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Will The Financial Crisis Jeopardize Your Property Or Casualty Insurance?

By: Kurt W. Melchior
09/29/08

Every day brings a new story about the collapse, or imminent collapse, of another American financial institution. First Fannie Mae, then Freddie Mac, then AIG and more. In these times of crisis, should you be worried about your property or liability insurance?

Insurer insolvency is a good subject to worry about: it has happened before and will happen again, to be sure. When an insurer goes under, it immediately stops defending claims and paying indemnity. Then, a state regulator assembles the insurer's assets and slowly--very slowly--liquidates the claims over the course of many years. Eventually, some payments are usually made, but they are generally for a small fraction of the policyholder's losses and come many years after the fact. So as a general proposition and at least in the near term after you suffer a claim or a loss, if your carrier is or becomes insolvent, you will be on your own.

There is one major exception: California, like many other states, has a limited form of coverage for claims against insolvent insurance companies. Long ago, the Legislature established the California Insurance Guarantee Association, commonly called CIGA, to pay "covered claims" on behalf of insolvent insurers who were admitted in California. The list of "covered claims" is too long to state here, but it includes most liability and property claims. But CIGA does not cover claims in excess of $500,000. Its claims management is not very different from that of active, solvent insurers.

California requires "admitted" insurers to meet well-defined capital requirements, which are set forth in the Insurance Code. Insurers are required to maintain stated amounts of paid-in capital and surplus. The Insurance Commissioner may examine the financial condition of any admitted insurer "whenever he or she deems necessary or whenever he or she is requested by verified petition, signed by 25 persons interested," suggesting the insurer's insolvency. Similar laws exist in most or all American jurisdictions.

In these times of financial turmoil, no one can be sure that yesterday's financial report remains accurate today. But it is generally believed that insurance companies, whose permitted investments are generally specified by statute or regulation, have not significantly invested in speculative instruments. Indeed, it has been reported that despite the troubles that have engulfed the holding company AIG, its 20+ subsidiary insurance companies remain sound.

Of course, a major meltdown of all financial instruments can have very severe consequences. It appears, however, that until that calamity actually occurs, insurance companies remain relatively closely regulated by law in the range of their permitted investments and should therefore be relatively remote from the chaos that has seized Wall Street, has implicated some insurance holding companies, and may even bring some of those insurance holding companies down.

Should you be worried about your coverages? Probably not. Still, there are steps you can and should make a required part of your company's insurance and risk analysis. First, know what insurer you're dealing with. For instance, many of the AIG subsidiary insurance companies do not include "AIG" in their names. Second, keep on top of your insurers' ratings. You can sign up with rating agencies: although their warnings may sometimes come too late, better late than never. Third, examine your options carefully when it comes time to renew your policies, because the cheapest policy is not necessarily the best policy. Fourth, be sure to get advice at renewal time from brokers about financial and market issues and from experienced policyholder counsel about coverage terms. Nossaman's coverage counsel continually monitor new developments and can help ensure that policyholders get the most from their insurance premium dollars.

Kurt W. Melchior is a litigation partner with Nossaman in San Francisco, where he chairs the Firm's insurance coverage practice group. He has over 50 years' experience litigating complex commercial matters, including class actions, antitrust, insurance coverage, health care, and professional responsibility cases. He can be reached at (415) 438-7279 or kmelchior@nossaman.com.

Thomas D. Long is a litigation partner with Nossaman in Los Angeles who focuses his practice on complex commercial disputes. He counsels private businesses and public entities on insurance issues and also represents them in coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. He can be reached at (213) 612-7871 or tlong@nossaman.com.

Deborah E. Beck is a senior litigation associate with Nossaman in San Francisco who focuses her practice on appellate, environmental, and insurance coverage issues. She counsels private businesses and public entities on insurance issues and also represents them in complex coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. She can be reached at (415) 438-7254 or dbeck@nossaman.com.

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