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Insurance Law

Reed Smith LLP on What to Do When Your Insurance Company Goes Broke

Timothy Law   By Timothy P. Law, Partner, Reed Smith LLP

Insurance company insolvencies cause disruption to businesses and create a risk of serious financial loss.  In many instances, however, policyholders can make a full recovery or mitigate their losses by considering all appropriate avenues of recovery. This commentary considers those avenues of possible relief.

One such approach is to look to the various state guarantee associations that act as a safety net to pay claims owed by insolvent insurance companies. Because each state's statute provides its own eligibility requirements, more than one guaranty association may be obligated to pay, including: (1) the state where the "insured" was a resident at the time of the insured event; (2) the state where the "claimant" was a resident at the time of the insured event; and (3) the permanent location of property from which the claim arises.

In addition, policyholders can obtain a direct distribution from the estate of the liquidating insurance company. The commentary describes the procedure for filing a claim with the Liquidator and notes some of the pitfalls and limitations involved.

In some instances, it is possible to recover directly from the reinsurance companies who reinsured the policyholder's insurance program.  A reinsurance contract may contain a "cut-through" clause specifically authorizing payment directly to a policyholder in the event of the insolvency of the insurance company.  The commentary points out, "Even where there is no "cut-through" clause, a policyholder may be permitted to directly recover from a reinsurance company when the policyholder is the intended beneficiary of the reinsurance contract."

The commentary further advises that policyholders should consider whether other, solvent insurance may apply. The factors involved in making that determination consist of "time, topic, and tower." The commentary examines each of these factors.

Lastly, the commentary suggests that policyholders consider the possibility of insurance broker liability where applicable.

Timothy P. Law is a partner of Reed Smith LLP. He regularly represents policyholders in disputes with their insurance companies, specializing in property and liability insurance coverage and bad faith litigation. His clients include the largest generic pharmaceutical company in the world and the largest home builder in the United States. Mr. Law also represents a number of small and medium size businesses in insurance recovery disputes. He has filed appellate briefs in state and federal court, including the United States Supreme Court in Humana v. Forsyth, which was decided unanimously in favor of the policyholder. He regularly represents corporations in premium disputes and insurance insolvencies. In addition, Mr. Law has extensive experience with mortgage insurance and directors and officers insurance litigation.

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