Insurance Guaranty Association

An insurance guaranty association is a state-sanctioned organization that protects policyholders and claimants in the case of an insurance company’s impairment or insolvency. Insurance guaranty associations are legal entities, whose members make guarantees and provide a mechanism to resolve claims.

Insurance guaranty associations provide an important backstop in the insurance market. An association is given its powers by the state insurance commissioner, with its duties and obligations outlined in a plan of operation. A board of directors is appointed in order to ensure the organization is able to effectively and efficiently meet the statutory expectations listed in the plan of operation. The association presents an annual report to the state insurance commissioner, outlining the activities that it had undertaken during the year, as well as outlining its income and any disbursements it may have made.

The failure of an insurance company is different from the failure of a business because insurance companies are regulated by the states in which they are registered to do business, and they do not have the protection afforded by federal bankruptcy laws. State insurance commissioners are charged with reviewing the financial health of insurance companies operating in their state, and in the case of an insolvency, must act as the estate administrator.

If a company is deemed to be at risk of becoming unable to meet its obligations, it can be deemed impaired, and the commissioner will determine the steps the insurance company must make to reduce its risk over a reasonable time frame. If an insurance company is unable to meet its obligations, it is considered insolvent, requiring the state insurance commissioner, the state insurance guaranty association’s board and the courts to determine how to pay the covered claims of the insurer. Often, the insurance guaranty association will obtain funds by assessing member insurers that write the same kind of business as the insolvent insurer. These assessments (together with the assets of the insurer) are then used to pay, up to statutory limits, the covered claims of policyholders of the insolvent company. An association may also provide continued coverage for the policyholder or transfer policies to healthy insurers.

Coverages provided by guaranty associations differ from state to state, but most states provide the at least the following amounts of coverage (or more), which are specified in the National Association of Insurance Commissioners’ (NAIC) Life and Health Insurance Guaranty Association Model Law:

• $300,000 in life insurance death benefits
• $100,000 in net cash surrender or withdrawal values for life insurance
• $250,000 in present value of annuity benefits, including cash surrender and withdrawal values (payees of structured settlement annuities are also entitled to $250,000 of coverage)
• $300,000 in long-term care insurance benefits
• $300,000 in disability income insurance benefits

Most states have an overall cap of $300,000 in total benefits for any one individual with one or multiple policies with the insolvent insurer. Insurance companies that are in rehabilitation are not considered insolvent. This means that unpaid claims are not paid by state guarantee funds.