PCI: Net Worth Exclusions Fair, Necessary for N.J.’s State Guaranty Fund

A New Jersey Assembly committee advanced several bills recently that would reportedly reform the state’s guaranty fund to focus on protecting individuals, small businesses and those most in need. The bills are now headed to the Assembly floor for consideration, which could be as early as Oct. 7.

“New Jersey’s guaranty fund laws are 25 years old, and it is time for the state to update them to aptly address current issues,” said Lenore Marema, vice president of industry and regulatory affairs at the Property Casualty Insurers Association of America (PCI). “New Jersey needs reasonable limits to tailor guaranty fund coverage so that resources are focused on injured claimants, workers and those most in need, versus large commercial lines policyholders who have the resources to withstand the insolvency of their insurers. PCI hopes New Jersey lawmakers would embrace this concept.”

In recent years, the insurance industry has reportedly sought to limit guaranty fund coverage to restore it to its intended purpose — protecting individual policyholders, claimants, and small businesses who would be harmed the most financially by the insolvency of their insurers, rather than covering large, sophisticated commercial policyholders, according to Marema.

The industry’s recent efforts have reportedly been in response to the commercial lines insolvencies of the mid-1980s, when guaranty fund assessments soared to pay commercial lines policyholders. States have begun to enact net worth exclusions to refocus guaranty fund coverage on individuals and small businesses, according to PCI. Net worth of the policyholder is calculated as the date of the insurer’s insolvency.

“Net worth exclusions redirect limited guaranty fund resources to those most in need,” said Marema. “Over the years, it has become common for the greatest amount of the guaranty funds’ capacity to be consumed by claims of large commercial policyholders, even though these policyholders are in a much better position to absorb an uncovered loss and have the ability, through professional risk managers, to carefully choose a financially sound insurer in the first place. Net worth exclusions simply reallocate guaranty fund coverage from large commercial policyholders to those more in need and deserving of protection. After all, guaranty funds were intended to be a safety net of last resort for the protection of individual policyholders and claimants, the group least able to bear the financial harm caused by the insolvency of their insurers.”

The bills passed by the Assembly Financial Institutions and Insurance Committee are designed to align the statutes more closely with the provisions of the National Association of Insurance Commissioners (NAIC) model act. The guaranty fund statutes would minimize financial loss to claimants or policyholders because of the insolvency of a property or casualty insurer. The New Jersey Department of Banking and Insurance supported the legislation, along with PCI and other groups.

The Assembly Financial Institutions and Insurance Committee advanced the following bills:

· Two identical committee substitute bills for AB 2462, AB 2873, SB 702, and SB 1580 eliminates as a “covered claim” any first-party claim by a policyholder whose net worth exceeds $25 million on Dec. 31 of the year prior to the year in which the insurer becomes insolvent. This change is intended to eliminate the more sophisticated policyholder from the pool of claimants, discouraging such policyholders from purchasing coverage from insurers who may have under priced a policy to gain market share at the risk of insolvency.

The legislation also makes an exception to the statute’s current provisions for covered claims of private passenger automobile insurance. Depending upon the volume of an insurer’s private passenger automobile insurance policies, volume of claims and conditions of the voluntary automobile insurance market, the commissioner may order the New Jersey Property/Liability Insurance Guaranty Association to treat all or a portion of the claims as covered claims, regardless of whether they occurred before or after the determination of insolvency, but before the policy expires, is replaced or canceled by the policyholder. The commissioner is also given the discretion to pay a portion of or defer the association’s obligations for covered claims based on the funds available to the association.

The legislation also permits the association to recover amounts paid on covered claims to or on behalf of a policyholder whose net worth on Dec. 31 of the year immediately preceding the date of insolvency exceeds $25 million and an affiliate of the insolvent insurer, if their liability obligations to the other persons are satisfied in whole or in part by payments made by the association.

· AB 2872/SB 1581 revises the New Jersey Surplus Lines Insurance Guaranty Fund Act and would add certain new definitions to the statutes, such as the definition of “covered claim,” to clarify what types of claims, damages and expenses are covered. Also, the legislation would eliminate as a “covered claim” any first-party claim by a policyholder whose net worth exceeds $25 million on Dec. 31 of the year prior to the year in which the insurer becomes insolvent.

The legislation would also authorize the New Jersey Surplus Lines Insurance Guaranty Fund to recover amounts paid on covered claims to or on behalf of a policyholder whose net worth of Dec. 31 of the year immediately preceding the date of insolvency exceeds $25 million and an affiliate of the insolvent insurer, if their liability obligations to other persons are satisfied in whole or in part by payments made by the association.

The committee amended the legislation to provide that the commissioner has the discretion to pay a portion of or defer, rather than adjust, the fund’s obligations for covered claims based on the money available for the fund.

· And AB 2914/SB 1579, which allows the commissioner of banking and insurance to open administrative supervision proceedings to guaranty associations under certain circumstances. Generally, the supervision proceedings of insurers are confidential, but this legislation would permit the guaranty associations to be included in these proceedings.