On Shaky Ground: When Your Insurance Company Is In Trouble

This week’s column comes straight from the headlines. With the tumultuous markets, failing insurance companies, banking buyouts, we are reminded that nothing is foolproof. Ultimately, there are no guarantees. One company’s “guarantee” is only as strong as the company is viable. That is why it is so important to not be taken in by hype and fast promises when purchasing a health insurance policy. However, even insurance companies that have been recognized as financially stable are not immune. This is one instance where a good insurance agent that specializes in health insurance can be worth their weight in gold. It’s not all doom and gloom however. When a crisis hits, it’s important to have all the facts and to know your options. Information can help to reduce uncertainty during these trying times. And so it is with insurance companies.

Insurance is run by your state. Every state has their own Department of Insurance and their own insurance laws. Because of that, insurance companies can pick which states they want to do business in. When an insurance company decides that they can no longer be profitable in a particular state, they can leave that state. Large, national insurance companies hesitate to do that because once they leave, they have to wait a length of time (usually years) to come back. Smaller plans usually just pick up and leave. What usually happens in both instances is that a larger insurance company in that state agrees to take over insuring the orphaned policyholders. Why would they do that? Any business thrives on selling their product. The more people they sell to, the more profit (hypothetically) they can make. Insurance also operates on the theory of “law of large numbers.” The more people you have, the more you can spread the risk of bad health.

In the unlikely event that another insurance company doesn’t pick up the orphaned policyholders of a failed insurance company, there may be other options.

Most states have something called a “Guaranty Fund.” It functions as a safety net for policyholders hurt by a failing insurance company. In essence, it helps to pay claims because of an insurance company’s failure. Why don’t we know about this? Because most states also have laws prohibiting insurance agents from informing their clients about their state’s Guaranty Fund as an inducement to buy. They don’t want people to be lulled into a false sense of security and purchase a marginal product because they know if the insurance company flops, they may have some recourse in getting claims paid. There are some severe limitations as well, both in what can be paid for and maximum coverage amounts. Generally you must live in the state if you want to collect from a particular state’s Guaranty Fund. Exceptions are for beneficiaries of benefits such as death benefits from a life insurance policy, which is also eligible to participate in the fund. Insurance companies pay into this fund via a tax they pay on the premiums that they receive from policyholders.

Not all benefit plans qualify. If you are insured through a non-profit like some Blue Cross/Blue Shield plans (some are for-profit), an HMO, a fraternal benefit society (usually member organizations that also have benefits), a state risk-pool (if your state has one), or by an insurance exchange, you may not be eligible for your state’s guaranty fund. There may be additional instances where your state’s guaranty fund doesn’t apply. Self-funded plans (whether or not they have an underlying insurance company involved) are generally exempt as well.

The bottom line is nothing takes the place of information. The more information you can get on an insurance company before you purchase a policy, the better. However, even good, solid insurance companies can be hit. So, if even after you have done your due diligence (or gone through an insurance agent who is supposed to) you find yourself holding a worthless insurance card, all may not be lost. Contacting your state’s Department of Insurance is a good place to start the claims process.

Until next time, stay healthy!