Having your insurance company closed down is not a situation that most people ever want to deal with, but it does happen. Sometimes insurance company bankruptcy can create uncertainty about your insurance policy. What happens if your insurance company closes down or declares insolvency? Does this mean you lose your insurance coverage?
Fortunately, there are protections in place for insurance policyholders, whether you’re buying insurance as an individual consumer or purchasing insurance coverage for small business. If your insurance company closed down, you can rest assured that you still have certain protections and rights.
Learn more about insurance company bankruptcy, how it affects policyholders and what you can do next in case this happens to your insurer.
How Does Insurance Company Bankruptcy Happen?
Insurance companies get paid to manage risks and the industry is heavily regulated, so you would think insurance companies are fairly safe from bankruptcy. The truth is: insurance company bankruptcy doesn’t happen often. Most insurance companies are financially strong and stable and are able to pay out claims as promised.
However, sometimes insurance companies misprice their risks: they don’t charge enough money for premiums, or they underestimate how much money they might have to pay out in case of an increase in claims. If this happens to an insurance company and the financial damage is too big, the company might need to go out of business.
What Protections Do Insurance Policyholders Have?
If your insurance company has closed down or gone bankrupt, don’t panic. The first thing you should do is keep paying the premiums on your policy – this will keep the policy in force and protect your rights to receive benefits if you have to make a claim.
Your state government is responsible for regulating insurance companies that operate in your state. The government agency might be called the state Insurance Division or state Guaranty Fund. States are required to step in and help customers of bankrupt insurance companies in the same way that the FDIC regulates banks and protects bank customers against bank failure. You will not “lose” your insurance policy if your insurer goes bankrupt as long as you keep paying the premiums on your policy as required.
What Happens to Your Insurance Policy in Case of Insurance Company Bankruptcy?
If your insurance company closes down or goes bankrupt, your state government will do one of two things to help:
Your insurance policy will be transferred to another insurance company, or
The state insurance regulator/guaranty fund will take over your insurance policy.
Keep in mind that you will not lose your insurance coverage as long as you keep paying your insurance premiums. However, some states limit the amount of insurance coverage they will provide for policyholders in these situations. Depending on the policy you purchased, the new state limit might be lower than the amount of coverage you had with your previous insurance company.
How Can You Avoid Problems from an Insurance Company Bankruptcy?
If you are worried about losing your insurance coverage or having a disruption in your insurance coverage due to your insurance company closing down, there are a few things you can do:
Check the financial strength ratings for your insurer. Agencies like A.M. Best, Fitch, Moody’s and Standard & Poor’s provide publicly available credit ratings of insurance companies. (You might need to register for the site to search the ratings.) If you’re curious to see how stable and creditworthy your insurance company is, these ratings agencies can be a good way to get a sense of how likely (or not likely) your insurer is to run into financial trouble. If your insurer’s rating gets “downgraded” by a ratings agency, that can mean the insurance company is struggling to pay claims or is overwhelmed by too many claims. If your insurer’s rating holds steady or is “upgraded,” that can signify that the insurance company is stable or getting financially stronger.
Consider switching insurers. If you’re feeling worried about your insurer’s financial stability, it could be a good idea to switch to a higher-rated, more financially secure insurance company.
Consider buying an additional policy from another company. In case your insurance company closes and your coverage limit goes below what you were paying for, you might want to keep that policy and buy an additional policy (from a different company) for extra coverage. This might not be the ideal solution, but it can help you get the right level of coverage that you want, even if it’s at a higher price. For example, if you bought $500,000 of life insurance, but the insurer went bankrupt and now the state is limiting you to $300,000 of coverage on that policy, you could buy an additional $250,000 policy from a different company to get back to the full coverage amount that you originally wanted.
Finding Small Business Insurance Coverage After Shutting Down
Many small business owners are still emerging from the chaos and uncertainty of 2020. Some small businesses had to shut down for the pandemic, and some have been surviving with low-interest government loans and grant money. If your business is just starting to get back on its feet in 2021, and especially if your insurance policies lapsed during the crisis because you couldn’t pay the bills, you might want to re-evaluate your small business insurance coverage.
A few types of business insurance coverage that you might need:
Commercial Property Insurance: If your business owns any real estate or property, you should get property and casualty insurance to protect yourself from losses caused by fire, theft or natural disaster.
Professional Liability Insurance or Product Liability Insurance: Depending on the type of business you own, you might want to get liability insurance to protect yourself in case of a lawsuit resulting from a defective product, disgruntled client or even a simple accident that happens on your business property.
Workers’ Compensation Insurance: If you have employees, this insurance coverage is mandatory and needs to be part of your overall planning. If your workers get injured on the job, this insurance can help take care of your people and protect your business from catastrophic costs.
Commercial Vehicle Insurance: You can get special insurance to protect your vehicles that you use for your business. This is separate from your personal vehicle and personal auto insurance policy.
Work-from-Home Insurance: If your business has downsized or pivoted during the pandemic and you’re now running your business from home, or if you’re still in startup mode and are working from home full time, you might want to consider getting in-home business insurance.
Business insurance can be complicated, and there are a lot of options for types of coverage, depending on your overall needs. Talking with an insurance professional can help you understand your overall business risks, what kinds of protections and specific coverages you might need and the best way to create a comprehensive package of business insurance coverage to protect your company.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.