Burand’s Agency E&O Blog: Tip #51

State Guaranty Funds. Many agency owners, producers, and CSRs believe state guaranty funds provide blank insolvency protection for any client insured by an admitted carrier. This is not true.

Many state’s guaranty funds are limited to insureds of a certain size. The size varies by state and sometimes by line. The basis of size may also vary sometimes by being income and sometimes by being asset based. Insureds that exceed a certain size, although insured by an admitted carrier, may not have any or only limited protection from a state guaranty fund.

Therefore, it is important to identify the state’s guaranty fund size limitations for each state in which the agency writes (the insured’s state is what matters because coverage likely follows the client). If a client exceeds the size limitation, notify them in writing. The goal is to prevent a situation in which the insured claims they would have taken a different approach to their insurance if their agent had advised them of the size limitation.

As more agencies use self-funded plans, I also recommend verifying whether the client’s state’s guaranty fund provides a back stop for their plan.