Frequently asked questions about guaranty funds

What is a guaranty fund?

Property and casualty guaranty funds are part of a non-profit, state-based, statutorily-created system that pays outstanding claims of insolvent insurance companies. By paying these claims, guaranty funds, sometimes called guaranty associations, protect policyholders and claimants.

Guaranty funds are active in every state, the District of Columbia, Puerto Rico and the Virgin Islands. State laws require that all 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 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; but it operates independently from the property and casualty system. This information concerns only the property casualty guaranty funds.

How prevalent are insurance insolvencies?

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 1976, there have been about 550 insolvencies. The system has paid out about $26.4 billion; about $10 billion has been paid out in the last six years.

Why have the amounts the guaranty funds paid gone up so much in the past few years?

When they were created almost 40 years ago, insurance companies tended to write simple personal lines policies in single states. This resulted in generally small insolvencies that were comparatively simpler and easier to administer.

The 1990s brought a growing number of large insolvencies among insurers writing large amounts of commercial insurance. Some recent insolvencies have involved complex multi-state commercial insurance products, such as large deductible policies. In addition, many of these insolvencies, such as Reliance Insurance Company, Fremont Indemnity Company and Legion Insurance Company, were larger than any the system had before absorbed.

These factors have significantly changed the landscape for guaranty funds - and considerably raised the costs of covering claims following an insolvency.

You say the guaranty funds pay these claims. Where do they get the money to pay them?

Guaranty funds largely are funded by industry assessments, which are usually collected following insolvencies. These assessments raise funds to pay claims and administrative and other costs related to the guaranty funds claim paying activities.

Assessments typically are capped at two percent of a company's net direct premium written in similar lines of business in the guaranty association state the prior year, although in exceptional circumstances amounts can be increased by state legislatures. The other source of funding is recoveries from receivers of the insolvent insurance companies. Assessment costs are recouped by various means.

How are these assessments computed?

With the exception of New York (which uses a pre-insolvency system), the states' guaranty funds assess 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.)

In most states the assessment cap is two percent of net direct-written premium or less. Guaranty funds can not assess an insurance company over the statutorily set cap on assessments. In exceptional circumstances, for instance when a natural catastrophe causes several large insolvencies and creates a need for additional assessments, state legislatures may enact emergency legislation that grants additional assessments or permits guaranty funds to borrow money, such as through a bond issue, or grant assessments to repay borrowed funds.

What happens when a company is liquidated?

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 that opt to buy less expensive alternative risk products) usually receive only partial payment on their claims.

What is the role of the guaranty funds?

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.

Are there limits on the amount that guaranty funds will pay?

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; the guaranty funds play no role in setting coverage caps. Most guaranty funds pay 100 percent of their state's statutorily defined workers' compensation benefits.

How long does a policyholder have to wait to receive a payment from the guaranty fund?

It varies, but claim payments usually begin as soon as possible once a company is ordered liquidated. The process is speeded by the guaranty funds' "early access" to estate assets provided by state law. It is not uncommon for claims to be paid within 60-90 days after the order of liquidation.

Guaranty funds, coordinating with the receivers of the liquidating companies, work hard to avoid any interruption in periodic benefits that are being paid to claimants, such as workers' compensation loss-of-wages payments.

Does a guaranty fund pay all claims of an insolvent insurer?

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 surety bonds, warranty coverage, 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 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; but a company does not have guaranty fund coverage if it is writing non-admitted or unlicensed products, such as surplus lines or is a self-insurer covered in the non-admitted market.

These limits on guaranty fund coverage are necessary to balance the need to provide a safety net to those who would be most harmed by the insolvency of their insurance company and keep the burden of providing the safety net at an acceptable level.

Do guaranty funds provide new policies to policyholders whose company has failed?

No. Guaranty funds do not sell insurance. The affected policyholder must purchase new coverage through an insurance company. Guaranty funds cover claims; they do not provide replacement policies.

How many guaranty funds are there?

Guaranty funds are active in every state, the District of Columbia, Puerto Rico and the Virgin Islands. State laws require that all licensed property and casualty insurance companies belong to the guaranty funds in every state where they are licensed to do business.

Every state has a guaranty fund for property and casualty insurance claims covering things like auto and homeowners insurance policies. Several states also have separate funds for workers' compensation claims.

In addition, every state also has a separate entity set up to handle claims related to life, health and annuity insurance companies that become insolvent.

Why are there guaranty funds in every state?

Unlike other industries, such as banking, insurance has long been regulated by the states. On the property and casualty side of the insurance business, the state tort and workers' compensation laws and benefit amounts vary from state to state. For this reason, guaranty funds exist for every state.

A Florida insurer fails, let's say, and the guaranty funds of other states get involved. Why is that? Isn't this a Florida issue?

Generally, state statute assigns guaranty funds the responsibility of paying claims for insureds residing in their states. The exception to this is workers' compensation coverage, for which covered claims are administered in the state of residence of the workers' compensation claimant.

Insurance companies write business across many state lines. For this reason, when a company that writes workers' compensation claims fails, these claims, which by law are paid in the state of residence of the claimant, triggers involvement of guaranty funds of many states.

That's why the failure of an insurance company domiciled in Florida that writes business all over the country, for instance, may trigger guaranty fund involvement in any state where a claimant resides and coverage premiums (and any post-insolvency-related assessments) are collected.

Who regulates or oversees guaranty funds?

Typically, state guaranty funds are administered by an industry board that is elected by the guaranty fund members (that is, all companies writing licensed business in that state). There is oversight authority by a state's commissioner of insurance, who reviews the fund's plan of operation, and may also audit a guaranty fund. In most states appointment to the guaranty fund board is subject to the approval of the commissioner of insurance.

Are all of the state guaranty funds the same?

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.

Do insurance companies pass the cost of insolvencies along to their customers?

Ultimately, yes. The cost of this consumer protection system, which was established by the states, is passed on to the public either in the form of increases in the cost of insurance policies, surcharges on policies or tax offsets. For this reason, it is important to have a well managed, financially sound guaranty fund system to keep the costs as low as possible.

What role does the National Conference of Insurance Guaranty Funds (NCIGF) play in the guaranty fund system?

The Indianapolis-based NCIGF is a non-profit association incorporated in 1989 to provide national assistance and support to the property and casualty guaranty funds located in each of the 50 states and the District of Columbia.

The NCIGF monitors and responds to issues that might impact state guaranty funds. The group serves as a trusted expert, informing trade and other organizations as they develop model legislation.

Where can I find a list of the various guaranty funds?

You'll find a list here