With the increasing number of insurance company insolvencies especially in Florida and Louisiana, an explanation of the unearned premium process for insolvencies may be helpful. While the guaranty fund statutes in each state may differ in the amount of unearned premium that is covered, including any applicable floors, maximums or statutory deductibles, the process that all guaranty funds go through in calculating unearned premium by the liquidator/receiver of the insolvent insurer is the same.

In a property and casualty insurance company insolvency, the liquidation order in most cases will cancel all policies of the insolvent insurer 30 days post-liquidation date. On rare occasions, like in the case of the St. Johns' insolvency, the liquidator will transfer the policies and reserves to another insurer.

In the case of Avatar Insurance Company, another insurer was not willing to take the policies; and all policies will be cancelled on April 13, 2022. The approximately 37,000 Avatar policyholders must seek new coverage prior to that cancellation date in order to avoid a lapse in coverage. Unfortunately, because of the way that unearned premium claims are handled in an insolvency, they will have to make a new premium payment prior to receiving any unearned premium refund from the Florida Insurance Guaranty Association (FIGA).

While liquidators/receivers do all they can to get the unearned premium claims calculated and sent to the appropriate guaranty association for payment in a timely manner, it is not an immediate process even with all the automation available to insurers today. Even with improved processing speed, there are some factors that delay the calculations by the liquidator's office until at least 30 days post-liquidation. These factors include:

  • Premium payments received by the company, but not yet credited to the policy
  • Payments returned for insufficient funds, unpaid or cancelled payments by the insured
  • Changes to a policy that affected the policy premium that were made during the policy period that need to be accounted for in the calculations
  • Policies that were replaced prior the 30 day cancellation date set by the liquidation court require documentation of the replacement
  • The policy is premium financed
  • The condition of the insolvent insurer's underwriting files and/or computer system
  • Number of unearned premium claims to be processed
  • Audits to ascertain the accuracy of the unearned premium data and final calculations of amount due to policyholders

Once the liquidator/receiver's office has determined the accuracy of the unearned premium date it will sign off on the calculations. Then the data will be uploaded using the required format developed by the National Conference of Insurance Guaranty Funds (NCIGF). This format facilitates the easy sharing of data back and forth between the liquidator and the guaranty funds. Finally, the unearned premium calculations will be sent to the guaranty fund for further processing and check issuance.

Once that data has been received by the guaranty fund it will be uploaded to their systems, and the guaranty fund staff will check the data to make sure that it has been entered correctly, and may conduct an unearned premium audit to verify the liquidator's calculations.

The guaranty fund will also review the unearned premium for the following:

  • Has the claim been assigned to the proper state (not so much an issue in single state insolvencies),
  • Is the unearned premium for a covered line of business,
  • Is it over the floor amount ( some states do not pay unearned premium claims that do not exceed $100),
  • Is under the maximum amount payable (some states do not pay any amount over $10,000)
  • Is over any applicable statutory deductible,
  • Financed (obtain additional information from the premium financing company).
  • Was the claim timely reported?

Once the guaranty fund has determined that the unearned premium is covered and ready to pay, it will begin issuing checks to the insureds. This process can take a few days or weeks depending upon the number of unearned premium claims received. If a check is returned for a bad address, the guaranty fund will attempt to correct the address. Should a policyholder have a change of address after the insolvency date, this should be the only time an insured should contact the guaranty fund directly regarding an unearned premium claim. Some guaranty funds will send out letters to those insureds to have claims under the minimum amount covered under the guaranty fund statute or under any statutory deductible amounts.

This is just a brief overview of how unearned premium claims are handled in an insolvency situation. Please refer to the appropriate state guaranty fund and statute should you have state specific questions or concerns.