ARE GUARANTY FUNDS THE ANSWER?
by Curtis Pearsall
Agents should be aware of several issues (some old, some new) about Guaranty Funds, what they’ll cover, and what they won’t. In this document Curtis Pearsall provides information about Guaranty Funds and their limitations.
Utica currently provides (and we have no plans to change this) in its standard policy protection for the agent against one of their companies being declared insolvent. We do add an exclusion for companies that are rated lower than B. As a result of our position, agents will appeal to Utica for reconsideration. We examine a number of factors in considering this appeal.
In virtually every state, the Guaranty Fund is designed to pay the claims of insolvent carriers. But there are some restrictions:
- There’s a dollar limitation (most are $300,000 or less). If you have a customer with an auto claim for more than this amount, the Guaranty Fund won’t pay 100% of the claim.
- There’s a time limitation on claims reporting. If your customer has GL coverage and submits a claim after this time limitation has expired, the Guaranty Fund might not respond.
- Many Guaranty Funds have an exclusion for accounts with a net worth over a certain amount. This might exclude claims for some of your Commercial accounts.
If you’re unsure of your state’s limitations, ask your Insurance Department.
An emerging issue with Guaranty Funds involves their financial condition. When the funds were first implemented, they were intended to compensate policyholders of small to medium size insurance companies. The Reliance insolvency will be the biggest in the history. This, together with the insolvencies of other significant carriers, could overwhelm the Guaranty Funds’ ability to pay claims.
What can you do about this? First, know the ratings of the carriers with whom you’re doing business. Ratings change frequently. Review them monthly. When you see a significant rating drop, discuss it with the company’s senior management or marketing representative.
A drop from A+ to A might not be a cause for alarm. But consider a drop from B++ to C++ a red flag and take appropriate action. When a carrier drops below B, send a memo to each policyholder advising them of the rating drop and what it means. Use honest and frank comments to avoid any misunderstanding. Notify policyholders that you have other markets for their coverages and that you will, on their instruction, remarket their accounts. Send these letters by themselves. Don’t include any other correspondence. Keep a record of the letters in your files. These will be critical documents if the carrier is declared insolvent and a claim is made against you.
If the future of the company doesn’t appear positive, I’d recommend that you cease doing business with them and remarket the business as the accounts come up for renewal. If it appears that a carrier’s rating is going to continue descending, consider mid-term replacement of the accounts.
Insurance company ratings are changing rapidly. Maintain a strong focus on your carriers’ ratings. Why? Because Guaranty Funds might not be the answer.
This article originally appeared in the Utica National Insurance Co. E&O Bulletin and is reproduced by permission. Curtis M. Pearsall, CPCU, AIAF is Vice President, E&O of the Utica National Insurance Group. He can be reached at Utica National Insurance Group, P.O. Box 530, Utica, NY 13503, (800) 274-1914, fax (315) 734-2807, or e-mail [email protected].