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When car insurers go under

You can still get insurance benefits, even if your provider goes bankrupt.

You may not feel any effects from a car insurer filing bankruptcy if the company works through its finances. However, if it does go under, you could still get the coverage you need through reinsurance or guaranty associations.

How a car insurance failure affects your policy

When a car insurance company files for bankruptcy, you could be affected by your insurer’s position to fulfill claims or benefits. A few situations could occur here:

  • You may not feel any effects. Insurers go through rehabilitation when they file for bankruptcy, which means yours could bounce back from its financial downfall. During rehabilitation, you can pay your premium as normal. You may not experience any problems, especially if you don’t file any claims.
  • You may have limits on coverage. If you do file a claim while the company is going out of business, you may receive some coverage. But depending on the case, you might not get coverage for high limits or specific benefits.
  • You may need a different provider. If the company’s doors close, you’ll need to look elsewhere for the best coverage.

Will I still get coverage during an insurance company’s bankruptcy?

Yes, you can still get coverage from your state or another insurance company after your car insurer files bankruptcy. Ways your benefits are protected:

  • Reinsurance company. Many companies purchase reinsurance, which is essentially insurance for an insurance company. Reinsurance often kicks in when a catastrophe occurs and may help cover policyholders if the company is going under.
  • State guaranty associations. Insurers are required to have membership in their state association. In the event of a closing, this association can require that claims get paid before any other debts.
  • Other insurers. Sometimes, the guaranty association spreads out unpaid claims or benefits across other insurers in the state to make sure these get taken care of.

Are there any exclusions?

Yes. Some guaranty associations have rules about which types of insurance have backing, and these may lean toward payout for life or medical insurance over car insurance.

Also, you may not get all the benefits you were paying for. Guaranty associations have limits to the benefits they cover, similar to how the federal government backs up bank funds up to $250,000. You’ll need to check with your guaranty association to see if you’re covered and for how much.

Case Study: Spirit Commercial Auto.

In 2019, Nevada placed Spirit Commercial Auto in a permanent receivership. This allowed an official receiver to manage the company’s current policies and claims. Once authorities set up a settlement process, policyholders will need to file a Proof of Claim form, even if they have filed a claim through the previous claims process.

This is an unusual case because Spirit doesn’t qualify for Nevada’s Guaranty Association as a risk retention group, a type of company not required to pay into guaranty funds.

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Does insurer bankruptcy affect my premium?

Your insurance company’s failure may not influence your rates at all. Unlike a lapse in coverage or your company canceling your policy, your rates won’t be affected if your insurer goes under. However, you do need to continue paying your premium if you want coverage or a benefits payout before the company goes under.

Factors to consider about how insurance failure affects your premium:

  • Bankruptcy may not mean closing doors. Insurers go through rehabilitation to attempt to regain footing, a stage that’s dictated by the insurance commission. Shutdowns occur only when the company is deemed beyond repair.
  • Keep paying the premium. You may catch wind of your insurer’s troubles, but stopping premium payments could result in an unnecessary loss of benefits. You might have recovered claims or benefits even if the company shuts down.
  • Look for better rates from a new provider. If the company does go belly up, you might pay a different rate with a new provider. For those who haven’t shopped around for a while, that could be a positive outcome, since you might have lower rates after a life event.
  • Your coverage levels may change. Not all the benefits of your policy may be guaranteed, which could affect whether you’re overpaying for coverage.

How to get cheap insurance regardless of your car insurer’s failure

Your insurance company might be going out of business, but you can still stay smart about your coverage. Ways to keep your premium low, before and after your company closes:

  • Switch providers. Consider shopping around before your insurance company closes if you won’t get as many benefits or discounts.
  • Drop coverage. You could scale back to the most basic coverage to lower your risk of a benefit not getting paid. For example, the company may place a higher priority on paying liability or personal injury claims over OEM parts or better car replacement.
  • Keep your driving record clean. A history of safe driving always benefits you in the long run, even if your company is no longer rewarding you for it.
  • Avoid making claims. While you might want to file minor claims for a payout before the company closes, that claim could still result in a premium surcharge with a new provider. Consider repairing damage yourself if it doesn’t go above your deductible anyway.
  • Reward yourself with discounts. Look to get as many discounts as possible with a new provider, including safe driver, safety features, automatic payments or policy bundling.

Bottom line

If your company goes under, your coverage or claims will likely transfer to another insurer or guaranty association. However, you may have limits on how much coverage you can receive, depending on how the bankruptcy is handled.

Either way, consider quotes from several providers to make sure you have the best option for you.

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