A Guaranty Fund protects consumers in the case of a failed insurance company. When a policyholder incurs a covered loss under an insolvent carrier’s policy, the loss will be covered by the Guaranty Fund. Just as with All Things Insurance, there are limitations and an exception to the coverage.
The exception is that policies issued by non-admitted insolvent carriers are not eligible for the Fund. This is why it is so important to check the AM Best rating (financial size and strength) of any surplus lines carrier before binding coverage. If an agent becomes aware of a negative change in that rating during a policy term, it may be prudent to replace the coverage.
One limitation to coverage is determined by the policy itself. If a building has a limit of $150,000, that limit still applies. Another limitation is determined by individual state laws, which determine the maximum limit that a policyholder may collect. Most states have a cap of $300,000 on P&C claims, although there is generally no cap on Workers Compensation claims. One can readily imagine claims exceeding $300,000, reminding us again of the importance of knowing an insurer’s financial strength.
Claimants and policyholders are usually first to be paid, before the insurer’s other creditors. Policyholders with a claim greater than the statutory limit can apply for full payment. This places the claim in line with other creditors, which can take years for distribution, if it ever occurs.
The National Association of Insurance Commissioners (NAIC) passed model legislation in 1969. Each state, plus Puerto Rico and Washington DC, has a Guaranty Fund. The statutory limit in the model act was set at $300,000. The Funds have paid out more than $35 billion resulting from around 600 insolvencies.
Each state determines the means of providing capital for claims and administrative costs. Most states levy assessment against admitted insurers, typically 1-2% of net direct written premium. Capital for payment of claims also comes from the insolvent insurer’s assets, including reinsurance.
How often does a carrier lose solvency? In the last 20 years, typically 10-15 carriers enter receivership each year. United Home Insurance entered receivership last month. It’s not common, but it’s not rare either, so agents must be mindful.
For more information, go to National Conference of Insurance Guaranty Funds.
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