When insurers go Belly up: Implications for insurers, policyholders and guaranty funds

The recent insolvencies of major commercial insurance companies such as Home and Reliance have created a significant problem for other liability insurers, as both were significant players in many mass tort and environmental liability claims. State guaranty funds also are increasingly seeking to shift their obligations to other parties. Indeed, the collapse of these insurers has created a hole that no one seems anxious to fill. Insurer insolvencies can have many collateral consequences beyond the immediate impact on that insurer's policyholders. As should now be clear, however, insurers are not necessarily responsible for shortfalls resulting from insurer insolvencies in longtail cases. Apart from the drop-down exposure of umbrella carriers that was so extensively litigated in the 1980s and early 1990s, other primary insurers have substantial grounds for contending that losses allocated to an insolvent primary insurer are a debt of the insured and recoverable, if at all, from state guaranty funds in the states where the insured is based.