State Guaranty Fund

A state guaranty fund is managed by a state in the United States to protect policyholders in the event that an insurance company fails to pay benefits or becomes insolvent. Only beneficiaries of insurance companies licensed to sell insurance products in that state are covered by the fund.

How a State Guaranty Fund Works 

All 50 states, Puerto Rico, the US Virgin Islands, and Washington, D.C. have state guaranty funds. Most states have separate funds for property and casualty insurance as well as life and health insurance. These state guaranty funds function as insurance for insurance and are funded by insurance companies that sell insurance in a particular state. The amount of funding required of an insurance company is a percentage ranging from 1% to 2% of the net amount of insurance sold in any given state.

Many states have passed guaranty laws to deal with insolvency, based on a model act drafted by the National Association of Insurance Commissioners (NAIC). Some states adopted the model act verbatim, but the majority adopted a modified version. As part of these laws, insurers who are licensed to do business in a state must contribute to the state's guaranty fund. An insurer licensed in all 50 states is required to contribute to a fund in each of those states.

Only licensed insurers are required to follow state guaranty laws. Unlicensed insurers (for example, reinsurers) are not. As a result, if a company is insured by a non-admitted insurer that is declared insolvent, there is no way to recover unpaid claims from the state guaranty fund.

Some states require employers to self-insure their workers' compensation obligations in order to participate in a self-insured employer guaranty fund. Workers receive benefits if their employers are unable to pay due to bankruptcy or insolvency.

Special Considerations

Federal statute established state guaranty funds in 1969, and they are non-profit systems that operate in all 50 states, Washington, D.C., Puerto Rico, and the Virgin Islands. Prior to this mandate, some states attempted to create their own guarantees in response to insurer insolvencies.

Initially, states kept a single fund to cover a single line of business, such as workers' compensation or personal auto insurance, and insurance companies were small. Many people only wrote one type of business in a single state. When an insurer declared bankruptcy, only a small number of policyholders and one state fund were affected.

The National Conference of Insurance Guaranty Funds (NCIGF) was established in 1990 to coordinate and streamline state guaranty funds.

Many states now have multiple guaranty funds. For example, a state may have separate funds for auto insurance, workers' compensation, and other lines of business. Furthermore, insurance companies are more complicated today than they were 40 or 50 years ago. Most offer a variety of coverages in multiple states, some in nearly all of them, which means that an insolvency today could affect many policyholders across the country and involve guaranty funds in multiple states.