Frequently Asked Questions
Property and casualty guaranty funds are part of a non-profit, state-based, system established in state law that pays certain outstanding claims of insolvent insurance companies. Guaranty funds, sometimes called guaranty associations, provide a limited “safety net” for policyholders and claimants of insolvent insurance companies.
Guaranty funds exist in every state, the District of Columbia, Puerto Rico and the Virgin Islands. State laws require that licensed property and casualty insurance companies belong to the guaranty funds in every state where they are licensed to do business.
Most guaranty funds were created in the 1960s and early 1970s as state insurance commissioners and lawmakers responded to an increase in insolvencies of insurers writing policies in the high-risk auto insurance business.
A guaranty fund system also exists for the life, health and annuity insurance industry. The life, health and annuity guaranty funds operate independently from the property and casualty system. This information concerns only the property casualty guaranty funds.
The potential failure of insurance companies, like the potential failure of all businesses, is an unfortunate but inevitable part of doing business in a free-market system.
Since inception of the property and casualty guaranty fund system, there have been about 600 insolvencies. In all, the system has paid out about $24.2 billion.
Guaranty funds are largely funded by industry assessments, which are usually collected following insolvencies. These assessments raise funds to pay claims, administrative charges, and other costs related to the guaranty fund's claim paying activities. In some states, the payment of guaranty fund assessments may qualify for a state tax credit.
Assessments typically are capped at two percent of a company’s net direct premium written in similar lines of business in the guaranty associations’ state the prior year. The other source of funding is recoveries from receivers of the insolvent insurance companies.
With the exception of New York (which uses a pre-insolvency system), guaranty funds make assessments after an insolvency occurs. Assessments are computed and billed based on the immediate needs of the guaranty association that has claims it needs to pay. Claim files come in from the insolvent insurance company; the adjusters review them, and set appropriate reserves on those files. (Reserves are the projected ultimate liability under terms of a given policy.)
The state insurance commissioner or a representative is appointed receiver and begins the process of collecting assets and determining the company’s outstanding liabilities. When this process is concluded a final distribution is made to the company’s creditors. This is almost always less than 100 percent of what is owed; usually this final distribution is made a number of years after the company is ordered liquidated.
In most cases, an estate will not yield sufficient money to pay claims in full; and most are not able to pay claims in a timely manner. For this reason, one or more guaranty funds step in (depending on the number of states in which the failed company wrote business) to cover claims. The estate’s creditors not covered by the guaranty funds (among them large corporate entities) usually receive only partial payment, if any, on their claims.
Guaranty funds ease the burden on policyholders and claimants of the insolvent insurer by immediately stepping in to assume responsibility for most policy claims following liquidation. The coverage guaranty funds provide is fixed by the policy or state law; they do not offer a “replacement policy.”
By virtue of the authority given to the guaranty funds by state law, they are able to provide two important benefits: prompt payment of covered claims and payment of the full value of covered claims up to the limits set by the policy or state law.
Yes. Most guaranty funds limit the amount they pay to the amount of coverage provided by the policy or $300,000, whichever is less. These coverage “caps” are fixed by state law. Most guaranty funds pay 100 percent of their state’s statutorily defined workers’ compensation benefits.
It varies, but claim payments usually begin as soon as possible once a company is ordered into liquidation. Guaranty funds, coordinating with the receivers of the liquidating companies, work hard to minimize any interruption in periodic benefits that are being paid to claimants, such as workers’ compensation and loss-of-wages payments.
No. The state insurance guaranty funds are designed as a safety net to pay certain claims arising out of policies issued by licensed insurance companies. They do not pay non-policy claims or claims of self-insured groups, or other entities that are exempt from participation in the guaranty fund system. In addition, some lines of business are excluded from guaranty fund coverage, such as warranty coverage and credit insurance. (Life and health claims and annuity claims are covered by the life and health guaranty funds, not the property and casualty system.)
Guaranty fund coverage is limited to licensed insurers. The licensed insurers in a state are the members of the guaranty funds that, in turn, pay insolvency-related assessments. When a licensed insurance company becomes insolvent, the guaranty funds pay eligible claims. Non-admitted or unlicensed insurance products are not covered; nor are surplus lines or most self-insurer covered products.
State guaranty funds are administered by a board that is set forth in state law. There is oversight authority by a state’s commissioner of insurance, (in Minnesota the Commissioner of Commerce) who reviews the fund’s plan of operation, and ongoing operations. In most states appointment to the guaranty fund board is subject to the approval of the commissioner as well.
While many of the funds are based on a model set forth by the National Association of Insurance Commissioners (NAIC), there are differences in statutes that govern the funds and their operation from state to state, including the amount of coverage provided by the fund.