Are
Guaranty Funds the Answer?
by Curtis M. Pearsall, Vice President, Agents' Errors and Omissions Department
At the current time (and we have no plans to change this), the standard Utica National policy provides protection if one of the agent's companies is declared insolvent. We do put on an exclusion for companies that are rated less than B. As a result of our position, agents often appeal to Utica National for reconsideration.
In the majority of the appeals, the agent will raise the issue that this is what the Guaranty Fund is for. While on the surface this is true, there are some old issues and some new emerging ones that agents should be aware of. In virtually all states, there is a Guaranty Fund that is designed to pay the claims of the insolvent carrier.
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However, there are some restrictions:
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Regarding emerging issues involving the Guaranty Fund, the most critical one involves the financial condition of these funds. When these funds were first implemented, the aim was at compensating the policyholders of the small to medium size insurance companies. It is generally acknowledged that the Reliance insolvency will be the biggest in the history of insolvencies. These funds have the ability to assess solvent carriers to pay for the insolvency of others and should be able to honor their commitment to pay for covered claims. It is possible that the Reliance insolvency, coupled with the insolvency of other significant carriers, could have an impact on the timeliness of these payments. Just because there is a Guaranty Fund, does not mean it is the answer.
So what can you, as the agent, do about this? First, know the rating of the carriers that you are doing business with. These ratings change frequently so I would suggest that this review be done monthly. It is actually very easy to do. AM Best is a generally accepted benchmark of the financial condition of the carrier. Their website is easy to navigate and if you save the site as a favorite, it should take you no more than a minute per carrier to check their latest rating. If you see that the rating has dropped, you should have some discussion with the company either through senior management or through the marketing rep. A rating drop from A+ to A may not be cause for alarm but a drop from B++ to C++ should send up the red flag.
Utica recommends that when a carrier drops below B, send a memo to each policyholder advising them of the drop in the rating and what it means. We recommend honest and frank comments to avoid any misunderstanding. You should notify the policyholder that you have other markets for this coverage and that you will, upon their instruction, market their account to more financially secure markets. I would recommend that these letters be sent by themselves rather than mixed in with other correspondence. Make sure you keep a record on file of the letter that you sent. This will be a critical document in the event that the carrier is declared insolvent and a claim is made against you.
If it does not appear that the future of the company is positive, I would recommend that you cease to do business with that company and replace the business as the accounts come up for renewal. If it appears that the rating of the carrier is going to continue to go down, midterm replacement of the account should be the course of action.
Insurance company ratings are changing very rapidly, and
a strong focus should be made to monitor the ratings of your carriers.
Why? Because Guaranty Funds may not be the answer.
Communiqué is published for our agent-customers for informational purposes only and is not intended to be, nor should it be relied upon as legal advice. Legal questions should be directed to your legal advisor.