The Insurance Guaranty Association System: A Safety Net for Policyholders

The state-based insurance guaranty association system provides a safety net to provide benefits, subject to statutory restrictions, to policyholders of impaired and insurance companies.
Few people are aware that most insurance companies in the United States are members of at least one guaranty association which provides a safety net for insurance policyholders if their insurance company becomes financially troubled.

Generally, insurance can be defined as a contract in which the insurance company promises, in exchange for the premium, to provide financial assistance to the policyholder in the event that the policyholder experiences some loss, such as a car accident, a medical emergency, or even a liability lawsuit.

Who protects the policyholder if an insurance company becomes financially impaired?
But what happens if an insurance company suffers loss? What if a significant amount of an insurer's financial investments take a negative hit because of a sudden economic downturn? What if an insurance company finds itself financially impaired, or even insolvent? Does that insurance company's promise to the policyholder ultimately become worthless? Who protects the policyholders from that kind of loss?

The answer to those questions is: the insurance guaranty association system. Each of the 50 states, as well as the District of Columbia, has one or more insurance guaranty associations that provide a safety net to protect policyholders in the event that their insurance company becomes impaired or insolvent.

State guaranty associations are made up of insurance companies doing business in that state.
Significantly, these state-based guaranty associations are generally made up of all the insurance companies doing business in each state, and each of these "member insurers" provides a reasonable level of protection for one another's policyholders in the event of an insurance company insolvency. While the guaranty associations are generally authorized, empowered and regulated by state law, most of them are much more comparable to private member-based organizations than true state agencies. In fact, many of the state laws that enable guaranty associations specifically provide that they are not state agencies and that their debts are not state debts.

This is important because it means that the assets that are used by a guaranty association to protect the policyholders of an impaired or insolvent insurer do not, generally, come from state coffers. Instead, guaranty associations and the policyholder protection they provide are funded by the member insurers – the insurance companies themselves.

In other words, with the authorization of and regulation by the state, the insurance companies that do business in each state come together to provide funds and resources to establish a safety net that provides protection for policyholders if their insurance company fails.
Put simply, guaranty funds provide an essential safety net for policyholders, one that meets the needs of those least able to deal with losses should their insurance company fail.[1]
Insurance companies that experience financial difficulties are not treated like typical corporations or other businesses. Insurers have their own state-based financial solvency laws, regulations and even their own insolvency procedures. Rather than entering the federal bankruptcy system like most non-insurance companies, a financially failing insurer is directed by state insurance regulators into a state court insolvency proceeding under the laws of the state in which that insurer is domiciled.[2]

When a state court, upon the motion of a state insurance regulator, issues an order stating that an insurance company is insolvent, generally the applicable state insurance guaranty system is "triggered" and steps forward to protect that insurer's policyholders.
Insurance guaranty associations provide protection to consumers; they do not provide rescue or “bailout” financing for financially troubled companies. The fundamental responsibility of an insurance guaranty association is to assure the provision of insurance protection to consumers, up to a statutorily established maximum level of guaranteed protection, once the duties of the guaranty association have been “triggered” by a judicial determination that an insurer is insolvent and should be liquidated.[3]
The protection provided by the guaranty associations is not limitless.
The protection provided by the guaranty associations is limited by the maximum amounts of coverage established under state law. In other words, state law provides certain "caps" on the amount of benefits that a guaranty association can pay to any one policyholder and/or under any one policy. Other conditions apply, such as residency restrictions and other limitations.


  1. Insurance is very important for us all, because we do not know when a disaster or calamity came over to us. insurance is a tool that can assist you in dealing with risks that would happen. We all certainly do not want exposed to a disaster, but when disaster arrives we will not be able to resist.