The primary purpose of insurance is to safeguard a policyholder’s financial interests in case of future catastrophic losses. Insurance departments of every state monitor the financial condition of insurance companies by requiring them to submit financial statements annually. And when an insurance company exhibits financial impairment, the home state initiates a process called rehabilitation to help the insurance company recover its monetary losses and restore its former financial standing. However, if the insurance provider cannot in any way recover or be rehabilitated, then the insurer is declared bankrupt or impaired. The policyholders will then be notified about the insolvency of their insurer and the ordered liquidation through a notification sent by the state guaranty association or the receiver. But what happens to a policyholder when in the course of being covered by an insurance policy, the insurer is declared by court to be insolvent? This can be answered by knowing the meaning and purpose of guaranty association.
What is guaranty association?
Guaranty association otherwise known as state guaranty fund is the safety net provided by the state to the policyholders to ensure that they will be financially protected in case their insurer is declared insolvent. Each and every insurance provider in all states of America is required to be members of the state’s guaranty association. This necessarily means that the state’s guaranty association receives funds from their insurance company members. When the insurance company is no longer able to pay claims and is declared insolvent, the court will then order liquidation. During the process of liquidation, the assets of the failed insurance company are maximized to pay off creditors and policyholder of offset liabilities. It is then that the state’s guaranty association takes charge of the concerns and issues of the policy holders arising from the bankruptcy. This means that all of the existing insurance coverage under the insolvent insurer including premium collectibles and claims are under the control and management of the state’s guaranty association. Policies under the failed insurer can be transferred to other insurance companies with stable financial condition and can be guaranteed of uninterrupted insurance coverage. So even if the original insurer has already gone out of business, the policyholders must continuously pay the insurance premiums so that their insurance contract will continue to take effect and will not be terminated. When the court orders liquidation for the insolvent insurer, the guaranty association then provides coverage and acts in place of the impaired insurer. Coverage limits may however differ by states according to their individual state laws. Although the coverage limits vary from one state to another, there is a common limit followed by most states in life insurance death benefits, cash withdrawal value for life insurance, withdrawal and cash values for annuities and health insurance policy benefits. Some states have higher maximum limits but the most common is $300,000 for individual life.
Guaranty association provides protection to the policyholders and beneficiaries for the life and health insurance coverage policies that they have under and insolvent insurance company. There is also a set of guaranty associations set by the state for property and casualty insurance claims.