Chapter 12

California Insurance Guarantee Fund

California Insurance Code 1067

Agents often have the misguided assumption that they dont have to worry about the products they sell since there is a guaranty fund in existence. This is a very dangerous attitude to take. The insurance guarantee fund does not cover every situation.

California does have an Insurance Guarantee Fund. Insurance Code Section 1067-1067.18 specifically deals with this issue. It is known as the California Life and Health Insurance Guarantee Association Act.

The California Life and Health Insurance Guarantee Association is a nonprofit legal entity that came about as a result of the merger of the Seastrand Health Insurance Guaranty Association and the California Life Insurance Guaranty Association. All member insurers must be members of the association as a condition of their authority to transact insurance in California. There are three accounts that are covered by the association. They include: (1) life (2) annuity, and (3) health insurance.

The point of the guarantee fund is to protect life, health, and annuity contract holders, subject to specific limitations, from the failure of insurers to perform their contractual obligations due to insolvency. Specifically, it provides protection of policies and contracts for all of the following individuals:

1. Beneficiaries, regardless of where they live.
2. All California residents.
3. Nonresident persons if they meet the following criteria:
1. The insurer is domiciled in California.
2. The insurer never held a certificate of authority or license in the states in which the persons reside.
3. The state in which the person resides has associations similar to the association created in California.
4. The insured is not eligible for coverage under their state association.

CIC 1067 provides coverage to those who qualify for direct, non-group life, health, annuity, and supplemental policies, contracts, and certificates. Annuity contracts under group annuity contracts also include structured settlement agreements, allocated annuity contracts, and any immediate or deferred annuity contract. Unallocated annuity contracts may also be covered under specific conditions.

What does the Guaranty Association Not Cover?

Not everything is covered under the guaranty association.

Non-Guaranteed Percentage Rates

The guaranty association does not provide coverage for any portion of a policy that is not guaranteed by the insurer. What does this mean? It means it covers only the guaranteed portion of an annuity contract not the higher rate that may have been stated. Any policy or contract of reinsurance is not covered unless assumption certificates have been issued.

Rates That Exceed Moodys Corporate Bond Yield Averages

The guaranty association will not cover any portion of a policy to the extent that the rate of interest that it is based upon exceeds either or both of the following:

1. The extent to which the interest rate, averaged over a period of four years prior to the date on which the association becomes obligated, exceeds an interest rate determined by subtracting six percentage points from Moodys Corporate Bond Yield Average averaged for that same four-year period or for such lesser period if the contract has not been in existence for four years.

2. The extent to which the interest rate, on or after the date the association became obligated, exceeds the interest rate determined by subtracting six percentage points fro Moodys Corporate Bond Yield Average as most recently available, not to go below a minimum of three percent.

Most Unallocated Annuity Contracts

The guaranty fund will not insure guaranteed investment contracts, guaranteed interest contracts, funding agreements, deposit administration contracts, and all other unallocated annuity contracts. There are exceptions to this. If the unallocated annuity contract was sold:

• By an insurer who received an order of liquidation (containing a finding of insolvency which later became final) was entered by a court in the state of its domicile after December 20^th, 1991, but prior to December 20^th 1992, and sold to a plan fiduciary in connection with a program of an employer prior to December 20^th, 1992 in order to provide the employees with deferred compensation or pension benefits, and the employee contributes from his or her wages some portion of the funds paid into the plan.
• By a mutual insurer, that became insolvent in its state of domicile in December of 1991 and sold to an employer qualifying as an Internal Revenue Code Section 201(c) (3) employer or to a fiduciary in connection with a program with the purpose of providing a deferred compensation benefit for the employees. The contract must have been purchased exclusively with funds of the employer in amounts computed as a uniform percent of the compensation of each employee entitled to participate. The contract must have a stated maturity date occurring within 15 days prior to the order of liquidation and the employer must maintain at the time of insolvency a tax deferred annuity plan.

Self-Funded Programs

The guaranty fund will not cover any plan or program of an employer, association, or similar entity to provide life, health, or annuity benefits to its employees or members that is self-funded or uninsured. That would include benefits payable by an employer, association or similar entity.

Plans Providing Dividends or Experience Rating Credits

The guaranty fund will not cover a policy or a portion of a policy that provides dividends or experience rating credits. This would include a plan that required fees or allowances be paid to any person, including the policyholder.

Non-Licensed Insurers

Obviously, the insurer issuing the contract must be licensed in California to do so. If a policy or contract is issued in California by a member insurer during a time when it was not licensed and did not hold a certificate of authority, the policy will not be covered.

Annuities Issued by Charitable Organizations

Any portion of a contract that is issued by a charitable organization that is duly qualified as such under applicable provision of the IRS that is not engaged in the insurance business as its primary business. Such an annuity might be issued for a number of reasons, but since the organization is not an insurer it would not be covered by the guaranty fund.

Maximum Liability

Even when the guaranty fund does apply, there are maximum limits to their liability. Their liability would not exceed the lesser of the following:

1. 80% of the contractual obligations for each policy or contract.
2. For life insurance on any one life, no matter how many policies are carried with the insolvent insurer, $250,000 in life insurance death benefits is the maximum, but not more than $100,000 in net cash surrender and net cash withdrawal values.
3. For annuity contracts, no matter how many contracts are carried with the insolvent insurer, $100,000 in present value benefits, including net cash surrender and net cash withdrawal values.

It is important to note, however, that under no event will the guaranty association be liable for more than $250,000 in the aggregate with respect to any one individual.

There is a difference between any one life and any one owner of contracts. Regarding any one owner of multiple policies of life insurance, whether the individual is a person, firm, corporation, or other legal entity in whose lives the policyowner has an insurable interest, five million dollars in benefits is the limit regardless of the number of policies held.

An unallocated annuity that is not covered by the association may not be offered to an employer, after January 1^st, 1994, unless prior to being offered the insurer or agent has disclosed to the employer and employee in writing that the guaranty association does not cover the contract.

End of Chapter Twelve

United Insurance Educators, Inc.