Most people think insurance companies are flush with billions in cash as they continually underpay and deny claims. For most of the big insurance companies, this is true, but for some smaller companies spread across the country and localized in certain states, solvency can become an issue. Often, insurance companies such as Tower Insurance get bought out or declare bankruptcy because they do not have enough assets to pay their claims and overhead, or other larger insurance companies squeeze them out of the market.
Back in 2014, Tower was in danger of becoming insolvent and AmTrust seemingly came to the rescue of the thousands of Tower insureds because their property and/or personal injury claim was absorbed in the acquisition. As many plaintiff attorneys and insureds know, if their insurance company goes bankrupt while settling a claim, the claim goes into the black abyss of creditors and it’s a toss-up on when and if any money will be recovered for their losses.
In a story that aired on NBC New York, AmTrust took Tower’s profitable books of business: the commercial and personal liability policies were transferred to AmTrust affiliates, while thousands of active insurance claims against Tower (not-profitable) were given to a company called CastlePoint. CastlePoint declared bankruptcy in 2016.
The story centered around an auto accident victim, Eita Pruss, who agreed to a $9 million settlement where Tower was responsible for $5 million. Even though the settlement was signed off by a judge, AmTrust declined to honor the payment because of Tower’s insolvency.
What happens to the money not paid out due to bankruptcy? Is AmTrust or Tower still on the hook? In short, no. Every state has an insurance guaranty fund, often comprised of public tax dollars, to fill these shortcomings. So, you and I get to pay our hard-earned money for this private sector transaction. Under New York law, when a private insurance company goes bankrupt, a claimant can obtain a maximum of $1 million from the state guarantee fund.
Unfortunately, these private sector deals are often approved by the state’s regulatory body without the interests of the insureds in mind (at least the insureds with active claims). I leave you with a quote from the late comedian, Joey Adams:
“Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give your coat to your creditors.”