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What should you do if your auto insurer fails?
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Auto insurance is a necessary expense for anyone who owns a car. But what happens if your auto insurance company fails? With Silicon Valley Bank, Silvergate, and Signature Bank all failing in a matter of days, many fear that the contagion may spread to other financial institutions, including auto insurance companies. If your auto insurer is having financial difficulties, you may be concerned that your coverage is in danger. Fortunately, your state will step in to ensure that claims are paid out. Here’s how it works.
Guaranty associations
In the past, if an auto insurer failed, claimants often faced lengthy delays and insufficient payouts when seeking compensation. To address these issues, each state created a guaranty association. The duties of the guaranty fund are to protect policyholders when a licensed insurance provider fails, by paying or making payments in accordance with the policy’s terms and conditions.
Just as the FDIC steps in for bank failures, these guaranty associations go to work when an auto insurer fails. It pays out any claims, helping to provide a reliable safety net for policyholders. The guaranty association will first try to rehabilitate the insurer or transfer its operations to another insurer, but if it fails, it moves to bankruptcy proceedings.
Company assets are then liquidated to help secure payment for any claims. Policyholders are generally given advance notice so that appropriate arrangements can be made for alternate coverage. The funds pay out up to a maximum amount per claim and can provide temporary coverage while members find new providers. Regardless of what happens, it is important to continue paying your premium to keep your coverage intact.
All 50 states have a guaranty mechanism in place to cover any claims should an auto insurer collapse. Each insurer pays an assessment to pay for the associations. Typically, all licensed insurers are members of the funds so it gives existing customers peace of mind they will be covered should their insurance carrier go under. Auto insurers are allowed to recoup the assessment they pay through premium increases, premium tax offsets, or policy surcharges.
Check the financial strength of your insurer
When selecting an insurer, it is important to check the financial strength of the company to ensure you are getting good value for your money. The financial strength of an insurer can be determined by taking a look at its investment portfolio and credit rating. A company with a high credit rating means it is more likely to pay out claims as promised. A company with a lower credit rating may signal higher premiums or potential problems meeting obligations if something unexpected were to occur.
There are five rating agencies and each have their own rating scale and standards:
AM Best rates companies on a scale of A++ to D-Fitch rates companies on a scale of AAA to DKroll Bond Rating Agency rates companies on a scale of AAA to DMoody’s rates companies on a scale of Aaa to CStandard & Poor’s rates companies on a scale from AAA to D
The credit rating agencies look at an insurer’s overall finances, how much debt it has, management stability, recent performance, history of the company, and other factors. You should check the ratings of each agency since their evaluations may differ. Check each insurer’s reviews, track record, and history before deciding which one to choose.
Dealing with an auto insurance company failure can be stressful and confusing, but each state’s guaranty association helps protect policyholders and pays out necessary claims. While state governments do not directly back a guaranty fund, they oversee it to help ensure you are fully protected should an auto insurer fail.
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