As we previously reported, on May 28 the financial strength rating of Adirondack Insurance Exchange (AIE) on the website of insurance carrier financial ratings agency Demotech was withdrawn. AIE, a subsidiary of Allstate Insurance Group headquartered in Western New York, posted the news on its website, as did Demotech. AIE sent an email on May 28 to its agents about the action; Demotech has not publicly commented.
Over the last several days, many Big I New York members have contacted us with questions and concerns about this development. We will attempt to answer them here, but our information is limited. The best sources of information, should they choose to provide it, are the carrier and the New York State Department of Financial Services (DFS.)
Why did was AIE’s Demotech rating withdrawn?
Demotech has not said publicly. On May 28, AIE sent an email to its agency force which said:
“Adirondack Insurance Exchange has been facing a surplus shortage for the last several years due to the severe increase of the cost to settle claims. … Due to the rapid rise in loss costs and the need for further rate infusion, the capital of Adirondack has deteriorated over the past few years. In attempt to improve and rectify the shortage, Adirondack entered a sustainability plan with the New York Department of Financial Services in which we are still actively participating.”
What is a “sustainability plan”?
That phrase does not appear in New York insurance law or regulations, so it seems to be an informal term. It does not mean that AIE is in “rehabilitation.” Rehabilitation is a legal term that applies when a court has given an insurance regulator authority to oversee a carrier’s operations. During the time the regulator has that authority, they attempt to get the carrier on a path to meeting state policyholders’ surplus and other financial requirements. A recent check of the website of the New York Liquidation Bureau found no reports of any court proceedings involving AIE.
As best we can tell, the sustainability plan AIE has entered with DFS is not mandated by law but shows evidence that the carrier is working with DFS to address its financial issues and protect the interests of its policyholders.
Has Big I New York learned anything more about the situation since its May 29 post?
No.
Does New York have a guaranty fund that would cover claims if AIE becomes insolvent?
Yes. It is formally known as the Property Casualty Insurance Security Fund and is authorized under Article 76 of the New York Insurance Law.
How much coverage does the Fund provide for claims an insolvent carrier is unable to pay?
Section 7603(a)(2) of the New York Insurance Law titled “Property/casualty insurance security fund” states, “… no payment on any one claim shall exceed one million dollars …”
It should be noted that Sect. 7603(a)(1)(H) states that the Fund covers, “… any obligation for the return of unearned premiums …”
How will this action impact insured homeowners who have mortgages, in terms of the mortgage lender’s insurance requirements?
That will likely vary from one mortgage lender to another. Concerned homeowners should inquire with their lenders to find out whether they need to do anything.
Was Adirondack required to send letters to its insureds (as it did recently?)
We are unaware of any provision in New York Insurance Law that required them to notify their insureds, but we also believe it was the right thing to do.
Should the fact that Allstate owns AIE give insureds comfort, or is Allstate washing their hands of AIE?
We have no way of knowing. As the parent company, Allstate may make additional investments in AIE if they so choose. We have no knowledge of their plans.
Is Allstate legally required to provide financial backup to AIE?
We are not aware of any provision in New York Insurance law that would require Allstate to do that.
What is the process for obtaining relief from the Property Casualty Insurance Security Fund?
First, understand that we are quite far away from involvement by the Fund, should that even be necessary. While we are not experts on the insolvency process, this is our understanding based on what happened in 2023 with United Property & Casualty Insurance Company:
- The regulator where the carrier is domiciled (in this case New York) examines the carrier’s financial condition. If they conclude that the carrier is solvent, they may monitor the situation for some time but will not take immediate action.
- If the DFS concludes that the carrier is insolvent, it must apply to a court of competent jurisdiction (New York State Supreme Court) for a declaration that the carrier is insolvent and that DFS should be appointed to operate the carrier during a period of either rehabilitation or liquidation.
- Should the court grant this request, DFS assumes operation of the company until it is either rehabilitated or liquidated.
- If the insurer is to be liquidated, the court will set a deadline for interested parties to submit claims against the carrier. This deadline is typically one year following the declaration of insolvency. After all claims are submitted, DFS will pay claims out of the carrier’s remaining assets. If those assets become exhausted, then the P/C Security Fund will pay claims up to the $1,000,000 limit mentioned above.
- No claims submitted after the deadline are honored, and no recovery from the P/C Security Fund is possible after a court formally judges the carrier to be liquidated and dissolved.
All of this occurs over a period of years. Right now, we do not know the extent of AIE’s financial difficulties, let alone whether DFS will need to step in further than they already have. If the P/C Insurance Security Fund eventually becomes involved, it will be a long time from now.
What advice does Big I New York have for agents on how to handle this situation?
The advice we gave in our May 29 post remains the same:
“Big I New York members who have placed coverage with Adirondack may want to consider contacting affected clients. Our ebook The Big I NY Big Book of Form Letters & Other E&O Tools contains a form letter for contacting an insured whose carrier has been downgraded. The letter can be adapted to fit this situation. The book is a free member benefit for Big I New York members; non-members can download it at a cost of $99.00.”
In addition:
- Contact AIE to see if they will provide additional information.
- Contact your insureds (or respond to them if they have contacted you) and tell them what you know (which is what we’ve provided in this post.)
- Ask them if they want you to look for a replacement policy.
- Encourage them to check with their mortgage lenders to determine whether the lenders will require a replacement.
- Document all conversations with insureds on this matter.
- Lastly, comply with your agency’s legal duty as stated in the New York State Court of Appeals 1997 decision in Murphy v. Kuhn: “…(I)nsurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so …”
Watch the Newsfeed section of this website and our ICYMI newsletters for any additional news we may have to report.
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