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When Your Insurer Can’t Pay Your Claim

By: The Editors of Standard Publishing Corporation (Mon, Sep/22/2008)

These are not the best of times. With the recent struggle of one of the world’s largest insurers to stay afloat, you might well wonder what you can do if your insurer becomes insolvent. Fortunately, most insurers still seem to be in pretty good shape. Even the problems that have engulfed American International Group did not originate from its property-casualty operations, which appear to be solvent and have the financial ability to pay claims. Nevertheless, this latest crisis underscores the fact that you cannot take anything for granted.

So, what do you do when your insurer cannot pay your claim because it has become insolvent? You can make a claim against one or more state guaranty funds and receive payment for your claim in a relatively short time, typically within 60 to 90 days after the order of liquidation. You can still make a claim against the insolvent insurer’s estate, but you probably will have to wait years to recover a fraction of what you are owed.
Keep in mind, though, that most guaranty funds have a cap of $300,000 for most types of claims, although some states have increased that limit -- to $400,000 in Connecticut and  $500,000 in Rhode Island, for example. However, most states do not have a cap for workers compensation benefits. In some states, the guaranty fund does not apply to insureds with a net worth over a certain amount  -- over $25 million in Massachusetts, for example.

All of the policy conditions remain effective, and you are required to follow the same procedures and cooperate as if the insurer were continuing to operate. Rights of subrogation remain intact, and you must do nothing to cause them to be relinquished. Similarly, salvage rights remain intact.

While the laws of individual states might vary, most states have a guaranty fund that applies to most kinds of insurance, with a few exceptions, such as life and health, insurance for investment risks, fidelity or surety bonds, credit insurance, warranties, title insurance, ocean marine insurance, alternative risk transfer, or any government-backed insurance.

If other insurance also applies to the claim, you must exhaust that other insurance before the guaranty fund will respond.

The relationship of reinsurers to policyholders and to guaranty funds is sometimes a subject for litigation. Generally, all collectible reinsurance proceeds become part of the insolvent insurer’s estate -- not payable to any particular insured even if that insured is specifically named in a reinsurance agreement. So, even if you have a cut-through endorsement, which you probably don’t, it likely won’t do you any good.

Another point to keep in mind is that guaranty funds generally apply only to insurers licensed to transact business in the state; you are not protected for claims against an insolvent surplus lines insurer. We should point out that many surplus lines insurers are as financially strong or stronger than some admitted (licensed) insurers. Also, foreign insurers are commonly required to maintain a trust fund in the event they run into financial trouble and are unable to pay claims.

While guaranty funds provide some measure of security against insurer insolvency, they are certainly no substitute for solvent insurers. Use your own best judgment when selecting an insurer and don’t rely on the blanket statements of others.
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