devoted to issuing in depth reports and financial strength ratings about insurance organizations.

     The financial standing of a warranty company is very important. You want to deal with a company that is not only backed by their own insurance, but is also financially sound and has their own funds. Much like an insurance company, a warranty company must invest their funds effectively to create the cash flow needed to pay claims, salaries, overhead, etc. Some companies sell their contracts to customers with "newer" cars, and these companies receive funds a long time before they will need to pay out on a claim. This gives them time to invest this money and builds their financial strength. In the next two articles, we will go more in depth on the companies that sell contracts for the "newer" cars and the companies that sell contracts for the "older" cars. The types of cars the company provides coverage for effects their financial strength. You see, companies that sell coverage for "newer" cars are selling coverage for cars that have less then 100,000 miles, are less then ten model years old, and may still have an effective manufacturer's warranty. This means the cars are more valuable, more technologically advanced, and the company and charge a premium for coverage. These newer, low mileage cars are also less likely to need an unforeseen repair, statistically.

     Companies that sell coverage for "older" cars will be liable to pay out on claims right away, or after a short exclusionary period. The cars they are covering are older, higher mileage, and statistically tend to need repairs more often. These companies pay out a higher percentage in comparison to what they take in then companies dealing with "newer" vehicles.