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Navigating State Guaranty Funds: What to Expect When Your Insurer Is Insolvent

By Gerald R. Kowalski and Jodi D. Spencer

Your insurance company is insolvent. Now what? Your state guaranty fund may provide some relief, but is it worth pursuing? That depends.

Every state has enacted some form of a property and casualty insurance guaranty fund intended to provide insurance coverage to policyholders whose insurers have become insolvent. The stated purpose of the state guaranty fund is typically set forth in the statute, but generally they are designed to, among other things: 1) provide a mechanism for the payment of 'covered claims' (as defined in the statute); 2) avoid delay and reduce financial loss to policyholders because of insurer insolvency; and 3) assist in the prevention of insurer insolvencies. See, e.g., Ohio Rev. Code '3955.03. The theory behind a guaranty fund is that, upon insolvency and with respect to any 'covered claims,' the guaranty fund will step into the shoes of the insurer. As a result, a state guaranty fund acquires some of the same duties and obligations of your insurance company.

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