Protecting Policyholders In Case Of Insolvency
The current recession has witnessed the fall of some of the country's biggest companies, from financial giants like Bear Sterns and AIG to automakers Chrysler and GM. Many insurance companies have also filed for bankruptcy, leaving many policyholders concerned about their personal financial security and the viability of any potential claims.
While these are valid concerns, insurance policyholders need not worry that their claims or their policies will become worthless. Like banks, insurance companies are legally required to take certain precautions to protect their customers in case of bankruptcy. State guaranty associations are one of these precautions.
State Guaranty Associations
Every state has a guaranty association that provides protection to policyholders in the state, in the event that an insurance company is declared insolvent. In Minnesota, the association is the Minnesota Life & Health Insurance Guaranty Association. Every insurance company licensed to sell life insurance, accident and health insurance, or annuities in the state is required to be a member of the Association.
If a court finds an insurance company insolvent and orders the company to liquidate its assets, the Association will step in to provide coverage to policyholders and pay existing claims up to a statutory maximum. Generally, the Association will transfer insurance policies to a new insurance company, which will then provide benefits to the policyholders of the old company.
To be eligible for coverage from the Association, the following conditions must be met:
-The policyholder must be a Minnesota resident at the time the company is found insolvent
-The company must have been licensed to sell insurance in Minnesota
-The policyholder must be current on their premium payments
-The type of insurance at issue must be covered by the Association
Coverage Limits
The Minnesota Guaranty Association does not provide protection for all types of insurance. For example, the Association does not provide coverage for HMO plans, self-insured employer plans or benefits that have not been guaranteed.
Currently, the Minnesota Guaranty Association covers:
-Direct individual or direct group health insurance
-Direct individual or direct group life insurance
-Long-term care insurance
-Annuities (only the guaranteed portion of the annuity)
Coverage also may be available for some types of property and casualty insurance, like auto insurance and homeowner's insurance.
It is important to note, though, that even if the Association covers a specific type of insurance policy, it does not mean the policyholder will receive the full benefit from the Association. There are limits on the amounts that may be recovered, depending on the type of benefit, the terms of the policyholder's insurance contract and state law. For example, the maximum death benefit available under a life insurance policy is $500,000 per insured.
Other limits include:
-Health insurance claims: $500,000 per insured
-Net cash surrender for a life insurance policy: $130,000 per contract owner
-Net cash surrender for a fixed annuity: $250,000 per contract owner
Policyholders who have outstanding claims worth more than Guaranty Association is able to cover have the option of filing a claim as a creditor against the insurance company during the bankruptcy. Once the company's assets are liquidated, the policyholder may be able to recover some of the amount owed to them.
There may be a gap between the time the insurance company is judged insolvent and the time the Association begins coverage. The bankruptcy court may temporarily reduce the amount of ongoing payments the insurance company must make, or may stop payments altogether to get a handle on the insurance company's full financial situation. This means it could be weeks or even months before the court activates the Guaranty Association and it begins taking over coverage from the insolvent company.
Conclusion
Even though there are precautions in place to protect policyholders in the event an insurance company becomes insolvent, policyholders should still investigate the financial health of an insurance company before purchasing any policies. While state guaranty associations provide coverage for outstanding claims and unpaid benefits, this coverage may be subject to unfavorable restrictions.
Reference: McSweeney & Fay, P.L.L.P.
While these are valid concerns, insurance policyholders need not worry that their claims or their policies will become worthless. Like banks, insurance companies are legally required to take certain precautions to protect their customers in case of bankruptcy. State guaranty associations are one of these precautions.
State Guaranty Associations
Every state has a guaranty association that provides protection to policyholders in the state, in the event that an insurance company is declared insolvent. In Minnesota, the association is the Minnesota Life & Health Insurance Guaranty Association. Every insurance company licensed to sell life insurance, accident and health insurance, or annuities in the state is required to be a member of the Association.
If a court finds an insurance company insolvent and orders the company to liquidate its assets, the Association will step in to provide coverage to policyholders and pay existing claims up to a statutory maximum. Generally, the Association will transfer insurance policies to a new insurance company, which will then provide benefits to the policyholders of the old company.
To be eligible for coverage from the Association, the following conditions must be met:
-The policyholder must be a Minnesota resident at the time the company is found insolvent
-The company must have been licensed to sell insurance in Minnesota
-The policyholder must be current on their premium payments
-The type of insurance at issue must be covered by the Association
Coverage Limits
The Minnesota Guaranty Association does not provide protection for all types of insurance. For example, the Association does not provide coverage for HMO plans, self-insured employer plans or benefits that have not been guaranteed.
Currently, the Minnesota Guaranty Association covers:
-Direct individual or direct group health insurance
-Direct individual or direct group life insurance
-Long-term care insurance
-Annuities (only the guaranteed portion of the annuity)
Coverage also may be available for some types of property and casualty insurance, like auto insurance and homeowner's insurance.
It is important to note, though, that even if the Association covers a specific type of insurance policy, it does not mean the policyholder will receive the full benefit from the Association. There are limits on the amounts that may be recovered, depending on the type of benefit, the terms of the policyholder's insurance contract and state law. For example, the maximum death benefit available under a life insurance policy is $500,000 per insured.
Other limits include:
-Health insurance claims: $500,000 per insured
-Net cash surrender for a life insurance policy: $130,000 per contract owner
-Net cash surrender for a fixed annuity: $250,000 per contract owner
Policyholders who have outstanding claims worth more than Guaranty Association is able to cover have the option of filing a claim as a creditor against the insurance company during the bankruptcy. Once the company's assets are liquidated, the policyholder may be able to recover some of the amount owed to them.
There may be a gap between the time the insurance company is judged insolvent and the time the Association begins coverage. The bankruptcy court may temporarily reduce the amount of ongoing payments the insurance company must make, or may stop payments altogether to get a handle on the insurance company's full financial situation. This means it could be weeks or even months before the court activates the Guaranty Association and it begins taking over coverage from the insolvent company.
Conclusion
Even though there are precautions in place to protect policyholders in the event an insurance company becomes insolvent, policyholders should still investigate the financial health of an insurance company before purchasing any policies. While state guaranty associations provide coverage for outstanding claims and unpaid benefits, this coverage may be subject to unfavorable restrictions.
Reference: McSweeney & Fay, P.L.L.P.
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