7 TortSource 1 (2004-2005)

handle is hein.journals/tortso7 and id is 1 raw text is: Vol. 7, No. 1
Fall 2004                      t                                               American Bar s o6ff.6...
APublication of the Tort Trial and Insurance Practice Sectio

Reshuffling the Deck:
All Bets Are Off in High-Stakes
Insurer Insolvencies

Oh, No! My Insurer Has
Gone Bust!
Can an Insurance Guaranty
Association Help Me?
Alan N. Gamse
n todays world, many types of property and casualty insurance coverages are consid-
,ed to be a necessity, not a luxury State laws require motor vehicle insurance and work-
-its compensation coverage. Lenders and other contracting parties require property and
liability insurance. These coverages provide a financial safety net for insureds, those from
whom they borrow money, and those who may have tort claims against them.
Most insureds are ill equipped to make any sort of knowledgeable assessment of the
financial strength of the insurers from which they purchase policies. Even the experts, the
insurance regulators charged with financial overview of insurers, sometimes have trouble
accurately determining an insurers financial strength; and the financial decline of an insur-
er may not come to the attention of its regulator until far too late for effective remedial
action. When an insurance company becomes insolvent, the protection and security it
I              continued on page 4

Francine L. Semaya
he failure of insurance companies is nothing new and, until recently, did not present a
serious threat to policyholders or the insurance industry But recent insurer insolvencies now
threaten both. There is concern that the current state insurance insolvency system, includ-
ing the state guaranty fund system, cannot handle the volume and cost of both current and
anticipated insurer failures.
The National Conference of Insurance Guaranty Funds reports that for property and
casualty insurance failures, guaranty associations assessed solvent insurers $1.2 billion in
2002 and approximately $1.3 billion in 2003. From 2001 through 2003, property and casu-
alty insurance guaranty associations handled in excess of $15 billion in new claims, com-
pared to $9.3 billion paid for all claims handled through 2000. With the volume and value
of claims increasing each year, one has to wonder who are the ultimate victims of failed
insurers-policyholders and clainants, or the solvent insurers assessed for the claims against
failed insurers?
The regulation of insurance, including insurer insolvency, is left primarily to the
states. Unlike failures in other industries, insurer insolvencies are not subject to the fed-
eral Bankruptcy Code but are governed by state receivership laws, generally modeled
after the National Association of Insurance Commissioners' Insurers Rehabilitation and
Liquidation Model Act (Model Act). Most state laws provide that when an insurer is
continued on page 6

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