What Happens When an Insurance Company Closes?

Insurance company closures: the basics

An insurance company — like any other business — can go under. An insurer can be purchased by and incorporated into a larger company. Even larger insurance companies aren’t immune to the possibility of being acquired or simply failing altogether. So what happens if your insurance company suddenly ceases to exist? 

There are a few scenarios that can lead to this happening. We’ll review each and explain your responsibilities, steps to take, and how you can protect yourself. 

What happens if an insurance company is bought by another company?

This happens on a fairly regular basis. Smaller insurance companies are often acquired by larger companies. This usually occurs when one company wants to expand its reach or branch out into new lines of insurance. For instance, Progressive acquired home insurance company ASI in order to expand its home, condo, and renters insurance options. Similarly, insurance company Kemper acquired Infinity to expand its reach into non-standard car insurance.

This is a fairly common practice and usually doesn’t disrupt clients' coverage. You will typically be notified of a company’s closure or merger well ahead of time. Any action that you need to take will be communicated to you. You will likely have the option to transfer your coverage to the new company, though you might need to enroll again. In some cases, it may be beneficial to shop around for a new policy at this time. 

What happens if an insurance company fails?

This is more troublesome. Though this circumstance is uncommon, insurance companies have been known to fail. This can happen for a number of reasons, each leading to problems for policyholders. 

However, you are not without protection. In the event that an insurer goes bankrupt, your state’s guaranty association steps in. Similar to how the FDIC protects bank customers, state guaranty associations pay in the event that your insurance company is declared insolvent and enters bankruptcy. The state may try to move your policy to more stable insurers. If unable to do so, the guaranty association will continue to fulfill the policy, though with limitations that vary by state.  

The guaranty association works to rehabilitate the insurer first, but if this is not possible, the company moves into bankruptcy. The company’s assets are then liquidated and the proceeds go to pay any outstanding claims or to repay the state guaranty association for claims that they pay on behalf of the failing company. You are usually given a fair amount of advance warning, which can give you time to make necessary arrangements for new coverage.

The above example is a fairly typical example of what happens when an insurance company goes under. The most important step to take is to file any necessary claims within the timeline provided. Also, if needed, seek out a new policy as quickly as possible. 

Steps you can take to protect yourself

The thought of an insurance company failing may seem frustrating, as the reason for having insurance is to protect you and your assets should the worst of circumstances arise. However, there are some things that you can do to measure your company’s likelihood of staying solvent. 

What to consider

It’s important to remember that insurance is a business and that businesses sometimes fail. State regulations are usually such that this happens only in rare instances, however. Still, when searching for home, car, or other lines of insurance, it pays to do some homework on the company in which you are putting your trust. This can help protect you and avoid a situation where your property could be put at risk.