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

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.

Despite this reassuring purpose, when a claim becomes subject to a state guaranty fund, there are several procedural aspects and statutory limitations that are not present when pursuing an insurance claim against a solvent insurer. Some policyholders can expect to recover significantly less for their claims than that which would have been available from their insurer. Some policyholders may even be required to reimburse the guaranty fund for any amounts that the guaranty fund pays on its behalf for a claim. These issues become more complicated if the policyholder does business in more than one state or if the insured has claims or lawsuits pending in multiple states. For these reasons, potential guaranty fund claims require significant analysis at the front end, and recovery from a guaranty fund may not be worth pursuing.