Fulfilling the promise to pay future periodic payments has been the primary mission, and a cornerstone for success, of the United States structured settlement industry for more than 30 years.
With the exception of Executive Life Insurance Company of California, which collapsed in 1991 and resulted in some individuals receiving somewhat less than 100% of their payments, all structured settlement recipients, or the factoring companies and/or investors who purchased their payment rights, have to this date received their promised future periodic payments in full.
What happens if and when a structured settlement annuity provider is financially unable to meet its periodic payment obligations?
In the United States, the regulation of insurance and insurer insolvency is governed by state law. Insurance companies are expressly excluded as debtors under the Federal Bankruptcy Code. For structured settlements, however, the Federal Bankruptcy Code could apply if a non-insurance qualified assignee entered bankruptcy.
Most state insurance laws provide for the Commissioner of Insurance of the state where an insurance company is domiciled to:
- Determine that an insurer should be placed in liquidation.
- Petition a state court to enter an order of liquidation.
- Serve as receiver or liquidator when an insurer is placed in liquidation.
- The liquidator's role is to wind up the insurer's business under court supervision.
- In New York, the New York Liquidation Bureau (NYLB) manages insurance company liquidations as well as conservatorships and rehabilitations.
Since 1971, when the National Association of Insurance Commissioners first promulgated the Life and Health Insurance Guaranty Association Model Act (Model Act), state life and health guaranty associations have provided a safety net to protect consumers from some of the risks resulting from the insolvency of a life or health insurance company.
Every state, plus the District of Columbia and Puerto Rico, currently has a life and health guaranty association. All of these guaranty associations are members of the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA).
NOLHGA was founded in 1983 and operates as a not-for-profit corporation. The primary mission of NOLGA and its members, who are separate from but work closely with state insurance regulators, is to ensure that consumers receive (at a minimum) a level of financial protection as prescribed by state statute when a life or health insurance company fails.
Perhaps anticipating the possible insolvency of Executive Life Insurance Company of New York (ELNY), the National Structured Settlement Trade Association (NSSTA) provided a timely and valuable educational discussion about state life and health guaranty associations featuring Thomas Ronce and Craig Ulman during its 2011 Annual Meeting.
In his NSSTA presentation, Ronce explained how the state life and health guaranty structure differs from FDIC protection because of the non-uniform state-based provisions, lack of pre-funding, and the nature of the guaranty itself. Ronce reviewed the history of the guaranty associations and also discussed:
- Guaranty association coverage issues.
- Powers and duties of guaranty associations.
- How assessments are calculated.
- Collections and tax offsets.
- NOLHGA's role generally and in multi-state insolvencies.
- NOLHGA's Insolvency Task Forces.
Ulman focused his discussion of guaranty association coverage on "Issues, Pitfalls and Developments Affecting Structured Settlements". Among the issues:
- Guaranty association coverage limits - with more than half the states providing $250,000 or less.
- Owner-based coverage vs. payee based coverage - with most states providing the later.
- The NAIC Model Act subrogation provisions (enacted in 27 states) which specifically address and impact structured settlements.
As potential pitfalls for structured settlements, Ulman highlighted general and state-specific coverage exclusions as well as timing issues which could determine whether and when a state guaranty statute applies to a structured settlement recipient.
As significant, related developments, Ulman identified several enacted or proposed amendments to state guaranty statutes:
- Replacing owner-based coverage with payee-based coverage.
- Increasing coverage limits from $100,000 to $250,000.
- Adopting subrogation provisions based on ยง 8.K.(3) of the NAIC Model Act.
- Relaxing or eliminating the prohibition on advertising the availability of Guaranty Association coverage.
- Reducing or eliminating state tax offsets for Guaranty Association assessments.
For additional information about structured settlement annuity company insolvencies and state insurance guaranty associations, see sections 3.05 and 5.04 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
For S2KM's complete reporting about the SSP and NSSTA 2011 Annual Meetings, see the structured settlement wiki.
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