An insurance company is a business that exists to make a profit. The company estimates its annual costs, including overhead and the expense of paying customers' claims, and then calculates how much it must charge customers to both cover its expenses and to make a profit. At times, however, that formula falls short. When an unexpected natural disaster, such as a hurricane, hits an area, the insurance company may find that it doesn't have enough money to pay all of its customers' claims. In cases such as this, the insurance company may become insolvent or file for bankruptcy.
Regulations Protect Policyholders
Because the insurance industry is heavily regulated, there are protections in place to assist insurance policyholders in the event an insurance company becomes insolvent.
Insurance companies must submit regular reports and financial statements to state insurance regulators. This allows regulators to step in if it appears that the insurance company may run out of money, and to take steps to prevent more serious problems.
In addition, some states have something called a guaranty association. This group handles the claims of people and organizations that bought insurance from a company that is now insolvent. The guaranty association receives its funding from insurance companies, and insurance companies are required to participate.
What Happens if Your Insurer Becomes Insolvent?
In the event that your insurer becomes insolvent, you'll receive a notice from a court, state regulators, a liquidator (the person or group that's responsible for selling all of the insurance company's assets in an effort to raise money to cover the company's debts) or the state guaranty association.
When you receive the notice, you may be told that your insurance coverage will cease in about 30 days, even if your insurance policy was due to expire at a later time. This gives you time to obtain replacement insurance coverage from another company. In some instances, your insurance policy may be automatically assumed by another insurance company, which guarantees that you'll have uninterrupted coverage.
The notice should also include instructions for submitting a new insurance claim, or instructions related to an existing claim. If you've prepaid your insurance premiums, you may be entitled to file a claim seeking reimbursement for any overpayments. If you have a potential claim, but haven't yet reported it to the insurance company, now is the time to do so. Your existing claim will automatically be transferred to the state's guaranty association.
The guaranty association will treat your claim no differently than your insurance company will have treated your claim. You'll still receive any settlement or reimbursement to which you're entitled. The only exception is that in some states, you may not be eligible for claims reimbursement if you have a very high financial worth (typically more than $10 million or $25 million).
Questions for Your Attorney
If your insurance company becomes insolvent, the state guaranty association will handle your claim and pay any money that you are owed. If you feel that the guaranty association underpaid your claim, or if they denied your claim entirely, you should consider hiring an insurance claims attorney to help get the money to which you are entitled.
Consider asking your attorney the following questions:
- Do you have experience handling insurance claims?
- Have you previously pursued claims against the state guaranty association?
- What is the likelihood that I'll receive reimbursement for my claim?
- How do you charge for your services, and what should I expect this to cost?
Related Resources on Lawyers.comsm
- Natural Disaster Insurance Claims
- Dealing With Insurance Companies
- Is It Too Late to File a Claim?
- Homeowner's Insurance FAQ
- Find an Insurance Lawyer in Your Area
- Visit our Insurance Claims message board for more help