What Happens If an Insurance Company Becomes Insolvent?
When insurance companies become insolvent, the best-case scenario for policyholders is that their policies are sold to another company. However, in many cases, policyholders are left to pursue their claims in liquidation proceedings. Insurer liquidations are governed by state insurance insolvency law rather than federal bankruptcy law. The state regulator overseeing the liquidation sets a deadline by which all policyholders must submit claims, which is usually six months to a year after the insurance company is placed in liquidation. For policyholders with valid claims, two basic sources of payment exist: state guaranty funds and the insurer’s estate. State guaranty funds operate somewhat like the Federal Deposit Insurance Corporation. If the insurance company becomes insolvent, the guaranty fund pays covered claims up to a certain amount. The limits vary from state to state. In California, for example, payments are generally limited to $500,000. It is important to note that payments o
