State Guaranty Fund

What Is a State Guaranty Fund?

A state guaranty fund is administered by a U.S. state to safeguard policyholders if an insurance company defaults on benefit payments or becomes wiped out. The fund just safeguards beneficiaries of insurance companies that are licensed to sell insurance products in that state.

How a State Guaranty Fund Works

State guaranty funds exist in each of the 50 states, Puerto Rico, the U.S. Virgin Islands, and Washington D.C. Most states keep up with separate funds for property/loss insurance and life/medical coverage. These state guaranty funds act as a form of insurance for insurance and are funded by insurance companies that sell insurance in a given state. The amount of funding an insurance company is required to pay is a percentage, going from 1% to 2 % of the net amount of insurance it sells inside a particular state.

To deal with insolvency, many states have passed a guaranty law in view of a model act drafted by the National Association of Insurance Commissioners (NAIC). A few states have enacted the model act word for word, yet most have passed a modified variant. As part of these laws, insurers must participate in a state's guaranty fund assuming they are licensed to carry on with work in that state. An insurer licensed in every one of the 50 states must participate in a fund in every one of those states.

Just licensed insurers must follow state guaranty laws. Unlicensed insurers, (for example, reinsurers) are not. Consequently, assuming a business is insured by a non-admitted insurer that is declared bankrupt, there is no mechanism for recovering unpaid claims from your state guaranty fund.

A few states expect employers to self-insure their workers' compensation obligations to participate in a guaranty fund for self-insured employers. The fund pays benefits to workers in the event that their employers can't pay due to bankruptcy or insolvency.

Special Considerations

State guaranty funds were made by federal statute in 1969, and are non-benefit systems operating in each of the 50 states, Washington, D.C., Puerto Rico, and the Virgin Islands. Prior to this order, a few states tried to freely make guarantees to answer insurer bankruptcies.

Initially, states kept a single fund to cover one line of business, like workers' compensation or personal collision protection, and insurance companies themselves were somewhat small. Many kept in touch with one line of business in a single state. On the off chance that an insurer failed, a limited number of policyholders and one state fund were impacted.

In 1990, a more thorough organization, the National Conference of Insurance Guaranty Funds (NCIGF) was made to facilitate and streamline state guaranty funds.

Today, many states keep several guaranty funds. For example, a state could operate separate funds for collision protection, workers' compensation, and different lines. Also, insurance companies are more complex than they were 40 or quite a while back. Most offer various coverages in different states, some in basically all states, and that means an insolvency today might influence various policyholders across the country and include guaranty funds in numerous states.

Features

• Many states have guaranty laws where insurers must participate in a state's guaranty fund on the off chance that they are licensed to carry on with work in that state.
• The fund just covers beneficiaries of insurance companies where the insurer is licensed to sell products in that state.
• State guaranty funds guarantee payment for insurance policyholders should the insurance company default.