BBB Answers the Question, “What Happens If Your Insurance Company Goes Bust?”

October 02, 2008

While American International Group (AIG) did not actually go out of business, thanks to an $85 billion loan from the Federal Reserve, the prospect did raise fears in the minds of consumers: What if my insurance company goes under? BBB is offering answers to consumers’ frequently asked questions on what will happen if their insurance company shuts its doors.

The ripple effect of uncertainty among consumers in the wake of the AIG bailout is deep and wide, even for those who do not have policies with AIG, once the world's largest insurer. More than two-thirds of Americans own life insurance policies. Nearly 85 percent of Americans have health insurance. About 70 million are homeowners, and more than 200 million people in the U.S. have auto insurance.

“The economy is in extreme turmoil right now and millions of consumers simply aren’t sure who to trust on any financial issues,” said Bob Shomphe, BBB NH CEO. “When it comes to insurance, they can rest assured, however, that there are a number of precautions in place to protect them and ensure they remain covered.”

Following are answers to frequently asked questions on what happens to a policy-holder’s coverage if their insurance company goes out of business:

Who regulates the insurance industry?

Insurance companies are regulated by state Departments of Insurance which monitor the financial well-being of insurance companies headquartered in their state. If a company is at risk of going under, the department, or commissioner, will step in to save the company from going bankrupt. If a company cannot be saved, the department will oversee the liquidation process.

Will I still have insurance coverage?

Insurance guaranty associations have been established in every state and are designed to protect policy-holders if their insurance company becomes insolvent. An insurance company must be a member of the guaranty association for every state in which it does business. If a company becomes insolvent, the insurance guaranty association ensures continuation of coverage either by taking on the policy directly or by transferring the policies to a financially stable insurer.

What about any claims?

The laws vary from state to state. However, most life and health guaranty associations provide coverage at limits of at least $300,000 for life insurance death benefits, $100,000 for life insurance cash surrender values, $100,000 for annuity withdrawal or payment values, and $100,000 for health insurance benefits.

Most property/casualty guaranty associations provide coverage on a per-claim basis for personal injury and property damages up to $300,000 and provide full benefit coverage for workers’ compensation claims.

Since 1988, the life and health insurance guaranty system has participated in approximately 100 multi-state insurer insolvencies, guaranteeing more than $21 billion in coverage benefits and assessed their member insurers more than $6 billion to protect more than 2.2 million insured consumers.

Further, since the early 1970s, the property/casualty insurance guaranty system has provided protection to policy-holders in more than 450 cases of insurer insolvencies, paying a total of approximately $21 billion in claims and expenses.

Where does that money come from to cover claims?

If an insurance company goes bankrupt, any amount of coverage that cannot be attained from the company’s liquidation is borne by other insurers in the state according to the amount in premiums those insurers earn from that state.

Should I switch insurance companies?

BBB is finding that some state insurance regulators are reporting unscrupulous agents are advising policy holders to pull out of AIG and/or other insurers and switch to different companies. Consumers should know that such sales pitches are at best suspect, and may in fact be illegal. Before making any changes to insurance plans, consumers should consider several factors. There may be cancellation fees when changing auto or homeowners insurance firms. And consumers can expect that there may be higher premiums associated with any new life insurance policy, particularly if they are now several years older than when the policy was originally purchased or if they now have any health issues.

How can I be sure my insurance company is safe?

There’s no way to be absolutely sure that an insurance company is healthy. Even AIG was considered one of the best stocks to purchase in the insurance sector by some analysts before it required the $85 billion loan from the government to stay afloat. To help consumers evaluate their insurer, there are several businesses that rate insurance companies on their financial strength and creditworthiness including Moody's, Standard and Poor's and A.M. Best. Consumers can also confirm with their state Insurance Department that the company is licensed to do business in the state.

For more BBB advice on insurance or other financial planning issues, consumers can start their research with trust at