Property and casualty guaranty funds are part of a non-profit, state-based, statutorily-created system that pays certain 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 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. The South Dakota Insurance Guaranty Association (SDIGA) was created in 1970.
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.No. Insurance guaranty associations do not write insurance policies. They act simply to help protect insurance consumers whose insurers have become insolvent.
When a final order is entered by a court that a member insurance company is insolvent and should be liquidated, the SDIGA steps into the shoes of the insurer. Because insurance companies are a main source of funds for the SDIGA, thereby affecting all insurance consumers, there are limits on the association’s obligations and responsibilities.
Insurance insolvency is like bankruptcy; however federal bankruptcy laws do not apply to insurance companies. Broadly speaking, a court determines whether an insurance company is able to meet its ongoing obligations. If it is not, it is placed in liquidation, meaning a receiver or liquidator is appointed to liquidate the company and settle its affairs. Among other things, the liquidator cancels existing policies and arranges for open claim files to be transferred to guaranty associations in states where the insolvent company was licensed. Most guaranty associations, including South Dakota’s, do not cover claims if the insolvent insurer was not licensed in the state.
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 550 insolvencies. In all, the system has paid out about $24.2 billion.Guaranty funds largely are funded by assessments on member insurers. These assessments raise funds to pay claims and to cover administrative and other costs.
In South Dakota, assessments are capped at two percent of a company’s net direct premium written in similar lines of business in the state the prior year. Member insurers can also be assessed $150 a year to pay administrative expenses of the guaranty fund. The other source of funding is recoveries from receivers of the insolvent insurance companies. Assessment costs are recouped by various means.State guaranty fund assessments are computed based on the number and value of claims the guaranty association is obligated to pay. Claim files come in from the insolvent insurance company; they are reviewed and appropriate reserves are established on those files. (Reserves are the projected ultimate liability under terms of a given policy.) As noted, the assessment cap is two percent of net direct-written premium in any one year.
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 what is actually owed; usually this final distribution is made a number of years after the company is ordered liquidated.
In most cases, the liquidation 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 certain claims. The company’s creditors not covered by the guaranty funds (among them large corporate entities that opt to buy less expensive alternative risk products) and usually receive only partial payment 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 insurance 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. For liability claims, the amount the SDIGA will pay on a covered claim is limited to the amount of the insurance 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. The SDIGA pays 100 percent of benefits to which a person is entitled for workers’ compensation claims.
The SDIGA also pays certain claims for “unearned premium,” which is premium an insured has already paid for a period of time for which the policy was cancelled due to the insolvency. The amount of that claim is calculated by the liquidator. The SDIGA is only responsible for the amount of an unearned premium claim in excess of $100 and no more than $25,000.It varies, but claim payments usually begin as soon as possible once a company is ordered liquidated. The process is speeded by guaranty funds receiving “early access” to estate assets. It is not uncommon for claims to be paid within 60-90 days after the order of liquidation.
The SDIGA, coordinating with the receivers of the liquidating companies, works hard to avoid any interruption in periodic benefits that are being paid to claimants, such as workers’ compensation disability benefits.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 and credit insurance. Life and health insurance claims and annuity claims are covered by separate 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.The SDIGA is administered and governed by an industry board elected by member insurers and subject to approval by the director of the South Dakota Division of Insurance. The director also has oversight authority, including reviewing the fund’s plan of operation and audit powers.
While many of the funds are based on model legislation, 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.
