Adirondack Insurance Exchange reported today that its financial condition has continued to deteriorate. The carrier is advising its agents to begin replacing its policies with other insurance carriers immediately.
As we reported on May 29 and June 18, Adirondack’s financial strength rating from rating firm Demotech was withdrawn on May 28. That same day, the carrier emailed its agents reporting a surplus shortage and a deterioration in their capital due to rising loss costs and inadequate rates.
Should the carrier reach the point of insolvency, a lengthy legal process must ensue before claim payments will become jeopardized. These are some of the questions we answered in our June 18 post:
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 …”
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. If the P/C Insurance Security Fund eventually becomes involved, it will be a long time from now.
For now, we recommend that members take the carrier’s recommendations to heart. Communicate the situation to your Adirondack clients, including the fact that the company itself has advised agents to replace the policies, and present quotes for replacement policies to them. As always, the clients have the final decision about what policies to purchase.
As was mentioned in our earlier posts, there is a form letter for this type of situation in our ebook The Big I NY Big Book of Form Letters & Other E&O Tools. This valuable resource is free for members and available for $99.00 to non-members.
We will post additional information on the situation with Adirondack as it becomes available.