Managing and Paying Claims for Property and Casualty Insurance

Western Guaranty Fund Services (WGFS) is a voluntary, non-profit, unincorporated association formed in 1984 for the purpose of managing and paying claims for property and casualty insurance guaranty associations. WGFS exists to provide management and claims supervisory services to insurance guaranty associations (also known as guaranty funds); to assist guaranty associations in the discharge of their statutory responsibilities; and to promptly and efficiently handle covered claims against insolvent insurers.

In 1984 a group of western United States insurance guaranty associations united with a common goal to form Western Guaranty Fund Services. Their goal was to centralize the management of their property and casualty insurance claims and to serve their administrative needs as economically as possible.

In its history, WGFS has managed over 28,000 property and casualty insurance claims on behalf of its member guaranty associations, paying over $440 million to claimants and policy holders.

Insurance Guaranty Associations

Most Americans who deposit money in a commercial bank or savings bank, know that if the bank runs into financial difficulty, they will not lose that money. Thanks to the Federal Deposit Insurance Corporation, a government agency, individual accounts up to $250,000 are protected.

Are there similar protections for people who purchase insurance? Are they safeguarded if something happens to their insurance company? Will their claims be paid? The answer is yes. The vehicle for this consumer protection is the PROPERTY and CAUSUALTY INSURANCE GUARANTY ASSOCIATION.

Despite careful oversight by state regulators, financially troubled insurance companies can become insolvent. State insurance departments monitor the financial condition of all insurance companies. If an insurance company appears to be in poor financial health, regulators are empowered to take certain steps to strengthen the insurer's position and, if all else fails, to ask the courts to declare the insurer insolvent and to order the liquidation of the insurance company.

Once a court has found an insurance company insolvent, and ordered it liquidated, a liquidator is appointed who begins an arduous task to identify assets, collect premiums, notify all parties who may potentially have a claim, and to turn covered claims over to the insurance guaranty association who will handle them to conclusion.

In the late 1960's, following several insolvencies, the first property and casualty (P&C) insurance guaranty associations were established. In 1970, the National Association of Insurance Commissioners (NAIC) representing state insurance regulators, proposed its model law.

Under the model law, a not-for-profit, property and casualty insurance guaranty association is established by each state. All property and casualty insurance companies licensed in the state, writing specified lines of insurance to be covered by the association, are required to be members.

This concept was gradually adopted by all states, the District of Columbia, and Puerto Rico. The associations had established procedures under which solvent property and casualty insurance companies contribute to absorbing covered losses of claimants against insolvent insurers.

Funds for the payment of claims and the expenses of the insurance guaranty association are derived primarily from assessments against licensed property and casualty insurance companies, writing specified lines of insurance, and from the assets of the estate of the insolvent insurer.

The insurance guaranty associations are obligated to pay covered claims of insolvent property and casualty insurance companies that existed prior to the determination of insolvency and typically those arising within 30 days from the date of the liquidation order.

Once claims are received, the insurance guaranty association assumes the day to day handling of the claims and, as seamlessly as possibly, handles all claims to their conclusion.

Under the state insurance guaranty association system, the property and casualty insurance industry has accepted a unique obligation to protect the public from insurer insolvency and has done this very well.

Frequently Asked Questions (FAQs)

What is Western Guaranty Fund Services (WGFS)?

WGFS is a voluntary, non-profit, unincorporated association formed in 1984 for the purpose of managing and paying claims for property and casualty insurance guaranty associations. The purpose of WGFS is to provide management and claims supervisory services to insurance guaranty associations or associations crated by statute (known as guaranty funds); to assist guaranty funds in the discharge of their statutory responsibilities; and to handle promptly and efficiently covered claims against insolvent insurers.

What is the role of the guaranty associations?

Guaranty associations ease the burden on policyholders and claimants of an insolvent insurer by immediately stepping in to assume responsibility for most policy claims following the insolvency. The coverage guaranty associations provide is fixed by policy language and state law; they do not offer a "replacement policy."

By virtue of the authority given to the guaranty associations by state law, they are able to provide two important benefits: prompt payment of covered claims and payment of the full value of covered claims up to the limits set by the policy or state law.

How prevalent are insurance insolvencies?

The potential failure of insurance companies, like the potential failure of all businesses, is an unfortunate, but inevitable, part of doing business in a free-market system. Since inception of the property and casualty guaranty association system, there have been about 600 insolvencies. In all, the system has paid out about $24.2 billion.

If my insurance company is insolvent, why isn't it in bankruptcy?

Insurance is a state regulated industry and many federal statutes, including bankruptcy laws, do not apply to them. When an insurance company becomes insolvent, the company's estate is administered, in its state of domicile, by the Commissioner of Insurance, as liquidator, and overseen by a state court.

Where do Insurance Guaranty Associations get the money to pay the claims?

The associations are largely funded by industry assessments, which are collected following insolvencies. These assessments raise funds to pay claims and administrative and other costs related to the association’s claim paying activities.

CIGA's assessments are capped at 2.0% of a company's net direct premium for the previous year. The other sources of funding are recoveries from distributions of the insolvent insurance companies and government backed investment income.

What happens when a company becomes insolvent and is in liquidation?

Liquidation is similar to bankruptcy. When a company is liquidated, the Liquidator (also referred to as the Receiver), collects the assets of the company and verifies the liabilities such as claim payments and bills. The Liquidator then develops a plan to distribute the company’s assets according to the law and submits the plan to the Court for approval.

In most cases, an estate will not yield sufficient money to pay claims in full; and most are not able to pay claims in a timely manner. For this reason, the guaranty association and other state guaranty associations step in (depending on the number of states in which the failed company wrote business) to cover certain claims. The estate’s creditors not covered by the guaranty associations usually receive only partial payment on their claims.

Should I get a new insurance policy if my insurer becomes insolvent?

Yes. Most liquidation orders cancel all policies within a certain time period after liquidation, typically 30 days. You will need to obtain coverage with another insurance company. However, guaranty associations do not recommend any particular company. You may contact any licensed insurance agent to get the names of other insurers.

If my policy has been terminated as a result of my insurance company’s order of liquidation, will the guaranty association provide me a new policy?

The purpose of the guaranty association is to protect policyholders and claimants from losses due to unpaid claims against policies issued by the insolvent insurance company. Guaranty funds cannot sell insurance policies. To obtain new coverage, you will need to contact a licensed insurance carrier or an insurance agent or broker.

Am I covered by the guaranty association if I purchased my policy from an unlicensed carrier?

No. Guaranty associations cover only licensed insurers. Companies not licensed in the your state, surplus lines carriers and self insured plans may not be covered under the property and casualty guaranty association statutes. If you purchased coverage from one of these entities, and the company is now insolvent, you may file a claim with the Liquidator. There may also be other guaranty associations that may provide coverage for policies issued by these types of organizations. Your State Department of Insurance can provide you additional information.

What is the status of my claim?

Please contact us or your assigned adjuster directly.

Are there limits on the amount that the guaranty association will pay?

Yes. If your insurance company has been declared insolvent, covered claims will be paid by the guaranty association up the limits (cap) prescribed by state statutes and the applicable policy. Although there is no maximum for workers compensation claims, the maximum amount CIGA can pay on other claims is $300,000 ($100,000 prior to August 2011). You may file a claim against the assets of the insurance company estate for amounts over that cap that are still within the limits of the applicable policy. The Receiver will send proof of claim forms and instructions for filing a claim.

Claims not covered by the guaranty association may be claims against the remaining assets (estate) of the insolvent insurance company and will be considered in the liquidation process.

How long does a policyholder have to wait to receive a payment from the guaranty association?

It varies, but claim payments begin as soon as possible once a company is ordered to be liquidated. The guaranty association, coordinating with the receivers of the liquidating companies, works hard to avoid delays but in some instances, delays may occur.

Does the guaranty association pay all claims of an insolvent insurer?

No. The associations are designed as a safety net to pay certain claims arising out of policies issued by licensed insurance companies. The associations may not pay non-policy claims or claims of self-insured groups or other entities that are exempt from participation in the guaranty association system. These limits on guaranty association coverage are necessary to balance the need to provide a safety net to those who would be most harmed by the insolvency of their insurance company and keep the burden of providing the safety net at an acceptable level.

Guaranty association coverage is limited to licensed insurers (the members of the guaranty associations that, in turn, pay insolvency-related assessments.) When a licensed insurance company becomes insolvent, the guaranty association pays eligible claims; but a company does not have guaranty association coverage if it is writing non-admitted or unlicensed products, such as surplus lines or is a self-insurer covered in the non-admitted market.

In addition, although most claims are covered by guaranty associations, coverage for a few types of claims may be excluded.

These limits on guaranty association coverage are necessary to balance the need to provide a safety net to those who would be most harmed by the insolvency of an insurance company and keep the burden of providing the safety net at an acceptable level.

Who regulates or oversees guaranty associations?

WGFS is governed by a Board of Directors that is elected by guaranty association members (that is, all companies writing licensed business in the state). There is also oversight authority by the Colorado Insurance Department, which reviews the association's plan of operation, and may also audit the guaranty association.

Are all of the state guaranty associations the same?

While many of the associations are based on a model set forth by the National Association of Insurance Commissioners (NAIC), there are differences in statutes that govern the associations and their operation from state to state, including the amount of coverage provided by the association.

I am a service provider or vendor of the insolvent company. Will the guaranty association pay my outstanding invoices?

After an order of liquidation is entered by the Court, the Receiver assumes responsibility for marshalling all of the assets of the insolvent company, liquidating the assets and recommending to the Court payment of liabilities as those assets allow. All “covered claims” which are amounts payable under an insurance policy of an insolvent company are transferred to the associations for the express purpose of avoiding excessive delay in the payment to claimants or policyholders. Therefore, most associations are not responsible for outstanding service provider or vendor invoices as these liabilities of the insolvent entity are not “covered claims” under the statute. You are, however, not without recourse as these outstanding invoices may be evaluated for payment by the Receiver.

If my insurance company is in liquidation, which guaranty association should I contact with questions regarding my claim?

In most instances, the guaranty association for your state of residence will be responsible for your claims. However, if your claim relates to property located in another state, that state's guaranty association will generally have responsibility for the claim.

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