Minuteman Health, an insurance company serving residents of Massachusetts and New Hampshire, went into receivership this week after the Division of Insurance found that it did not meet tests for financial stability. So what happens when an insurance company goes bankrupt?
It turns out that the answer depends on your state government. Unlike bank accounts, which are generally covered by the Federal Deposit Insurance Corporation, the safety of your insurance policies is left up to state regulation. That holds true for everything from life or auto to health insurance and annuities. In just about all cases, any company that wants to sell insurance in a state will need to go through some regulatory hoops before they begin, and this may include participating in a state’s guarantee fund. After that, state regulators might ask for annual filings that show them that your insurance company is not taking unusual risks with your money and is likely to be able to pay out on any claims. The quality of this oversight depends on your state’s insurance division and the regulations that govern them.
If an insurance company does become insolvent, the state will likely step in to pay out on any current claims and either maintain your policy or request that other insurers agree to take it over. Here is where it gets sticky, though. There is no guarantee that your policy will be maintained or transferred – you might well need to buy a new policy. Just as significantly, your state sets a cap on how much it will pay out on each policy that comes due for a bankrupt insurer. For instance, the Massachusetts Insurer Insolvency Fund steps in when a property and casualty (think home and auto) insurer goes belly up. They will pay up to $300,000 to refund your unearned premiums or to compensate you for a loss. That’s just fine if your policy is for $250,000, but not great at all if you were counting on coverage for a $600,000 home loss.
Similarly, the Massachusetts Life & Health Insurance Guaranty Association covers only up to $300,000 of a death benefit or $100,000 of the cash value of your life insurance policy. It also limits what will be paid out for your health insurance claims and covers only $250,000 in total of any and all annuity policies you have with the failed insurer.
On top of all of this is the question of how far a state is willing to go if one or more large insurers in the state failed at once. No state maintains sufficient reserves for that sort of scenario, so we would likely see states asking other insurers – and taxpayers - to step in and assist. All of this serves as a reminder that even insurance companies have their risks. Make sure to check the ratings on your insurance company before you commit, and check this post and this post for whether you should be buying a policy at all.