The state of a U.S. state runs a state guaranty trust fund to protect policyholders if an insurance company fails to pay benefits payments or is declared insolvent. The fund will only cover the beneficiaries of insurance companies who have been granted the license to sell insurance products within the state in which they are licensed.
How a State Guaranty Fund Works
State guaranty funds operate as insurance for insurance. They are paid by insurance companies that sell insurance within a specific state. The amount an insurance company has to provide is a percentage and ranges between 1% and 2 percent of the net amount of insurance they sell in any given state.
In the event of insolvency, several states passed a law on the guaranty based on a model act that NAIC drafted. Certain states have adopted the act entirely; however, the majority have enacted an amended version. By these laws, insurance companies must be a part of a state's guaranty fund if they're authorized to conduct business in the state. A licensed insurer across all 50 states has to be a part of the fund for each state.
Only insurers with a license must adhere to state-specific guaranty law. Non-licensed insurers (such as reinsurers) aren't. So, if a business is insured by a not-admitted insurer and has been declared insolvent, there is no way to recover the unpaid claim from your state's guarantee fund. The fund benefits workers if employers fail to pay their obligations due to insolvency or bankruptcy.
Special Considerations
A federal statute established state Guaranty Funds in 1969. They are non-profit organizations that operate across the 50 states of Washington, D.C., Puerto Rico, and the Virgin Islands. Before this law, certain states attempted independent guarantees to deal with insolvencies of insurers.
At first, states had one fund that covered only one type of business: workers' or personal auto insurance. Insurance companies were comparatively small. They typically were able to write one line of business within one state. Since 1990, a more extensive institution called NCIGF was established to streamline and coordinate the state-guaranty funds.
Many states have various guaranty funds. For example, states may have separate funds for workers' compensation, auto insurance compensation, or other areas. Insurance businesses are more complex than they were fifty years earlier. They offer a range of insurance coverages across several states, and some cover all states. This means insolvency can affect a variety of policyholders across the country and may involve guaranty funds across many states.
Claims Covered By Guaranty Funds
Guaranty funds cover certain, however, not all kinds of claims. They typically do not cover claims made from self-insured businesses. Some exclude certain lines of business, such as credit and surety insurance. Certain guaranty funds do not cover punitive damages. The insured company is typically protected by the guaranty fund managed by the state in the location of the business. However, workers ' compensation claims are handled by the guaranty funds of the state in which the person filing the claim (employee) is located. So, a claim made by a worker living in Missouri is handled by Missouri's guaranty funds, regardless of whether the employer is situated in another state.
Guaranty funds cover third-party and first-party claims. The fund will cover defense costs if a liability case is made against your business and defense is required. Most guaranty funds stipulate the maximum amount they'll cover for any claim. The most commonly used limit is $300,000. The fund cannot cover any part of an amount greater than the specified limit. Therefore, certain policyholders can take only a fraction of their due claims. But, there is no limit to workers ' compensation claims. They are usually completely paid.
For coverage, claims are generally required to occur before (or after 30 calendar days following) when the decision was made for liquidation. When your insurance expires before the 30-day period is over, the coverage will expire at the expiration date of your policy. You should immediately obtain replacement coverage from a different insurer to avoid losses not covered by insurance. Guaranty funds cannot create new policies.
The claim can be settled up to 90 days after the liquidation is declared. Certain claims payments could be delayed. Liability claims are generally slower to be settled as compared to property-related claims. Some states restrict companies from seeking insurance through the guaranty fund when their net worth is higher than the floor of a certain amount, for example, $ 25 million or $50 million. These limits are based on the notion that companies with good capital have the resources to pay for the cost of unpaid claims. They don't need the same level of protection that smaller businesses do.
