Frequently Asked Questions

What is a guaranty fund?

A guaranty fund, also known as a guaranty association, protects policyholders and claimants
when an insurance company becomes insolvent. Guaranty funds are nonprofit entities
created by state law. Most guaranty funds were created in the 1960s as state insurance
commissioners and lawmakers reacted to an increase in the number of insurers that became
insolvent after writing policies in the high-risk auto insurance business.

There are separate guaranty funds for property and casualty and life and health insurance
insolvencies. This information concerns only the property casualty guaranty funds.
Do many insurance companies become insolvent?

Insurance is a business that deals with risk, and although the vast majority of companies are
well managed and financially sound, occasionally a company does run into problems. Since
the late 1960s when most property and casualty guaranty funds were first established, there
have been about 600 insolvencies. Since they came into being, guaranty funds have paid out
more than $35 billion to protect policyholders impacted by failed insurance companies.
What happens if the company is liquidated?

Insurance companies in each state are required to become members of the guaranty fund as a
“condition of authority” to transact insurance business. Guaranty funds generally operate
under the authority of the state’s insurance code, work cooperatively with the insurance
commissioner to protect policy claimants of an insolvent insurer, and pay covered claims as
defined by the insurance code.

When a company is placed into liquidation, the state insurance commissioner is appointed as
receiver and begins the process of collecting assets and determining the company’s
outstanding liabilities.

After the court declares an insurer insolvent and puts it into liquidation, many of the state’s
policy claims will be handled by the guaranty fund. Policyholders are also told they will
have to find a new carrier for their insurance coverage going forward. Generally, they must
find replacement coverage within 30 days of the date the company is liquidated.

When a guaranty fund is alerted that an insurer doing business in its state is insolvent, it
works with the insurer’s receiver as the receiver marshals the insurer’s data and converts it
for use with a data system universally used by guaranty funds and receiverships.

In insolvencies where a number of state guaranty funds are impacted, the funds, with
coordinating support from the National Conference of Insurance Guaranty Funds, (NCIGF)
will typically form a coordinating committee to coordinate activity and serve as an
intermediary between the guaranty funds and receiver.

What is the role of the guaranty funds?

Guaranty funds ease the burden on policyholders and claimants of the insolvent insurer by
stepping in and assuming responsibility for most policy claims immediately following the
liquidation. By virtue of their unique role, guaranty funds are able to provide two important
benefits: prompt payment of covered claims and payment of the full value of covered claims
up to the guaranty fund’s cap.

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

Yes. Most guaranty funds limit the amount they will pay to the amount of coverage
provided by the policy or $300,000, whichever is less. Many guaranty funds apply a
deductible, usually $100, which is subtracted from the amount paid on the claim. All
guaranty funds in the United States pay 100 percent of their state’s statutorily defined
Workers’ Compensation benefits.

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

It varies, but claim payments usually begin as soon as possible once a company has been
placed into liquidation. It is not uncommon for claims to be paid within 60-90 days after the
Order of Liquidation. Guaranty funds, coordinating with the receivers of the liquidating
companies, work hard to avoid any interruption in periodic benefits that are being paid to
claimants, such as Workers’ Compensation bi-weekly payments.

Does a guaranty fund pay all claims that a policy obligation of an insolvent insurer?

No. The state insurance guaranty funds are designed as a safety net to pay certain claims
arising out of policies issued by licensed insurance companies. Claims are paid to limits
established by state law. Guaranty funds do not pay non-policy claims or claims of self-insured
groups or other entities that are exempt from participation in the guaranty fund
system. There are also certain lines of business that are excluded from guaranty fund

Will the guaranty fund provide a new policy to the policyholder whose company was

No. Guaranty funds do not sell insurance policies. The affected policyholder must purchase
new coverage through another company.

How many guaranty funds are there?

Every state has a guaranty fund set up to pay property and casualty insurance claims.
Several states also have separate funds for Workers’ Compensation claims. In addition,
every state has a separate guaranty fund set up to handle claims related to life and health
insurance companies that become insolvent.

Are all of the state guaranty funds the same?

While many of the funds are based on a model set forth by the National Association of
Insurance Commissioners (NAIC), there are differences from state to state. Most of the
differences center on the amount of coverage provided by the fund.

Where do guaranty funds get the money used to pay claims?

Funding comes from two sources. Historically, approximately half of the guaranty
associations’ funding has come from assessments made against solvent licensed insurance
companies doing business in their state. Assessments are made as needed and are typically
capped at two percent of a company’s net direct premium written in that state the prior year.
The other source of funding is recoveries from assets of the insolvent insurance companies
for which the guaranty funds pay covered claims.

Do insurance companies pass this cost along to their customers?

The cost of this consumer protection system established by the states is passed on to the
public either in the form of increases in the cost of insurance policies, surcharges on policies
or tax offsets. For this reason it is important to have a well-managed, financially sound
guaranty fund system to keep the costs as low as possible.

What is the role of the National Conference of Insurance Guaranty Funds (NCIGF)?

NCIGF, located in Indianapolis, is a nonprofit association incorporated in 1989 to provide
national assistance and support to the property and casualty guaranty funds located in each
of the 50 states and the District of Columbia.

The NCIGF monitors national insurance activities and coordinates information for multistate
insolvencies. We provide support to our members in various legal and administrative
matters. The NCIGF works in close cooperation with the property and casualty insurance
trade associations on a range of guaranty fund-related issues, and helps develop model
legislation. The NCIGF provides a national forum for discussions and interchange of
information on guaranty fund and insolvency matters.



At the heart of the insurance contract lies the assurance that when misfortune happens,
insurance will be there to soften the blow with coverage for one’s losses.

But what happens when a property and casualty insurance company becomes financially
troubled and fails? What happens to policyholders who draw on coverage written by an
insolvent company?

The good news is they are protected because the property and casualty guaranty fund system
pays the claims.

Established in the late 1960s by the insurance industry and public policymakers to cover the
outstanding claims of insolvent insurance companies, the guaranty fund system has
delivered protection to thousands of policyholders and beneficiaries who otherwise would
have no coverage.

The guaranty funds maintain an essential safety net for policyholders, one that makes good
on the foundational promise of insurance: to pay losses covered under the policy.

A promise kept
The property and casualty guaranty fund system is a privately funded, nonprofit state-based
program. The system, which pays covered claims up to a state’s legally allowable limits, has
safeguarded countless policyholders who might otherwise face financial ruin because of
unpaid claims related to an insolvency.

The guaranty fund system supports the insurance promise by assuring the viability,
commitment and reputation of the property and casualty insurance industry, adding
substantial value both to the insurance industry and for its customers.

A state life and health insurance guaranty fund system also exists; but it operates
independently from the property and casualty system.

In some – but not all – ways, guaranty funds perform a consumer protection function similar
to the Federal Deposit Insurance Corporation (FDIC) and its protection of bank deposits.
Guaranty funds ensure that when a policyholder of an insolvent insurance company incurs a
covered loss, it is covered within limits determined by individual state laws and the
insurance contract.

Guaranty funds represent “a promise kept on a promise made,” says Roger Schmelzer,
president of the National Conference of Insurance Guaranty Funds (NCIGF), a nonprofit
national association that provides support and coordination to the state property and casualty
guaranty funds.

“For nearly five decades the guaranty fund system has kept its promise, paying out more
than $35 billion to cover claims against about 600 insolvencies,” said Schmelzer. “Through
the years, the system has successfully met every challenge that’s come its way, and has been
instrumental in supporting the insurance promise.”

The roots of the guaranty fund system
Today’s property and casualty guaranty fund system traces its origins to 1969 when the
National Association of Insurance Commissioners supported the Model Liquidation Act –
legislation that provided an administrative framework for conducting liquidation

The same year saw the formation of the first state property and casualty guaranty fund
associations. Since then, every state, the District of Columbia, Puerto Rico and the Virgin
Islands have established an association for administering guaranty funds.

State laws require that licensed property and casualty insurance companies belong to the
guaranty funds, the relationship that enables them to transact property and casualty
insurance business.

The guaranty funds: how they work
The failure of an insurance company is administered differently than other business
bankruptcies. This is because insurance is regulated by the states and failures are exempted
from federal bankruptcy law.

When an insurance company becomes insolvent and is unable to pay outstanding claims, a
state’s courts and the insurance commissioner begin a legal process to determine if the
company should be placed into receivership. Receivership is a form of bankruptcy in which
a company can avoid liquidation (that is, selling its assets) by reorganizing with the help of
a court appointed trustee.

Among the options available to a commissioner prior to liquidation is conservation, a
judicial proceeding that gives the commissioner direct control over the assets of an insurer.
Another step a commissioner might take is placing the troubled company into rehabilitation.
Under rehabilitation, the commissioner takes title to the insurers’ assets and closely
supervises the company with the view toward rehabilitating it.

The “last resort” option is liquidation. If a company is unable to pay its debts or has
insufficient assets, the courts and the state insurance commissioner conduct a thorough
investigation of its financial condition. If the commissioner deems the company incapable of
being rehabilitated, it is placed into liquidation and its assets are liquidated.

During liquidation the commissioner becomes the receiver of the company’s “estate.” The
commissioner marshals the company’s assets, determines liabilities and begins distributing
assets to the estate’s creditors.

A company in liquidation is unable to issue new policies. Its current policies are cancelled,
and policyholders are notified and directed to seek coverage elsewhere.

Enter the guaranty funds
Liquidation does not halt payment of outstanding claims against the company. Instead,
liquidation triggers involvement of the state’s guaranty association. The state guaranty
association works with the receiver and regulators to pay claimants, answer questions, assist
in claims data management and generally play a coordinating role in overseeing the

Covered claims are paid according to policy amounts and state-established limits. The law
defines the guaranty association as a creditor of what is termed the “estate” – one that is,
however, statutorily authorized to obtain early disbursements of estate funds, which it passes
on to claimants.

How estate assets are distributed varies from state to state. In most states, the receiver
prioritizes distribution of estate assets, paying liquidation-related administration costs first,
claimants next, and remaining creditors last.

The receiver/guaranty association partnership ensures that claimants and beneficiaries are
among the first creditors to be paid.

Covered within statutory limits
State statutes determine coverage types and limits of the guaranty fund system; these limits
vary from state to state. This means the guaranty funds pay claims within the scope of the
policy, statutory limits, or “caps,” fixed by the state.

Most states maintain $300,000 caps on property and casualty claims (caps, however, do not
generally apply to Workers’ Compensation claims.)

These caps, which were established in the early days of guaranty funds, reflect the original
intent of the system: to protect individuals and small businesses – those potentially hardest
hit by insolvencies. Caps enable the guaranty fund system to ensure sufficient funds, or
“capacity,” is available to serve all claimants.

Generally, a policyholder whose claim is greater than the statutorily determined limit can
apply to the estate to get full payment. However, such payment places the claimant with
other creditors who sometimes must wait years for estate asset distribution.
Funded by assessments

When an insolvent company does not have enough money to cover all its claims, a state’s
guaranty fund is statutorily empowered to fund the amount needed to pay the claims through
mandatory industry assessments.

These assessments raise funds to pay claims and administrative and other estate-related

Assessments and the means of collecting them vary from state to state. Generally, guaranty
funds levy assessments against solvent companies that write similar types of policies in their
states. Assessment are typically a small percentage of business written. In most states there
is an annual assessment cap of two percent of net direct written premium. In some states,
assessments may be recouped through tax offsets.

To the extent possible, the funding to enable the guaranty funds to fulfill their statutory
duties is obtained from remaining estate assets. These include the insurance company’s
assets (including reinsurance) and funds deposited with state regulators in certain states
while the company is still writing business. Guaranty funds also are funded through
assessments from member insurers – that is, insurance companies licensed to write business
in a state.

All but three guaranty funds (the New York Liquidation Bureau, New Jersey Workers’
Compensation Security Fund and the Pennsylvania Workers’ Compensation Security Fund)
assess post-insolvency. These guaranty funds use a pre-insolvency assessment process.

“Like all businesses, insurance companies are not free from the threat of failure,” said Roger
Schmelzer. “But when insolvencies do occur, the guaranty fund system is with an effective
and proven safety net that provides policyholder protection to the maximum legally
allowable limits.”


The Property and Casualty Guaranty Fund System: Supporting the Insurance Promise for 50 Years

After 50 years, the nation’s property and casualty guaranty funds system remains strong, resilient and true to its original intent of protecting policyholders by stepping in to pay covered claims of insolvent insurers.

“Since the guaranty fund system was established by industry and state lawmakers five decades ago, it has performed well, meeting its obligations by paying claims to policyholders, beneficiaries and claimants when their insurance companies fail,” said Roger H. Schmelzer, president & CEO of the National Conference of Insurance Guaranty Funds (NCIGF).

The NCIGF is a nonprofit national association that provides support and coordination to the state property and casualty guaranty funds.

A state-based insurance consumer protection mechanism, the property and casualty guaranty fund system safeguards policyholders and claimants by stepping in to pay claims to the limits established by state law when an insurance company becomes insolvent.

Guaranty funds are administered by state guaranty associations, which are created by state law as nonprofit entities. The guaranty fund system works with regulators to ensure uninterrupted injured workers’ and other outstanding claims are paid by the guaranty funds as defined by state law.

There are separate guaranty funds to handle claims related to property and casualty and life and health insurance insolvencies. (For more information on how guaranty funds work and are funded, see the accompanying Backgrounder and Q&A.)

Schmelzer said the nation’s property and casualty guaranty funds system remains a strong and effective safety net that protects the nation’s policyholders.

“The system has paid about $35 billion to policyholders and beneficiaries in claims relating to nearly 600 insolvencies over the past 50 years,” said Schmelzer. “The property and casualty guaranty funds stand strong and ready to protect covered insurance consumers whose insurance companies fail. By doing so, the system protects not only the consumer, but the sanctity of the insurance contract by assuring the viability, commitment and reputation of the property and casualty insurance industry.”

Schmelzer said the insurance industry experiences relatively few insolvencies in part because companies, regulators and the industry work to prevent them.

“State insurance departments conduct rigorous company oversight, and the insurance industry spends considerable resources studying exposure; the industry also spreads risk through reinsurance and other tools. For this reason, insurance company insolvencies are unlikely. However, when an insurance company fails, the property and casualty guaranty funds stand ready to protect consumers, as they have for the past 50 years.”


The NCIGF is a nonprofit national association that provides assistance and support to the property and casualty guaranty funds located in each of the 50 states and the District of Columbia.