Insurance Company Insolvency

All insurance lawyers need to know what happens to a claim when an insurance company becomes insolvent.  Insolvency to an insurance company is the same as bankruptcy to other companies and individuals.  So what effect is this to policy holders?

Companies that write insurance policies in the State of Texas are heavily regulated, and the Legislature has provided numerous safeguards to protect the public against insurance company insolvency.  This can be seen by looking at the Texas Insurance Code, Chapter 462 and in the Texas Transportation Code, Section 643.105.  In connection with these statutory safeguards, Texas Insurance Code, Section 1952.102 lists and defines the definition of “uninsured motorist” to include a vehicle for which the liability carrier is or becomes insolvent.  As an adjunct to this requirement, the Texas Property and Casualty Insurance Act provides further protection for the public against failure of licensed insurance companies as a result insolvency.

The Act creates a Guaranty Association for the purpose of paying unpaid claims, including those of third-party liability claimants that arise out of and are within the insured’s coverage, but not in excess of the insured’s applicable policy limits.  This limitation can be found in Texas Insurance Code, Section 462.201.  According to Section 462.213, covered claims are limited to $300,000.00 in value.

But, while the Act does provide the insured with a source for recovering damages that would be assessed against an uninsured motorist, the Act does not alter a solvent insurance company’s obligation to pay UM/UIM coverage, and, in fact, requires the insured to first exhaust UM/UIM coverage that may be applicable under his or her own policy.  In this regard, the Act provides:

A person who has a claim against an insurer under any provision in an insurance policy other than a policy of an impaired insurer that is also a covered claim shall exhaust first the person’s rights under the policy, including any claim for indemnity or medical benefits under any worker’s compensation, health, disability, uninsured motorist, personal injury protection, medical payments, liability, or other policy.

All to often an insurance company does go out of business.  But as explained above, that is not the end of the story for claimants.