Insurance is a promise to pay in the event that an insured risk occurs. Bankruptcy can seriously compromise the integrity of this promise. It is not reassuring to know that your business insurer- who protects your business from losses - may not be fully insulated from insolvency. However, a guarantee or promise is only as good as the person or entity making it.
With the 2008 failure of larger insurers (notably AIG), a strong insurer may be made susceptible by external circumstances that are anathema to its business model. Also, financial statements necessary to indicate strength may not immediately available or may lag behind the current financial dynamic. As a business owner, you cannot be completely certain. Therefore having an idea of what happens in the event of the failure of your business insurer is critical.
If your business insurer becomes bankrupt, coverage for your business does not simply disappear. There are procedures and statutory guarantees that aim to ensure that your business remains covered for the period that it should be covered for. Naturally, what happens when your business insurer goes bankrupt is contextual, but can be answered in broad terms.
a) Your coverage should be in force
Every insurer is required to maintain enough liquid asset classes to meet potential claims. When an insurer is bankrupt', it may not have enough cash to operate daily, but may have enough cash to meet potential claims on existing policies. However, an insurer should not use its statutory reserves for any purpose other than honoring its obligation to business policyholders.
b) Regulatory intervention
If solvency with regard to existing and potential claims is a problem, the relevant insurance regulator can intervene. The insurance regulator has the option of restructuring, rehabilitating or managing the insurer to ensure that it regains solvency. During these processes, the insured businesses in the insurer's portfolio will be accorded priority over creditors. Claims that were made before bankruptcy will be honored in full. Depending on the severity of the situation, claims made after the insurer went bankrupt may or may not be honored immediately and not necessarily to their full extent.
c) State guaranty funds
If all else fails, the last resort is to use state guaranty funds to meet the obligations to claims made by policyholders. Claim coverage will be honored, but not necessarily to the fullest extent either. Even in a situation where the insurer is no longer a going concern, current policy holders will have some claim coverage until their policies are no longer in force.
d) Renewal
Business insurance is different from other forms of insurance is that it is renewable- annually in many cases. You may be required to seek coverage elsewhere if the insurer cannot be rehabilitated such that it can remain a going concern. If, despite the attempts by the regulators, the insurer cannot be made viable again, you will certainly have to get a new business policy with another business insurer.
Protection of policyholders and maintaining competitive insurance industry are critical to insurance regulators. Your business will receive claim coverage for the period that your policy contract remains in force even if your business insurer goes bankrupt. If you have an existing claim, it should be fully honored. Claims made after bankruptcy is filed have a lower priority typically. The worst case scenario is that your business would have part-claim coverage until renewal and then you will have to seek another business insurer.
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