From the January 2004 issue of Entrepreneur

Ever thought about what would happen if your insurance carrier went bankrupt? It's not impossible. Insurance companies are businesses-and like any business, it's not unheard of for them to face financial difficulties, including insolvency. Policyholders need to pay attention and react swiftly to protect their companies.

Here's what happens when an insurance company goes bankrupt. A public notice is issued, and the carrier also notifies policyholders, says Holly Bakke, commissioner of the New Jersey Department of Banking and Insurance and chair of the National Association of Insurance Commissioners' Insolvency Task Force.

"There is a national system of guarantee funds that provides a safety net for policyholders," says Bakke. Particulars differ by state, but essentially, the guarantee fund pays some pending claims-typically up to $300,000, but not all types of claims are covered-refunds unearned premiums, and provides short-term coverage while you seek replacement insurance.

Bakke says that with the insolvency notice, you'll also receive a set of instructions. It's important to follow those instructions promptly and completely, especially if you have a claim you haven't filed yet. And don't delay your search for new coverage; the period during which the guarantee fund will protect you varies by state, but it's not a lot of time.

The best way to guard against a bankrupt insurance carrier is to buy your coverage from financially sound, well-managed companies. Bakke says your insurance agent should provide you with this information, as well as an explanation of how your state's guarantee fund works. "Your agent should be educating you on this issue long before it ever becomes an issue," says Bakke. And let's hope it never does.


Jacquelyn Lynn is a freelance business writer in Orlando, Florida.