At the heart of every property and casualty insurance contract lies a promise to soften the blow of misfortune.
But what happens when an insurance company becomes financially troubled, fails and is no longer able to uphold its end of the bargain?
That’s when the state property and casualty guaranty fund system – a system few know much about – steps in. Put simply, guaranty funds provide an essential safety net for policyholders, one that meets the needs of those least able to deal with losses should their insurance company fail.
Established nearly 40 years ago by the insurance industry and public policymakers to cover the outstanding claims of insolvent insurance companies, the property and casualty guaranty fund system has delivered protection to hundreds of thousands of families who otherwise would experience lengthy delays getting resolution of their claim and receive only a fraction of the amount due from the insurer.
Paying claims, protecting policyholders
Property and casualty guaranty funds are non-profit, state-based, organizations that are enabled by statute. They are organized to ensure that when a policyholder of an insolvent insurance company incurs a loss, it is covered within limits determined by individual state laws and the insurance contract. While the guaranty fund system was not contemplated as an all-encompassing remedy, fortunately most claims are paid within the state limits, most commonly up to $300,000. Workers’ compensation claims are generally paid at 100 percent.
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 be members of guaranty funds in every state where they are licensed to do business. A state life, health and annuity insurance guaranty fund system also exists, but operates independently from the property and casualty system.
From the casebook …
To see just how guaranty funds help policyholders, consider the situation in July 2006 when a Texas court cancelled thousands of personal lines policies across the nation as part of liquidating The Vesta Companies. In one fell swoop, tens of thousands of policies nationwide were voided, creating a groundswell of claims that cover the unearned portion of premium remaining on a policy term. These are commonly known as Unearned Premium (UEP) claims.
As soon as the Pennsylvania Property & Casualty Insurance Guaranty Association received data on these claims, it began processing 1,000 to 1,500 checks a day through a 10-day period. In all, the fund cut 12,077 checks totaling $1,963,888. Also swinging into action, the New Jersey Property-Liability Insurance Guaranty Association promptly mailed 17,556 unearned premium checks totaling $5.6 million.
When Texas Select Lloyds Insurance Company failed in August 2006, the Texas Property & Casualty Insurance Guaranty Association paid about 142,000 UEP claims related to cancelled homeowner’s policies totaling $62,428,071. And it did it quickly, processing 100,000 checks in seven days — about 10,000 to 20,000 checks a day. Within three weeks of receiving data, the fund had distributed 110,000 checks, with other additional batches quickly following.
Texas Select was the sixth largest writer of homeowners premiums in Texas the year before; and the massive cancellations occurred prior to the most active part of hurricane season for many coastal residents.
The receiver’s latest financials reflect that the guaranty associations have paid $74 million in unearned premium claims in the four Texas-based liquidations of Vesta Group insurers — this was fortunate for policyholders, many of whom would not have been able to afford replacement coverage had it not been for the prompt payment for their UEP claims.
For 40 years successful
The property/casualty guaranty fund system supports a competitive insurance marketplace by standing ready to make good on promises of unsuccessful companies, thereby helping to preserve the reputation of the entire industry.
Property/casualty insurance is based on a delicate public policy balance that allows the risk of property loss to be shared among millions of consumers under the watchful eye of state departments of insurance. A key element of that balance is the low-cost structure of state-based guaranty funds that helps protect people and small businesses least able to absorb the impact of an uninsured loss in the event of a property and casualty insurer insolvency. For nearly four decades the guaranty fund system has fulfilled its public policy mission, paying out about $21 billion in claims on 700 insolvent companies, fulfilling the public policy charge entrusted to them by lawmakers.
While rare, insolvencies are inevitable in a competitive marketplace. No one ever wants to put guaranty funds to the test but everyone agrees that it’s a test that has and can be passed with flying colors.
Roger H. Schmelzer is president and CEO of the National Conference of Insurance Guaranty Funds (NCIGF). The NCIGF monitors national insurance activities, coordinates information for multi-state insolvencies and provides legal and administrative support to its members.
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