There are two main attributes that define a non-admitted insurance company. First the company is not regulated in the state, and second the company does not contribute to the state guaranty fund. We will explain what each of these attributes means so that you can answer the question, am I safe with a non-admitted company for my insurance?
Non-admitted Company’s Policyholders Are Not Covered by State Guaranty Fund
A state guaranty fund is a quasi-governmental organization administered by individual states to help provide financial protection for insurance policyholders in the possible event that their insurance carrier becomes financially insolvent. These funds only provide coverage for insurance companies who are “licensed” in that state. A non-admitted company is NOT licensed in that state. (Every non-admitted company approved for operation must by license in at least one state.) Every state has a guaranty association, although not every guaranty association operates under the same rules. Insurance companies are legally required to be members of these associations.
Most states have two guaranty associations: one for property and casualty companies and one for life and health companies.
When an insurance company becomes insolvent and can’t meet its obligations to pay claims, the association steps into the shoes of the insurance company and pays those claims. In some states, the association will refund unearned premiums when policies are canceled. The association then will assess its membership to pay those claims and loss adjustment expenses. In many states the insurance companies are allowed premium tax credits to offset those assessments.
Insurance companies who are in “rehabilitation” are not considered to be insolvent and, therefore, claims for coverage are not allowed under guaranty funds.
The amount of recoverable loss is limited by statute and varies from state to state from $100,000 to $300,000.
In my experience state guaranty funds are political and unpredictable as to what they will do. Therefore, I think that anyone who depends on a state guaranty fund for coverage will be poorly served.
A Non-admitted Insurance Company Is Not Regulated by the State
While it is true a non-admitted insurance company is not regulated by the state where it is considered “non-admitted”, it is also true that every non-admitted company that is approved to write business is admitted in at least one state. That state or states have full regulatory authority over the company and perform normal financial and operation audits.
Admitted companies must file their rates and policy forms. Non-admitted companies do not file either rate or form.
Non-admitted companies are required by states to file financial information, articles of incorporation, list of officers, and other general details. In most states non-admitted companies are prevented from writing risks that are readily available through admitted companies. Non-admitted companies tend to provide insurance coverage for unique and unusual risks. Since non-admitted companies avoid filing expenses they can economically address the needs of individual risks.
Studies show that the percentage of non-admitted companies that become insolvent is lower than the percentage of admitted companies that become insolvent. However, it is key that the insurance buyer exercised proper diligence in checking the company’s financial rating through companies like A.M. Best.
Insurance companies are in business to create profits. I believe that the profit motivation is much stronger than any regulator’s drive to protect. Further, most non-admitted companies are subsidiaries of admitted companies. Although the parent company isn’t necessarily financially obligated for the subsidiary, many parent companies will not want the stigma of allowing a subsidiary to become insolvent.
Are you safe with a non-admitted company? You are as safe, and considering historical data, maybe even safer with a non-admitted company.
However, to sleep a little better at night you might ask your broker or agent whether of not his professional liability insurance policy will cover insolvency for a non-admitted company? (Normally and insurance agent has no liability as long as the company was solvent when the policy was purchased. However, the laws become cloudy when a non-admitted carrier is involved.)
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Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.
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