Guarantee Funds And What Car Insurance Companies Need Them For

July 15th, 2010

For an insurance company, the worst possible position to be in is one in which they are unable to pay the claims they owe. In 2001, many companies found themselves in this position after the 9/11 attacks, and were hard-pressed to deal with the volume of claims they were receiving. Some were able to continue on despite heavy losses, and some simply closed their doors. Across the nation, insurance rates of all kinds rose, from home and car to term life and long term care insurance. Just as this kind of disaster can prove extremely difficult for insurance companies, so too can things such as the recent economic downturn. For that reason, states require insurance companies that are licensed within their borders to have what are known as guarantee funds. These funds help to ensure that all insurance products, from cheap car insurance quotes to long term care policies, are covered in the event that the insurance company becomes financially insolvent.

Companies will do their utmost to avoid being placed in a position in which they must pay out more claims that they have money to do so. Car insurers do this by limiting the type of events they will pay for – such as damage cause by fire, flood or natural disaster, and this helps them to avoid having to pay out a large volume of claims all at one time. However, there are times when circumstances lie beyond the scope of businesses to control, and an insurance company can find itself overdrawn. In this type of situation, guarantee funds play a role.

Often known as the "insurance for insurance," these funds are administered by the state and are disbursed to companies if and when they need them in order to pay policy holders. They are also typically provided at least in part by the companies themselves, in exchange for being allowed to do business in the state. These funds are not used to shore up or prop up the company, but can only be used to settle outstanding claims. It is also worth noting that these funds can only be used by those companies that are operating legally within the state. Extremely cheap car insurance quotes coming from companies that are not following state law may seem like a good idea a first, but should such a company fall on hard times, neither they nor the state government will be on the hook to bail out a consumer who cannot pay for their car repairs.

While the hope of any state is that these funds will never need to be used, having a backup to typical insurance is necessary in the event of a widespread insurance collapse.

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