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What happens when your insurance company becomes insolvent

You're reading a newspaper, scanning through the headlines, when one story grabs your attention: Your insurance company is insolvent and is going out of business. Great. Now what does this mean for you?

Try not to lose too much sleep. Almost every state has a "guaranty association" or "guaranty fund" that handles insurance bankruptcies much like the FDIC handles bank failures. Guaranty funds pay your claims up to a certain limit if your insurer becomes insolvent. In most states, the maximum aggregate benefit for all claims is $300,000 for home, auto and life insurance policies. That level of coverage will generally cover the average consumer's insurance claim. In most cases, you are not burdened with paperwork if your insurer has gone bust.

Guaranty funds will pay your claim up to a certain limit if your insurer becomes insolvent.

"The consumer doesn't have to do anything to be protected," says Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). "They don't have to apply for protection. They will get it automatically."

A defunct insurance company will send you a letter soon after it has been placed under regulatory control. You might also be contacted by the insurance company's rehabilitator and your state's guaranty association. If your insurance company does not notify you of its insolvency, you can always call your state guaranty association or your state's department of insurance for instructions on what to do.

Most states have two guaranty associations. One association handles life, health and annuities; the other, a property casualty guaranty association, usually oversees auto and home insurance. In some cases, you will receive forms and documents in the mail that you should fill out and return according to the instructions. These documents may include forms to help move your policy to another insurance company. In any case, unless you are instructed otherwise, continue making premium payments as you would normally in order to keep your policy in force.

"If you don't, there is some risk that your contract could be cancelled for nonpayment," Gallanis says.

While state guaranty funds try to pay claims as quickly as possible, payments might be made more slowly than usual if the court system gets involved in the administration of the liquidated company. If you filed a claim prior to your company becoming insolvent, your claim will be paid. After the insolvency, you'll need to find a new insurer.

The chart below shows life insurance and annuity coverage that may be available in your state if your insurance company goes bankrupt. It is based on information gathered by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) as well as information from some individual state guaranty associations. Since statues and laws change often, contact your state insurance guaranty association to confirm numbers and to get answers to specific questions about your policy coverage.

 
 

State

Max. aggregate benefit

Max. death benefit

Max. life insurance cash surrender

Max. annuity benefit value

Guaranty fund phone number

Alabama
$300,000
not specified

$100,000

$100,000
(205) 879-2202
Alaska
$300,000
$300,000
$100,000
$100,000
(907) 243-2311
Arizona
$300,000
not specified
$100,000
$100,000
(602) 364-3863
Arkansas
$300,000
$300,000
$300,000
$300,000
(501) 375-9151
California
$250,000
$250,000
$100,000
$100,000
(323) 782-0182
Colorado
$300,000
$300,000
$100,000
$100,000
(303) 292-5022
Connecticut
not specified
$500,000
$500,000
$500,000
(860) 647-1054
Delaware
$300,000
$300,000
$100,000
$100,000
(302) 456-3656
District of Columbia
$300,000
$300,000
$100,000
$300,000
(202) 434-8771
Florida
$300,000
not specified
$100,000
not specified
(904) 398-3644
Georgia
$300,000
not specified
$100,000
not specified
(770) 621-9835
Hawaii
$300,000
$300,000
$100,000
$100,000
(808) 528-5400
Idaho
$300,000
$300,000
$100,000
$300,000
(208) 378-9510
Illinois
$300,000
$300,000
$100,000
$100,000
(773) 714-8050
Indiana
$300,000
$300,000
$100,000
$100,000
(317) 636-8204
Iowa
$350,000
$300,000
$100,000
$250,000
(515) 248-5712
Kansas
$300,000
$300,000
$100,000
$100,000
(785) 271-1199
Kentucky
$300,000
$300,000
$100,000
$100,000
(502) 895-5915
Louisiana
$300,000
$300,000
$100,000
$100,000
(225) 381-0656
Maine
$300,000
$300,000
$100,000
$100,000
(207) 633-1090
Maryland
not specified
$300,000
$100,000
$100,000
(410) 998-3907
Massachusetts
$300,000
$300,000
$100,000
$100,000
(413) 744-8483
Michigan
$300,000
$300,000
$100,000
$100,000
(517) 339-1755
Minnesota
$300,000
$300,000
$100,000
$300,000
(651) 407-3149
Mississippi
$300,000
$300,000
$100,000
$100,000
(601) 981-0755
Missouri
$300,000
$300,000
$100,000
$100,000
(573) 634-8455
Montana
$500,000
$300,000
$100,000
$100,000
(262) 965-5761
Nebraska
$500,000
$300,000
$100,000
$100,000
(402) 474-6900
Nevada
$500,000
$300,000
$100,000
$100,000
(775) 329-8387
New Hampshire
$300,000
$300,000
$100,000
$100,000
(603) 226-9114
New Jersey
$500,000
$500,000
$100,000
$500,000
(973) 623-3989
New Mexico
$300,000
not specified
$100,000
not specified
(505) 820-7355
New York
$500,000
not specified
not specified
not specified
(212) 909-6813
North Carolina
$300,000
$300,000
$300,000
$300,000
(919) 833-6838
North Dakota
$300,000
$300,000
$100,000
$100,000
(701) 235-4108
Ohio
$300,000
$300,000
$100,000
$100,000
(614) 442-6601
Oklahoma
$300,000
$300,000
$100,000
$300,000
(405) 272-9221
Oregon
$300,000
$300,000
$100,000
$100,000
(503) 588-1974
Pennsylvania
not specified
$300,000
$100,000
$300,000
(610) 975-0572
Puerto Rico
$300,000
$300,000
$100,000
$100,000
(787) 765-2095
Rhode Island
$300,000
$300,000
$100,000
$100,000
(401) 273-2921
South Carolina
$300,000
not specified
not specified
not specified
(803) 276-0271
South Dakota
$300,000
$300,000
$100,000
$100,000
(605) 336-0177
Tennessee
$300,000
$300,000
$100,000
$100,000
(615) 242-8758
Texas
$300,000
$300,000
$100,000
$100,000
(512) 476-5101
Utah
$500,000
$500,000
$200,000
$200,000
(801) 572-1218
Vermont
$300,000
$300,000
$100,000
$100,000
(802) 229-3553
Virginia
$350,000
$300,000
$100,000
$100,000
(804) 282-2240
Washington
$500,000
$500,000
$500,000
$500,000
(360) 426-6744
West Virginia
$300,000
$300,000
$100,000
$100,000
(304) 733-6904
Wisconsin
$300,000
not specified
not specified
not specified
(608) 242-9473
Wyoming
$300,000
$300,000
$100,000
$100,000
(303) 292-5022

Source: The National Organization of Life and Health Insurance Guaranty Associations and state guaranty associations. Current as of June 30, 2008.

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