Life Insurance Company Guaranty Corporation of New York…

Who pays when a life insurer fails?

When a life or health insurer becomes insolvent, its policyholders do not simply lose their coverage. New York answers that problem with a statutory safety net: The Life and Health Insurance Company Guaranty Corporation of New York, created by Insurance Law article 77 (the article may be cited as "The Life and Health Insurance Company Guaranty Corporation of New York Act"). Exam questions may shorten the name to the "Life Insurance Company Guaranty Corporation."

What the corporation is

It is a not-for-profit corporation created by statute, under the immediate supervision of the superintendent of financial services.
Membership is mandatory. Every member insurer must belong as a condition of its authority to transact insurance in New York. An insurer cannot opt out and keep its license.
It acts through a board of directors and under a plan of operation approved under the article.
It keeps two accounts for administration and assessments: the health insurance account, and the life insurance, annuity and funding agreement account.

Who the members are

Member insurers include life insurance companies licensed (or formerly licensed) in New York for the covered lines, plus insurers writing accident and health insurance, article 43 corporations, and health maintenance organizations. Fraternal benefit societies, municipal cooperative health benefit plans and employee welfare funds are not members, so their certificates are not protected by this fund.

When it steps in

The corporation acts when a member insurer is:

Impaired: placed under an order of liquidation, rehabilitation or conservation under article 74; or
Insolvent: placed under a final court order of liquidation, rehabilitation or conservation.

With the superintendent's approval it may guarantee, assume or reinsure the covered policies, arrange substantially similar replacement policies, and assure payment of contractual obligations. It never pays more than the failed insurer itself owed under the contract.

What and whom it covers

The article applies to direct life insurance policies, health insurance policies, annuity contracts, funding agreements and supplemental contracts. Protected persons are mainly:

New York residents who own the policy or hold a certificate under it;
Non-residents only in a narrow case: the insurer is domiciled in New York, the person's home state has a similar guaranty entity, and the person cannot be covered by that state's entity because the insurer was not licensed there;
the beneficiary, assignee or payee of a covered owner, wherever they live; and
health care providers who rendered services to a covered person.

The coverage limits

$500,000 aggregate, per life, for all benefits including cash values.

This cap does not apply to group or blanket accident and health insurance. A higher $1,000,000 cap applies to an unallocated group annuity contract (one that does not guarantee benefits to specific named individuals) and to a funding agreement that funds an employee benefit plan.

How it is funded: assessments, not a reserve

The corporation does not hold a prefunded pool. When an insurer fails, it assesses the surviving member insurers, generally in proportion to the premiums each wrote in New York on business in the relevant account over the three preceding calendar years. Long-term care assessments are split 50/50 between health and life member insurers. The board may abate or defer an assessment that would endanger a member's own ability to pay its claims.

A flow diagram with five boxes. In the center is the New York Life and Health Insurance Company Guaranty Corporation, holding two accounts: a health account and a life, annuity and funding agreement account. Above it, the superintendent box points down to show immediate supervision. On the left, an impaired or insolvent member insurer under an article 74 order points into the corporation. Below, the surviving member insurers, whose membership is mandatory, send money up to the corporation through assessments based on three years of New York premiums. On the right, the corporation points to covered persons, protected up to five hundred thousand dollars per life, or one million dollars for an unallocated group annuity. — How New York's life and health guaranty corporation protects policyholders

Other powers to know

Subrogation: a person who receives benefits assigns the matching policy rights to the corporation.
Emergency loan: when an article 74 proceeding begins, it must lend the superintendent up to $500,000 for administering the failed domestic insurer.
Resolution facility: it may form a not-for-profit resolution facility to run off a failed domestic insurer's business. That facility may not issue new policies.

For the producer

Guaranty protection is a backstop for failure, not a product feature. Standard practice, and the advertising rules in most states, forbid using it to induce a sale. Recommend insurers on financial strength, never on the existence of the guaranty fund.

Life Insurance Company Guaranty Corporation of New York (Ins. Law art. 77)