A client's inquiry caused me to review the Hawai`i Life and Disability Guaranty Act ("Guaranty Association Act"). Haw. Rev. Stat. 431:16-201 to 219. Here is a summary of Hawai`i's statute.
1) Purpose of Statute.
The statute seeks to protect persons against the failure of life and accident and health or sickness insurance policies and annuity contracts because of impairment or insolvency of the insurer. Haw. Rev. Stat. 431:16-201. To provide such protection, an association of insurers is created to pay benefits and to continue coverages as limited by the Act. Members of the association are subject to assessment to provide funds to carry out the purpose of the litigation. Haw. Rev. Stat. 431:16-202.
2) Operations of Hawai`i's Life and and Disability Insurance Guaranty Association.
In order to be licensed to sell life, accident and health insurance in Hawai`i, an insurer must be a member of the Hawai`i Life and Disability Insurance Guaranty Association. Haw. Rev. Stat. 431:16-206.
If an insurance company becomes insolvent, its obligations are taken over and paid through a variety of methods. Most importantly, the Association has the power to collect assessments from other insurers. Haw. Rev. Stat. 431:16-202. If a member becomes insolvent, money to continue coverage and pay claims is obtained through assessments of other members. Haw. Rev. Stat. 431:16-209 (b)(2).
The Association can also seek to have a financially sound insurer take over a troubled company's policies and continue providing coverage and paying claims. Haw. Rev. Stat. 431:16-208 (a)(1); (c). In addition, the Association is empowered to continue collecting premiums from policy holders, which, if unpaid, can relieve the Association of having to provide further coverage. Haw. Rev. Stat. 431:16-208 (f)-(g). The Association can also change the premium rate in accordance with the amount of insurance provided and the age and class of risk, subject to approval by the Insurance Commissioner or the Court. Haw. Rev. Stat. 431:16-208 (d)(6). Further, the Association has the ability to borrow money to provide coverage and pay claims. Haw. Rev. Stat. 431:16-208 (n)(3).
Other safeguards the Guaranty Association has in its arsenal are as follows:
- There are statutory limits on the amount the Guaranty Association can pay to policyholders of insolvent insurers. Haw. Rev. Stat. 431:16-203 (c). For example, the Guaranty Association is liable for life insurance death benefits up to $300,000.
- Subject to Court approval, the Guaranty Association can impose permanent policy or contract liens in connection with any guarantee, assumption or reinsurance agreement if the amounts which can be assessed are less than the amount needed or if the economic or financial conditions of member insurers are sufficiently adverse to justify such liens to be in the public interest. Haw. Rev. Stat. 431:16-208 (i)(1).
- The Guaranty Association can require an assignment to it of rights and causes of action by any insured as a condition precedent to the receipt of any right or benefits conferred in such person under the statute. Haw. Rev. Stat. 431:16-208 (m)(1).
- When the maximum assessment that can be made is insufficient to cover anticipated claims, the Guaranty Association can allocate the limited funds it has among various claims. Haw. Rev. Stat. 431:16-209 (e).
- Any member insurer can determine its premium rates based on an amount reasonably necessary to meet its assessment obligation under the Guaranty Association Act. Haw. Rev. Stat. 431:16-209 (g).
- If an order of liquidation is entered, the receiver can recover on behalf of the insurer from any affiliate that controlled it, all distributions made in the previous five years unless the recipient could not have known that the distribution might adversely affect the ability of the insurer to meets its obligations. Haw. Rev. Stat. 431:16-214 (f)(1)-(2).
- The Guaranty Association may work with other state guaranty associations to develop an overall plan to provide protection for a failed insurer's policyholders. Haw. Rev. Stat. 431:16-208 (o).
3) Managing the Association's funds.
The Guaranty Association does not exist to hold and invest funds. When funds are needed to cover for an insolvent insurer, they are raised through assessments. However, there are small amounts held by the Guaranty Association from prior assessments. These funds are deposited with the First Hawaiian Bank, which manages the account.
