“High Net Worth Insureds” have been legislated out of the benefits of the Massachusetts Insurers Insolvency Fund
We know that not every agent in the Commonwealth represents insureds that have a net worth of $25 million or more. For insurance agents lucky enough to have such clients, however, they might wish to make their clients aware of a contingent risk created by a 2007 amendment to the law creating the Massachusetts Insurers Insolvency Fund.
When an agent places insurance with an admitted carrier, whether or not the carrier is top-rated, their insured will still be protected under the Massachusetts Insolvency Fund.
For those unfamiliar with this entity, The Massachusetts Insolvency Fund, or the Insolvency Fund, is a nonprofit unincorporated statutory body consisting of all insurers. Its statutory purpose is to cover claims against admitted carriers that are declared insolvent. Therefore, the Insolvency Fund will step in to defend and indemnify an agent’s insured whether or not it is insured with an A-rated carrier.
The protection under the fund includes almost all types of property-casualty insurance. A separate statutory Life and Health Insurance Guaranty Association provides insolvency protection for life and accident and health policies. The rules of the fund do limit indemnity to $300,000 for first and third party liability claims. But, insureds with liability policies from an insolvent insurer would have the all-important defense cost provisions under their policy maintained without limit by the fund.
More importantly, for insureds that had workman’s compensation policies, they would also have complete defense and indemnity from the fund without limit.
For insureds with net assets of $25 million, or more, however, this protection is no longer available to them. In February of 2007, then-Governor Mitt Romney signed a bill to create a “a high-net-worth exclusion” to the Insolvency Fund statute. The amendment to the statute not only created the “high-net-worth exclusion” but gave the Insolvency Fund the right to control the handling of the claim and to charge the high-net worth company for indemnity paid, defense costs, or any other payments.
What happens to those entities that were not high net worth companies when the loss occurred but became high net worth companies by the time their insurer went bankrupt? They can find themselves liable.
The statute defines high net worth companies in an unusual way. High net worth status is not determined as of the date of the loss but as of the date of the insolvency of the insurer that covers the loss. This raises the possibility that a small company that may have initially purchased insurance on the cheap may find itself paying dearly for that insurance if it becomes successful in the future.
A start-up company, for example, manufacturers a product that results in workmen’s compensation claims from its workers. In this example, the claims become long-term workmen’s compensation claims with the company’s carrier eventually becoming insolvent. Such a scenario could spell real trouble for the company. Many years later, the start-up that has become a successful company, may find that it is now responsible for assuming liability for total and permanent disability claims that it had thought it had insured. Depending on the industry and the advancement of the science of epidemiology, companies operating today could find a substantial contingent liability hidden in the statute.
Also, an insured that had a long tail workmen’s compensation loss years ago when it had relatively little net worth but that could be classified as high net worth company today, may start receiving bills from the insolvency fund for that ongoing loss due to the insolvency of its former workmen’s compensation carrier. The high net worth status is not based upon the date of the loss but, instead, is determined as of December 31st of the year before the insurance carrier goes bankrupt. That means that many years could pass before this hidden liability could emerge. Likewise, insureds that expand by mergers and acquisitions may find that the merger or acquisition results in a contingent liability as illustrated below.
As impaired carriers move out of run-off into insolvency some high-net worth insured may have to foot the bill for open claims.
Most agents probably believe that the old Kemper companies, Lumberman’s Mutual and American Manufacturers Mutual Insurance Company are long gone and forgotten. Actually, however, these companies have been in run-off since 2003. The run-off ended on July 2nd of this year when the Illinois Insurance Department petitioned for rehabilitation and eventual insolvency proceedings.
Yet, before these companies eventually stopped writing insurance they issued a number of policies for large insureds that promised after the expiration of a policy a dividend declared from available surplus. The promised dividends disappeared when the companies went into runoff.
Now some high net-worth insureds could get an unwelcome surprise from these companies going into insolvency. As of June 30th, 2012, Lumberman’s still had approximately $800 million of open loss reserves. Once the Illinois Department of Insurance seeks to liquidate these companies, this state’s Insolvency Fund will become responsible for handling any of these open claims in Massachusetts. High net-worth insureds could find open workmen’s compensation claims coming back to haunt them when the Insolvency Fund claims that the insured and not the fund is liable for defense, indemnity and any settlements.
This is a risk that is not insubstantial. In recent years, commissioners of insurance have adopted the practice of allowing, if not encouraging, troubled insurance companies to go into runoff rather than into receivership. The result is that over the course of the runoff the assets of the insurance company are rundown paying claims and management fees. At the end of the process, the depleted core of the company goes into liquidation and there is nothing left to do but go to the insolvency fund. Whether this is a good or bad practice remains to be seen as existing runoff companies move into liquidation.
Basically, when a company is put into administration, a third party administrator attempts to collect the reinsurance and resolve the outstanding claims. But, for large insureds the resolution of claims works in reverse. Large insureds that see the natural result of the run-off being a final insolvency with no assets often seek to buy back their policies. These buy-backs consist of a “disengagement agreement” where the insured negotiates a payment equal to a percentage of the carrier’s claim reserves in exchange for the insured’s policy being taken off the insurance company’s books.
The net effect for large commercial insureds is a game of legal musical chairs where those companies that do not actively buy back their liabilities may ultimately be left to pay their unresolved claims.
Agent Takeaways:
- The uninsured risk for your high net-worth insureds arise from long-tail liability and workers compensation. Both these classes of cases may have substantial future payments due that will become uninsured by virtue of a carrier’s insolvency.
- These companies are able to pay the freight but from the point of view of an agent it’s important to alert these important clients and their risk managers as to this contingent liability. This is especially the case since this contingent liability is probably uninsured.
- Excess insurance policies have long been written so that they do not drop down upon the insolvency of the underlying carrier. This results in an uninsured loss until the insured has paid the full amount of the insolvent policy limit.
- Is anyone aware of any product in the market today that would cover this contingent liability for companies that are or become high net-worth insureds?
Are any of your agency’s high-net worth insureds contesting a claim payment billing from the Insolvency Fund?
Currently, there is at least one high-net worth company that plans to contest with the Insolvency Fund the right to apply this statute retroactively to a claim that occurred before the statute took effect. This company is interested in learning if there are other high-net worth companies that the Insolvency Fund has billed for old claims.
Any agents or companies can contact this company by sending their contact information to the author of this article.
