About The Insolvency Process
Who declares an insurance company insolvent?
A court, upon application by the Commissioner of Banking and Insurance, has the power to declare a domestic insurance company insolvent.
The court then appoints a Receiver (often referred to as the Liquidator) to liquidate the company, settle its affairs, and manage the estate. The receiver is usually the Commissioner of Banking and Insurance or his or her designee.
The receiver stops payments to all creditors of the insolvent company, including general creditors, policy claimants, defense attorneys, and adjusters. Generally, the Receiver can only pay administrative expenses from the remaining assets of the insolvent company. The court can later order a distribution of assets, as available, to pay claimants.
Will policyholders receive official notification that their insurer was placed in receivership?
A Notice of Liquidation is usually mailed to each policyholder advising that the court has ordered all policies canceled as of a determined date and the policyholders must replace their coverage with another company. Generally, a notice of insolvency is also published in New Jersey newspapers of general circulation.
Do all creditors share equally in the distribution of assets?
No. Certain wage claims, claims of state or federal governments and secured claims are paid first. Policy claims are then paid in full if funds are available. After policy claims are paid in full (including legal expenses covered under the policy), the other creditors, such as stockholders, agents and vendors, are paid.
How and when are policy claimants paid?
The claims of claimants residing in states in which the insolvent company was licensed may be defended, settled and paid by the state insurance guaranty association of those states. The Receiver will forward all files on unpaid claims to those guaranty associations for handling. These insurance guaranty associations then have a claim against the estate for claims they pay which is on par with policyholder claims.
In states where the company was not licensed, no payment can be made until the court authorizes a distribution of company assets at a later date. Guaranty associations generally do not cover claims if the company was not licensed in their state.
Are insurance agents required to pay balances owed at the date of insolvency?
Yes. Those balances are payable by the agent to the Receiver who must accumulate all assets for eventual payment to claimants. The Receiver can sue an agent for unpaid balances if necessary.
What must creditors do to be eligible for any distribution of assets?
A "proof of claim" (POC) must be filed with the Receiver. A POC must be filed by those with policy claims and by general creditors. Claims must be re-filed even though they were reported to the company prior to its insolvency.
This must be done before the "bar date" - a final date for filing claims. The filing of claims with the Association is not sufficient to perfect the claim with the Receiver.
Should policyholders continue to pay their premiums if an insurer is declared insolvent?
To be eligible for coverage of claims that might arise, premium payments should be continued until policies are canceled by the court.
Are defense costs paid by the Association or Fund if the insured is sued?
Yes. Although the Association or Fund attempts to make voluntary settlements and payment, it will provide a defense in any litigation as provided for in the policy.
What does the Guaranty Association or Fund consider a "covered claim?"
A "covered claim" is an unpaid claim which arises out of, and is within the coverage and limits of, an insurance policy issued to a New Jersey resident or for property permanently located in New Jersey and where all other available coverage has been exhausted. A "covered claim" does not include amounts due any insurance pool, re-insurer, insurer, or underwriting association. This applies to all kinds of direct insurance except life, accident and health insurance, workers' compensation, title insurance, annuities, surety bonds, credit insurance mortgage guaranty insurance, municipal bond coverage, fidelity insurance, investment return assurance, ocean marine insurance, pet health insurance and insurance provided by the Motor Vehicle Liability Security Fund.
How much does the Association or Fund pay on a "covered claim?"
In New Jersey, the Association pays up to a maximum of $300,000 per covered claim, but not in excess of policy limits, subject to any deductible. The Fund pays up to $300,000 per occurrence, but not in excess of policy limits subject to any deductible.
Does the Association or Fund refund any of the premium paid to an insurer that becomes insolvent?
The unearned premium due on a policy canceled at the time the insurer was declared insolvent is considered a "covered claim" payable by the Association or Fund. Policies canceled before that are considered "general creditor" claims against the assets of the insolvent company.
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