Does the Guaranty Fund Guarantee Your Policy?

As a responsible homeowner, you dutifully pay your home insurance premium and expect that your insurance company will pay your claim if you suffer any damage to your home. However, have you ever considered that your insurance company may have financial difficulty in paying your claim? What happens to you at that point? Fortunately, the insurance departments of each state have worked to create a guaranty fund that will assist insurance policyholders in the event of an insurance company’s inability to pay claims. Certainly, you should hope that you’ll never have to access the guaranty fund’s services, but it’s good to know that it’s available for your protection – just in case.

Before purchasing insurance, you should always research your insurance company’s financial stability. Financial rating agencies such as A.M. Best provide updated information on insurance companies, which is available free of charge to consumers. In addition to reviewing the financial strength ratings, you should also review your state’s department of insurance website to see if there are any issues with your prospective insurer. Even though you are dealing with a large, reputable insurer, you never know if they will encounter financial difficulties at some point. In the last decade, two large insurers, Kemper and Reliance, both became insolvent.

Unfortunately, even if you have diligently performed all your research, it’s still possible for an insurance company to become insolvent due to bad management or poor underwriting results. That’s where your state’s insurance guaranty fund will step in and assist policyholders and third party claimants who would otherwise have been covered by insurance. The state department of insurance regularly audits and examines insurance companies to verify they have enough funds to cover claims from the policies they’ve underwritten. In certain situations, the department of insurance may take over an insurance company if they believe it is on its way to becoming insolvent, hoping to rehabilitate the company.

Each insurance company licensed to write insurance in your state must pay a small percentage (usually 1-2%) of its premium into the state’s guaranty fund. This fund essentially operates as insurance for the insurance companies. Once an insurance company is taken over by the state department of insurance, unfunded or underfunded claims are then paid using the guaranty fund’s assets. In times of financial difficulty, it’s possible for the guaranty fund itself to face difficulty due to many insurance companies going under at one time. And this can affect anyone regardless of where you live – San Francisco, Seattle, Washington DC, Jacksonville, Kansas City.

You can investigate your state’s guaranty fund by going to the National Conference of Insurance Guaranty Funds’ website, which provides information about all 50 states’ funds. One thing to keep in mind is that not all insurance companies are members of the state guaranty fund. There are some insurance companies known as surplus lines insurers who are not licensed in your state, yet still allowed to write business. These insurers usually write very difficult to insure risks that licensed insurers will not insure. While they provide a valuable insurance need, you should be aware that they are not members of the guaranty fund and you will not be protected in the event they become insolvent.

Ultimately, it’s good to know that there is insurance supporting your insurance company and the policy they provide. However, it’s best to work with financially stable insurance companies so that you never have to access the services of the guaranty fund.

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