AIA Applauds Pa. Key Guaranty Fund Reform

July 6, 2004

A new law signed last week by Pennsylvania Governor Ed Rendell marks the successful conclusion of a multi-year effort to fix problems arising from the Reliance Insurance Company insolvency, according to the American Insurance Association (AIA), which strongly supported enactment of the law.

“This new law (Act 46-2004) should bring much-needed fairness to the way large deductible workers’ compensation policies are handled during insolvencies,” said Taylor Cosby, vice president of AIA’s Mid-Atlantic Region. “It will save both insurers and policyholders money, while giving an economic boost to businesses across the country.”

The “large deductible law” produces significant savings for insurers (estimated to total $600 million) by changing the way that payments made to insolvent insurance companies are handled by the Commonwealth of Pennsylvania. The need for statutory change arose from the insolvency of Reliance Insurance Company, and subsequent litigation brought against the state insurance department, which was the liquidator of the Reliance estate. Individual state guaranty funds had sued the liquidator in the Reliance case because of issues regarding the treatment of large deductible policies.

“Under these policies, the insurer is often required to pay the claimant – such as an injured worker – and then the policyholder reimburses the insurer for payments made within the deductible,” Cosby explained. “In the Reliance case, the liquidator was treating policyholder reimbursements under large deductible policies as general assets of the Reliance estate, rather than of the guaranty fund that paid those policies’ claims.”

This treatment had the unfair effect of rewarding the insolvent insurer’s general creditors, added Cosby, because “these creditors would receive greater distributions only because the guaranty fund paid claims that, in effect, were the responsibility of the large deductible policyholder. The larger recoveries of these individuals, who typically have high net worth, were to the detriment of policyholders and their insurers, who would ultimately face increased guaranty fund assessments.”

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