Insurers Can Go Broke, Too: How Guaranty Funds Protect Policyholders
A guaranty fund is a pool of money to which insurers licensed in a particular state contribute. State insurance regulators tap that pool of money when a licensed (also known as “admitted”) insurer becomes insolvent. In other words, they’re unable to pay what they’re legally obligated to.
It’s common for people to see the insurance industry as a wealthy monolith that cancels policies for the pickiest reasons and pays/denies claims as it sees fit. But that belief is false, and while it’s rare, insurance companies can and do run out of money. If that happens, a guaranty fund is there to protect policyholders and claimants.
New York has several guaranty funds:
The Property/Casualty Insurance Security Fund: Covers most types of property and casualty insurance policies issued by admitted insurers for –
- Each claim up to the policy limits or $1,000,000, whichever is less
- Unearned premiums
The Public Motor Vehicle Liability Security Fund: Covers insurance policies and surety bonds insuring motor vehicles that carry passengers for hire –
- Unpaid claims up to the policy or bond limits
- Unearned premiums
The Life and Health Insurance Company Guaranty Corporation of New York: Covers –
- Unpaid life insurance benefits, including cash values, up to $500,000 per life or policy
- Unpaid benefits with no limitation under group or blanket accident or health insurance or accident and health insurance policies
- Unpaid benefits, including cash values, under part or all of a group annuity contract that does not specify benefits to any individual
- Unpaid benefits under agreements issued to fund employee benefit plans
Workers’ Compensation Security Fund: Covers –
- Unpaid Workers’ Compensation benefits
- Unearned premiums
- Unpaid Employers Liability Insurance claims up to the policy limits or $1,000,000, whichever is less
Before a guaranty fund becomes involved, the state insurance regulator (in New York, the Department of Financial Services, or “DFS”) must ask a judge to declare that the insurer is insolvent. If the judge grants the request, they will appoint DFS to pay the insurer’s claim and other obligations out of whatever funds remain. The guaranty fund pays any claim and return premium obligations outstanding, up to the limits mentioned above, after those funds run out. The New York Liquidation Bureau (NYLB) administers the guaranty funds.
The judge will:
- Order the cancellation of all the insurer’s outstanding policies, typically by 60 days after the insolvency order date.
- Set a deadline for the insurer’s claimants to submit their claims, typically one year after the insolvency order date.
- Direct claimants to submit their claims to the NYLB.
The NYLB must post notice of the judge’s order to claimants and others on its website and possibly in major publications such as newspapers.
In the unlikely event that an insurer becomes insolvent, policyholders should contact an insurance agent or broker right away to obtain replacement insurance coverage from an insurer in stable financial condition.
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