If an insurance company goes under, policyholders have some safety nets.
1. First, they have access to the insurance company’s assets. Claims from individual policyholders are given priority over the claims of other creditors. In most cases, an insurer’s assets will be sufficient to cover policyholders’ claims.
2. Second, if an insurer’s assets won’t cover policyholders’ claim, protection comes from guaranty associations in each state. Insurance companies operating in each state contribute to these groups. If it becomes necessary, these guaranty associations will evaluate claims and pay policyholders whose claims would have been covered by the troubled insurer.
There generally is a cap–perhaps $300,000–on the amounts a particular guaranty association will pay on a policyholder’s claim. If you have a claim that’s larger than your state’s cap, you can submit a claim for the excess amount as a general creditor of the failed insurance company. Then you may receive distributions as the insurer’s assets are liquidated.