Guaranty Fund Reforms Passed in Legislative Sessions

August 30, 2004

Model legislation created to address guaranty fund insolvency issues has been passed in several key states in the 2004 legislative sessions, putting reform efforts on the right path, according to the Property Casualty Insurers Association of America (PCI).

All or parts of a package of reform legislation created by the National Conference of Insurance Guaranty Funds (NCIGF) was passed in several states with support from PCI in legislatures around the country.

“While PCI is definitely pleased with the proactive reform to date, a variety of guaranty fund concerns remain on the table,” said Lenore Marema, PCI vice president, industry and regulatory affairs. “The issue of the large deductibles was tackled by two key states, Illinois and Pennsylvania and both have enacted the new large deductible model legislation which clarifies guaranty fund and liquidation laws with a “cover and recover” approach. The guaranty fund also has the right to the assets posted as collateral and the right to subrogation against the insured. These recovered deductible dollars go back into guaranty funds to relieve some of the stress on the fund as well as on the insurers who pay the assessment underlying those funds.”

According to Marema, a rash of recent commercial insolvencies and a corresponding increase in state guaranty fund assessments was the motivation to push for more reforms in the 2004 legislative sessions.

In addition to Illinois and Pennsylvania, other states have passed a variety of reform proposals. Missouri, for example, substantially revised its guaranty fund law and exempted from guaranty fund coverage any amount that is within an insured’s deductible or retention as well as any claim under a policy with a deductible or self-insured retention of $300,000 or more. Missouri also added a net worth exclusion and a separate bar date, among other things.

Wisconsin also overhauled its guaranty fund law this year and, among other changes, clarified the trigger of guaranty fund coverage, gave the fund a right to intervene in insolvency proceedings and requires claimants to exhaust other sources before pursuing payment from the fund. Additionally, Wisconsin excluded from coverage the deductible, self-funded or self-insured portion of any claim under a liability or workers compensation policy if the insured is in bankruptcy proceedings.

New Hampshire enacted a comprehensive package of reforms including legislation that amends the trigger of coverage to require a final order of liquidation, adding a separate bar date for the fund; giving the funds a right of intervention in liquidation proceedings and excluding punitive damages from coverage and the fund’s duty to defend.

Additional states that adopted reform legislation include: Florida, Idaho, Maryland, Louisiana, and Virginia. New Jersey and New York have significant reform proposals still pending.

Rhode Island and Washington established study commissions to explore the present exclusion of workers compensation state funds from guaranty fund coverage and the impact of including longshore and harbor workers claims coverage under a guaranty fund.

“With the 2005 Legislative session just around the corner, PCI believes that more states will pursue reform efforts to strengthen guaranty funds, protecting insurers and their policyholders,” Marema said. “PCI will lead and support legislative proposals in the states on this initiative.”

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