Insurance should buy you peace of mind, knowing that you are covered financially if the worst should happen. What do you do if you file a claim only to find the insurance company is insolvent? In California, guarantee associations step in to provide coverage to policyholders.
Conservation and Liquidation Office
The Conservation and Liquidation Office (CLO) of the California Department of Insurance is responsible for determining whether an insurance company can continue normal operations, without interference by the Insurance Commissioner. If it can, your claim will be paid. Conservation happens when a Superior Court of California orders the Insurance Commissioner to manage an insurance company, usually when the company is insolvent so that the company's assets can be preserved and used to pay policyholders, creditors and other interested parties.
When a Superior Court orders the Insurance Commissioner to end an insurance company's business by canceling existing policies and not issuing new policies, it is called liquidation. During liquidation, the Insurance Commissioner sells the company's assets to raise money to pay policyholders' claims. If the company is ordered into liquidation there are other protections in place.
California Insurance Guarantee Association
The California Insurance Guarantee Association (CIGA) provides protection for policyholders (property, casualty and workers' compensation) of insolvent insurers. If you have filed a claim and your insurance company goes into liquidation, CIGA will contact you and advise you of your rights under the Guarantee Act.
If your insurance company goes into liquidation before you file your claim you will receive notification from the CLO that your policy will be cancelled. If this happens you should immediately contact CIGA and send them a copy of the claim. You must also file a proof of claim with the Insurance Commissioner.
CIGA will determine whether your claim is covered. If it is they will pay your claim up to a limit of $500,000. Where either the whole or part of the amount is not covered, the residual claim will be dealt with by the CLO as part of the company's liquidation. In a liquidation, the amount you receive depend upon what assets remain in the insolvent company and the number and value of other creditors' claims. It is unlikely you will receive 100% of your claim.
California Life and Health Insurance Guarantee Association
The California Life and Health Insurance Guarantee Association (CLHIGA) provides limited protection for policyholders who are residents of California at the time an insurance company becomes insolvent. It also provides this protection to beneficiaries of policyholders regardless of where they live. CLHIGA is made up of insurers that sell life and health insurance and annuities. If a member is insolvent and is ordered to liquidate, a special deputy receiver processes the insurer's assets and liabilities, and CLHIGA takes charge of company's policies and providing coverage to policyholders.
CLHIGA will determine whether your claim is covered, and it is possible that CLHIGA will not pay the full value of your claim. For life insurance death benefit protection it pays 80% of the policy death benefit (up to $300,000). For life insurance net cash surrender and net cash withdrawal values, it pays 80% of the policy value up to a maximum of $100,000. Present value of annuity benefits including net cash surrender and net cash withdrawal values are paid 80% of present value (maximum of $250,000). The maximum total amount the Guarantee Association will provide for any one individual for life insurance and annuity coverage is $300,000, even if that individual is covered by multiple life insurance policies and annuities.
If the assets of the insolvent company are insufficient to cover claims, CLHIGA can assess member insurance companies to cover the shortfall. If your claim is not covered by CLHIGA the claim will be administered by the CLO as part of the company's liquidation.
Obtaining Damages from a Defendant's Insurance Company
If you have been awarded monetary compensation in a personal injury lawsuit, and the defendant's insurance company is insolvent, the defendant's claim on his or her insurance policy will be paid by the California Insurance Guarantee Association (CIGA). The minimum coverage required by the California Department of Motor Vehicles Code for automobile liability insurance is $15,000, and the maximum CIGA will pay is $500,000. If the amount paid by CIGA is less than that awarded to you, your own underinsured motorist coverage will apply to make up the difference.