In March, a judge placed Penn Treaty and its subsidiary American Network in liquidation. The long-term care insurers had more than 70,000 policyholders across the country who were probably wondering what would happen to their policies and claims.
While insurance companies don’t fail all that often, it happens enough that there’s a steady process for policyholders to follow.
What to do if your insurer goes under
Insurers aren’t subject to federal bankruptcy laws. They’ve been regulated by the states since a 19th-century Supreme Court decision we'll talk about later.
Instead of going through bankruptcy, insurance companies go into receivership. Rather than dealing with insolvency through federal bankruptcy court, insurer failures are handled by state guaranty associations.
When an insurer goes under, the receiver, usually the state insurance department, and the state guaranty association send notifications to all the policyholders, said Sean McKenna, a spokesman for the National Association of Life and Health Insurance Guaranty Associations (NOLGHA), a group comprising all the guaranty associations in the country. If you get a notice, it’s a good idea to make sure you have your policy and any other supporting materials handy.
Policyholders should continue to pay premiums if they want to keep their coverage, McKenna said. They’ll go to the guaranty association that’s taken over the failed company.
If they don’t keep paying premiums, policyholders may lose coverage.
What happens to your policy
If your insurer fails, your most pressing questions will probably concern what happens to your coverage and your benefits. Your state’s guaranty association laws govern which insurance products are covered.
In general, individual and group life, health and annuity policies are covered, but there may be some limits, McKenna said.
State guaranty associations have maximum benefit levels, sort of like how the Federal Deposit Insurance Corp. insures bank deposits up to $250,000 per depositor. If your benefits are higher than the maximum, the amount becomes a claim against the assets of the failed insurer.
Maximum benefits vary by state, most states provide at least the following standard amounts, according to NOLGHA:
$300,000 in life insurance death benefits
$100,000 in cash surrender or withdrawal values for life insurance
$250,000 in present value of annuity benefits, including net cash surrender/withdrawal values
$500,000 in major medical or basic hospital, medical and surgical insurance policy benefits
$300,000 in long-term care insurance policy benefits
$300,000 in disability insurance policy benefits
$100,000 in other health insurance benefits
Check with your state guaranty association to get the specific limits in your state.
When all else fails
What happens if a failed insurer doesn’t have enough assets to pay out all the benefits its policyholders are owed? It falls to the other insurers in the state.
For insurance companies to be licensed in the states where they do business, they’re required to be part of the state guaranty association.
“In other words, a company that does business in 25 states would be a member of 25 guaranty associations,” McKenna said.
If a failed insurer doesn’t have enough funds to meet its obligations, the guaranty association makes assessments on other member insurers to pay the claims of policyholders in the state. Insurers have to pay assessments based on the premiums each company collects on the kind of business for which benefits are required.
So if there are lots of claims on life insurance benefits against a failed insurer, the insurers who collect life insurance premiums are assessed based on the proportion of their share of the life insurance market in that state.
McKenna said this should happen quickly.
“Guaranty associations are often ready to pay claims on the day the company is placed in liquidation, thanks to their close working relationship with insurance regulators,” he said. “If plans to begin claim payments are not ready on day one, they are usually in place in a matter of weeks, and any backlog of claims is dealt with quickly.”
In practice, there can often be delays, said Robert Hunter, director of insurance for the Consumer Federation of America. Many of the guaranty funds are not pre-funded, so it can take time for guaranty associations to collect the funds from member insurers.
Policyholders also may face restrictions after an insolvency, Hunter said.
“Consumers lose certain rights and may lose some benefits that are in the policy,” he said. “They may lose the right to get out of the policy and they may have delays in getting their claims paid. Usually, the bigger the insolvency, the worse it gets.”
Hunter said if guaranty associations pre-funded their guaranty funds, it would reduce much of the delay in getting claims paid. New York is the only state that assesses funds for its guaranty fund before an insolvency.
Pre-assessment is uncommon because insurers generally don’t like shelling out the money, Hunter said, and there’s little push for legislators to change things.
How it got this way
The states regulate insurers, not the federal government. It’s been this way since at least 1868, when the Supreme Court decided a case called Paul v. State of Virginia.
The court ruled issuing an insurance policy was not interstate commerce, and thus, couldn’t be regulated by the federal government. The court reversed itself in 1944, in The United States v. The South-Eastern Underwriter Association.
The case questioned whether the South-Eastern Underwriter Association was governed by the Sherman Antitrust Act, a federal law. The court held insurance companies were actually operating across state lines and so could be regulated by the federal government.
It didn’t last. The next year, Congress passed the McCarran-Ferguson Act, which handed regulatory power back to the states and partially exempted insurers from federal anti-trust laws. Ever since, it’s been a frequent target for repeal, but has survived thus far.
Hunter believes the law, which led to a hodgepodge of regulations across all the states, has hurt consumers.
“Some states do a very good job but the typical state does not,” he said.
Where we are now
Luckily, failures don't happen too often. NOLGHA, which usually only gets involved in failures affecting three or more states, only lists two or three insolvencies per year on its website. McKenna said only 10 life insurers that sold policies in more than two states had failed in the past 10 years and guaranty associations covered all the obligations.
However, catastrophes can wreak havoc in the insurance industry. Hurricane Andrew was resonsible for the failure of at least 16 insurance companies in 1992 and 1993, according to the Insurance Information Institute.
Consumers have ways of telling which insurance companies are less likely to fail. Ratings agencies like A.M. Best, Fitch Ratings, Moody’s, Standard & Poor’s and Weiss Ratings assess the financial stability of insurers.
They can help tell you whether your insurance company will be around for the long haul or whether you should take your money elsewhere. Policygenius also has more information on the best life insurance companies right here.