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What Happens if an Insurance Company Goes Bankrupt?


Natural and other disasters are becoming more frequent in California, putting a strain on some insurance companies. In some cases, the number of claims has caused some insurers to fold.

A court in 2018 ruled that Merced Property & Casualty Co. couldn’t meet its obligations after the Camp Fire. According to media reports, Merced had assets of about $23 million but had about $64 million in claims in the City of Paradise alone. The Camp Fire decimated the town, burning more than 153,000 acres and killing 85 people. Almost 19,000 structures were destroyed. The Camp Fire was the most destructive wildfire in California history.

Property insurance companies aren’t the only ones vulnerable. Long-term care, health, life, and accident insurance companies have all gone belly-up in the last decade.

Recent bankruptcies affecting Californians include the following:

Fortunately, state guarantee associations provide some protections to insureds if an insurance company becomes insolvent. However, there are limitations to benefits paid.

Guarantee Associations Pay Claims for Bankrupt Insurance Companies

Depending on the type of insurance claim, there are two separate guarantee associations that have been established to help pay the claims made to an insolvent insurer.

The two associations in the Golden State are as follows:

The State’s Role in Insurance Company Insolvency

Once the Superior Court rules an insurance company insolvent, the company is either placed in conservation or liquidation. The California Insurance Commissioner, with the help of the Conservation and Liquidation Office (CLO), manages the affairs of conservatorships or receiverships (liquidation).

When a company is placed in conservation, the following occurs:

  • The Commissioner, as conservator, operates the company to conserve assets for the benefit of policyholders, creditors, and other persons interested in the assets of the company.
  • The Commissioner continues as much, or as little, of the insurance business as they believe appropriate.
  • The Commissioner examines the company’s books and records to determine if the company can be rehabilitated with the goal for it to operate again as a regular insurance company.

When a company is placed in receivership, the following occurs:

  • Liquidation is ordered. Liquidation usually occurs after conservation and after the Commissioner determines that the company cannot be rehabilitated.
  • The Commissioner publishes a notice to the company’s policyholders, creditors, and shareholders.
  • The Commissioner mails a notice to all policyholders that their policy with that company will be canceled effective 30 days after the liquidation order date.
  • Anyone with a claim against the company must file a proof of claim with the Commissioner before the final claims filing date.
  • All insurance policies are canceled and no new or renewal policies are issued.
  • Company assets like furniture, fixtures, and equipment are sold to generate cash to pay policyholders’ claims and other creditors. Not all companies have assets to sell.

Making a Claim Against a Bankrupt Insurer

The associations are limited by statutory and policy provisions. A claim paid by an association may not represent 100% of what you are owed by the bankrupt insurer. As such, you can also make a claim against the insurer’s remaining assets.

If you have an open claim (property, casualty, or worker’s compensation) with a bankrupt insurer, the CLO will contact you about your rights. Remember that CIGA pays up to $500,000, except for workers’ compensation claims. Any amount above that is referred to CLO to become part of the liquidation. How much you receive depends on the number of claims and how much cash was collected in liquidation.

Those with claims handled by CLHIGA should not expect to receive the full value of their claim. Life insurance death benefit protection, life insurance net cash surrender and net cash withdrawal values, and annuity benefits are paid at 80% of the policy benefit, or up to a maximum, which varies depending on the type of claim.

As mentioned earlier, not all insurance companies have sellable assets. In those cases, claimants are paid only by CIGA or CLHIGA.

Personal Injury Claims Against an Insolvent Insurance Company

If you have a claim for damages in a personal injury lawsuit and the defendant’s insurance company becomes insolvent before you collect, your damages may be covered by CIGA, up to a maximum of $500,000. However, whether CIGA pays anything depends upon whether you have uninsured motorist coverage that would provide for payment for your damages upon the insolvency of an insurer. That’s why it is always a good idea to ensure that you have sufficient uninsured motorist coverage on your auto policy! When in doubt, call us and we will be happy to review your auto policy with you.

Call on Experience for Your Personal Injury Claims

When you have been injured, you can rely on the experience and reputation of Zavala Law, PC. We focus on personal injury, and wrongful death cases. Don’t let an insurance company’s bankruptcy keep you from seeking the compensation you deserve. Call us today.

Contact Zavala Law, PC today at 805-429-4292 to schedule your free consultation.

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