The Nevada Division of Insurance regulates insurance companies. One reason for doing so is to protect policyholders if their insurer becomes insolvent.
It is worrisome to think that you will be without coverage if your insurer goes bankrupt. But there are ways you can still be covered by insurance, even if your insurer becomes insolvent.
Insurers and insolvency
Sometimes an insurance company, like any other business, experiences financial trouble. It can no longer pay its bills, its debts or its employees. It can no longer pay for coverage for all of its policyholders.
When this happens, the state insurance commissioner will, per law, try to help the insurer out financially. This is called rehabilitation.
If rehabilitation does not work, the insurer will be deemed insolvent. If this happens, the state insurance commissioner will move the court to liquidate the insurer.
When this happens, a receiver assigned by the commissioner will oversee the insurer’s assets and debts. The receiver will administer the estate of the insurer. Assets will be transferred to cash and distributed to creditors in priority order.
What does this mean for policyholders?
Insolvency may resurrect a failing insurer, but what does this mean for policyholders?
If an insurer does not have the funds to pay policyholders what they are owed, the state guaranty association will step in to provide coverage. The state guaranty association has subrogation rights. This means they can take on a share of the insurers assets to make sure policyholders’ claims are paid. In addition, insurers are assessed a portion of the amount of funds needed to cover the guaranty associations’ claims that could not be paid off with the insurer’s assets.
State coverage for policy benefits is usually based on amounts set by the NAIC Model Act.
For example, you may be covered for up to $300,000 in life insurance death benefits or up to $500,000 in medical insurance benefits. So, if your insurer becomes insolvent, you will still have some sort of coverage. This is not only fair, but it also assuages any fears you have that you will suddenly be without insurance.