If your insurance company goes bust

Advice for consumers from the Better Business Bureau By Edward Johnson To say that the current economy is wrought with uncertainty is an understatement. The extreme turmoil in our economic state will be written into history books and the term “stability” and “financial institutions” will not be synonymous. One of the ways that many people manage potential financial risk in their life is through insurance. Life, health, and auto insurance are among the most fundamental building blocks that we rely on. More than two-thirds of Americans own life insurance policies. Nearly 85 percent of Americans have health insurance and more than 200 million people in the U.S. have auto insurance. These policies provide security and a guarantee. So, what happens if your insurance company falters? Fortunately, there are a number of precautions in place to protect you. A great case in point is American International Group (AIG), once the world’s largest insurer. While AIG did not actually go out of business, thanks to an $85 billion loan from the Federal Reserve, the prospect did raise fears in the minds of consumers. Following are the BBB’s answers to frequently asked questions on what happens to a policy-holder’s coverage if their insurance company goes out of business: Who regulates the insurance industry? Insurance companies are regulated by state Departments of Insurance which monitor the financial well-being of insurance companies headquartered in their state. If a company is at risk of going under, the department will step in to save the company from going bankrupt. If a company cannot be saved, the department will oversee the liquidation process. Will I still have insurance coverage? Insurance guaranty associations have been established in every state and are designed to protect policy-holders if their insurance company becomes insolvent. An insurance company must be a member of the guaranty association for every state in which it does business. If a company becomes insolvent, the insurance guaranty association ensures continuation of coverage either by taking on the policy directly or by transferring the policies to a financially stable insurer. What about any claims? The laws vary from state to state. However, most life and health guaranty associations provide coverage at limits of at least $300,000 for life insurance death benefits, $100,000 for life insurance cash surrender values, $100,000 for annuity withdrawal or payment values, and $100,000 for health insurance benefits. Most property/casualty guaranty associations provide coverage on a per-claim basis for personal injury and property damages up to $300,000 and provide full benefit coverage for workers’ compensation claims. Should I switch insurance companies? The BBB and some state insurance regulators are finding that unscrupulous agents are advising policy holders to pull out of AIG and/or other insurers and switch to different companies. Consumers should know that such sales pitches are at best suspect, and may, in fact, be illegal. Before making any changes to insurance plans, consumers should consider several factors. There may be cancellation fees when changing auto or homeowners insurance firms. Consumers can also expect that there may be higher premiums associated with any new life insurance policy, particularly if they are now several years older than when the policy began or if they now have any health issues. How can I be sure my insurance company is safe? There is no way to be absolutely sure that an insurance company is healthy. Even AIG was considered one of the best stocks to purchase in the insurance sector by some analysts before it required the bailout loan from the government to stay afloat. To help consumers evaluate their insurer, there are several businesses that rate insurance companies on their financial strength and creditworthiness including Moody’s, Standard and Poor’s and a.m. Best. Consumers can also confirm with their state Insurance Department that the company is licensed to do business in the state. Edward Johnson is President and CEO of the Better Business Bureau serving the greater Eastern and Northeastern Pennsylvania region.