National Organization of Life & Health
Insurance Guaranty Associations

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What Happens When an Insurance Company Fails?

A Company In Trouble

Insurance is monitored and regulated by state insurance departments, and one of their primary objectives is protecting policyholders from the risk of a company in financial distress. When a company enters a period of financial difficulty and is unable to meet its obligations, the insurance commissioner in the company’s home state initiates a process—dictated by the laws of the state—whereby every attempt is first made to help the company regain its financial footing. This period is known as rehabilitation.

If it is determined that the company cannot be rehabilitated, the company is declared insolvent, and the laws of the state require the commissioner to ask the state court to order the liquidation of the company.

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Role of the Insurance Commissioner

The insurance commissioner, either appointed by the governor or elected, heads the state insurance department and monitors and regulates insurance activity within the state. The commissioner also has the responsibility to determine when an insurance company domiciled in the state should be declared insolvent and to seek authority from the state court to seize its assets and operate the company pending rehabilitation or liquidation.

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Role of the Receiver

By obtaining control of a company, the commissioner (or the insurance department) is, by law, the rehabilitator or liquidator of the company. In this capacity, the commissioner or department takes control of the company’s operations. Rather than do so directly, the commissioner may retain a special deputy receiver to supervise the company’s activities. The receiver may be an employee of the state insurance department or an independent professional experienced in legal, accounting, and actuarial issues.

The receiver oversees an accounting of the company’s assets and liabilities and administers the estate of the company. In doing so, the receiver seeks to maximize the company’s assets, transfer them to cash, and then distribute that cash to creditors having valid claims against the insurer in accordance with payment priorities specified by state law.

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Role of the Guaranty Associations

State life and health insurance guaranty associations are state entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance in a state must be members of that state’s guaranty association.

The guaranty association cooperates with the commissioner and the receiver in determining whether the company can be rehabilitated or if the failed company should be liquidated and its policies transferred to financially sound insurance companies. Once the liquidation is ordered, the guaranty association provides coverage to the company’s policyholders who are state residents (up to the limits specified by state laws—see below). For a complete listing of each state’s laws regarding this coverage, see Guaranty Association Laws in the “Facts & Figures” section.

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Guaranteed Coverage

While laws governing maximum limits and types of policies covered vary from state to state, virtually all states offer at least the following limits. Check your state association’s Web site, because many states offer higher limits for certain products:

  • $300,000 in life insurance death benefits
  • $100,000 in cash surrender or withdrawal value for life insurance
  • $100,000 in withdrawal and cash values for annuities
  • $100,000 in health insurance policy benefits

The overall benefit “cap” in most states for an individual life is $300,000, though some states have maximums that are higher. The above coverage limits apply separately for each insolvent insurer. For more information on covered and uncovered policies, see the FAQ section.

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How Coverage Is Funded

When an insurer fails and there is a shortfall of funds needed to meet the obligations to policyholders, state guaranty associations are activated. To amass the funds needed to protect the state’s policyholders, insurers doing business in that state are assessed a share of the amount required to meet all covered claims. The amount insurers are assessed is based on the amount of premiums that they collect in that state.

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Role of NOLHGA

The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) is made up of the 52 life and health insurance guaranty associations. Through NOLHGA, the associations voluntarily work together efficiently and effectively to provide continued protection for policyholders affected by a multi-state insurance insolvency. NOLHGA establishes a task force of representative guaranty associations to work with the insurance commissioner to develop a plan to protect policyholders.

For more information on NOLHGA's role in the process, see "What Is NOLHGA?" and "The Safety Net at Work."

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