Liquidation with a finding of insolvency triggers protection from the life and health guaranty associations, assuring that at a minimum, covered policies will be honored to guaranty association levels of statutory benefits. National responses to multi-state insolvencies are closely coordinated between the receiver and National Organization of Life and Health Guaranty Associations (NOLHGA). The receiver and the guaranty associations will collaborate on issues relating to the registered products business, including the assessment of what securities laws might apply because of registered products and any separate accounts, and evaluate options for proceeding in the liquidation.
Covered policyholders are protected in insurance liquidations: (1) by guaranty associations, discussed more below; (2) by special deposits that are held separately (not as general assets) for the policyholders in states requiring such deposits; and (3) by having an absolute priority status over general and other lower level creditors under the statutory priority scheme for the distribution of general assets contained in all state receivership statutes. Covered policyholders who hold policies that, among other things, required the insurer to hold assets backing some portion of the insurer’s policy obligations in a separate account are further protected because the assets in the separate account can be used only to satisfy those insurer obligations under such policies that are supported by the separate account.
Once the guaranty association obligations are “triggered”, the guaranty association becomes responsible for covering insurance contracts and paying claims at least to the lower of: (1) the contract’s limit of coverage; or (2) the guaranty association’s statutory benefit level set forth in the guaranty association statutes. In the life and health insurance context, guaranty association statutes generally require that guaranty associations “guarantee, assume or reinsure or cause to be guaranteed, assumed or reinsured the covered policies of covered persons of the insolvent insurer”, or issue substitute or alternative policies to replace the insolvent insurer’s covered policies or contracts.
As a general matter, guaranty association statutes cover, subject to applicable maximum statutory benefit levels and other limitations/exclusions, life insurance policies and allocated annuity contracts11 that are issued by a properly licensed life insurer and owned by residents of their state. Guaranty association statutes generally exclude coverage for that portion of a product not guaranteed by the insurer or where the risk is borne by the contract owner.
Even if a policy or annuity is not covered, either in whole or in part by a guaranty association, the policyholder or contract holder may be protected by the policyholder-level priority status in the liquidation.