What Happens if Your Insurance Company Goes Bankrupt?
After a prominent insurance company recently failed, policyholders are beginning to wonder what would happen if their insurance company went bankrupt. This question can't be answered with any specificity because each state has its own agency that regulates the insurers licensed to do business there. Some states have more extensive protections for policyholders than others. You can learn more about how your state handles these situations by visiting its department of insurance website.
Prevention
Insurers are not invincible; they do fail on a regular basis. That is why it's so important to look into your prospective insurer's financial health before you take out a policy. Usually, when an insurance company goes under, it's not exactly a surprise. The company typically had a very poor financial standing to begin with, which should've been a red flag for policyholders. When you're shopping around for insurance, check out Moody's or Standard & Poor's financial index to see what kind of grade your prospective insurer received. It's extremely unlikely that a company with a high rating will fail, so select an insurer with a strong financial foundation. Remember the words of Warren Buffet: an insurance policy is just a promise on a piece of paper.
When Insurers Become Insolvent
If your insurer becomes unable to cover potential claims, the state guaranty association would step in. These associations assist in paying the claims of insolvent insurance companies. The legislature of your state determines what types of insurance policies are protected by the guaranty association and how much coverage is provided. Each state has different maximums that the guaranty will pay out for different kinds of insurance.
Should You Be Worried?
It is very unlikely that an insurance company's failure would result in unpaid claims. Here are a few comforting facts about insurer failures:
- States require insurance companies to be solvent, meaning they must have sufficient cash on hand to pay out potential claims.
- In the event of insolvency, the guaranty association takes over, which means claims might be limited or delayed, but hardly ever are they abandoned.
- Commonly, the business of the failed insurer is transferred to one or more other insurers that are stable
- If you don't have any claims pending, your best bet might be to look for coverage elsewhere in the event your insurer goes under. You aren't under any obligation to stay with the insurer, and you are in a good position to leave if you have no outstanding claims.