Each state has an insurance guaranty fund. Each operates in substantially the same way. In the event of insolvency of an insurer whose policies are covered by the guaranty fund (i.e., an admitted insurer in that state), policyholders of that insolvent insurer are covered up to the statutory limit. This limit varies from state to state, but is sufficient to cover most anticipated property claims and all the genuinely catastrophic liability claims. In addition, the guaranty fund statutes provide for defense of liability claims in addition to paying judgments or settlements up to the amount of the statutory limit.
The protection offered by the guaranty fund is not perfect protection. But, the protection offered is far better than having none and is a substantial reason to purchase insurance coverage from an admitted insurer as opposed to a nonadmitted insurer.
Guaranty funds are funded by you,and every other policyholder in your state. You are all providing protection for each other. The initial capitalization (i,e., start-up funds) for guaranty funds comes from assessments of all admitted insurers doing business in that state, in proportion to the respective amount of premiums written by each insurer in that state. Under the guaranty funds statutes of all states, the insurers that have paid these assessments to provide the start-up capital to establish the guaranty fund were, and are, entitled to recover the costs of those assessments.
This is recovered premium surcharges on all of their policyholders. If you were to examine your premium billing notice over a period of time, you will notice such surcharges, typically between $1 and $5. This charge is imposed by your insurer proportionately on all of its policyholders to cover the costs of assessments it has been obligated to pay to fund the guaranty fund in your state.
The guaranty fund in each state operates much like an insurance company. Guaranty funds set reserves, retain defense counsel, and settle and defend claims. They also adjust property claims. The primary difference is in the source of their funding, Insurance companies fund their operations primarily by charging premiums and by realizing investment income on their reserves (premium reserves and loss, loss adjustment expense, and other reserves).
Guaranty funds likewise generate income by investments received on reserves. They do not have, however, premium income as a source of income. Nor do guaranty funds have the overhead associated with marketing and selling policies, as do insurance companies.
When an insurance guaranty fund needs to generate income because the claims it has paid are depleting it imposes assessments on all admitted insurers doing business within the state.
CHOOSING WHAT IS BEST FOR YOU
A good independent agent is likely to be the best place for most insurance consumers to start. By employing an independent agent, you preserve the maximum number of options for yourself. And, you are less likely to find yourself in a situation in which you have insufficient limits or unexpected gaps in insurance coverage in the event of a major loss.
This is particularly true if you are the owner of a small business. The underwriting of commercial insurance policies is inherently more complex than is the underwriting of personal lines policies, Independent agents are much more likely than captive agents to have a substantial volume of commercial business in addition to their personal lines book of business.
Consequently, a good independent agent is likely to be much more attuned to the inquiries necessary to assure that your coverages are as complete as possible and to avoid coverage gaps. This is particularly true with respect to the form of and the amount of business interruption insurance, plus additional, optional commercial coverages, that may be appropriate for you.
These are some common examples of situations where a good independent agent's skills are important. For example, a developer might want its own coverage to apply only as excess coverage over its coverage as an additional insured under the policies of the subcontractors working for it on a construction project. The knowledge of the developer's loss exposures and the ability to assure that those loss exposures are covered appropriately requires expertise that is often beyond that of an agent for a direct writer.
Similarly, a vendor might want the coverage of its own policy to apply only as excess coverage over its coverage as an additional insured under a manufacturer's policy for product liability suits brought against the vendor by a purchaser of an alleged defective product made by that manufacturer. Again, effecting the insurance needs of such a vendor requires a certain level of knowledge and expertise that may be beyond that of many personal lines oriented agents.
The choice is yours; The important point is for you to realize that you have a choice and that exercising that choice means that you need to better inform yourself so that you obtain the protection best suited to your needs. If you want to learn more, you can get lots of other insurance information from Secrets of Insurance.
