What happens if your insurance company goes bankrupt?

In these trying economic times, we’ve had a few people ask us what would happen if their insurer should go belly up. Because insurance laws vary state by state, there are no specific answers but we’ll give you a generalized overview.

First of all, state insurance bureaus regulate insurance matters for their state. As part of that function, they require various reports to monitor the financial health and well being of insurance companies licensed in their state. But because many large insurers don’t operate in just one state, or as in the recent case of AIG, in one line of business, insolvencies can and still do occur.

So what happens if you have a policy or an open claim and your insurance company gets in financial trouble? First, the state will work with the insurer to help solve the problem. And if that fails, the good news is that states operate Guaranty Funds to protect policyholders in the event of insurer insolvencies. These funds will pay claims, often giving priority to hardship cases. Some state bureaus also have a mechanism for short-term insurance coverage to allow insured parties to find alternate coverage. On the downside, however, claim payments may be delayed, settled, or capped.

There are also many excluded lines of insurance. Guaranty Funds usually cover auto and home and similar types of insurance, but generally have exclusions. Common exclusions include life, accident and health, annuities, disability, and mortgage. Many states also draw the line at protections for high net worth insureds ($25+ million). For specifics, you would need to check with your state law.

Should worse come to worst, your local agent should be your first and best source of information. You can also learn more about the topic at the Insurance Information Institute’s excellent overview of insurer insolvencies and Guaranty Funds. And you can find links to state insurance department websites on this map.

2 thoughts on “What happens if your insurance company goes bankrupt?

  1. Good information provided here. Consumers, I might add, should also be checking the A.M. Best rating of a company they are considering doing business with.
    It doesn’t guarantee safety, but it helps.

  2. This was a particularly valid questin when AIG was in such deep trouble in September and October. The good news is that these larger companies use operating subsidiaries, each subject to state insurance laws so that the failure of the parent doesn’t necessarily mean the operating companies were failing. A much better system than the banks and investment banking houses which subjected all their assets to market losses.
    A more important, but quiet issue may be the health of reinsurers: less closely regulated (many operate in Bermuda and Europe), and subject to the major catastrophes that retail companies rely on. It’s deeper due diligence, but matters when a catastrophic event touches lots of people.

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