Pennsylvania Moves to Enforce Large Deductibles in Insolvencies

Pennsylvania lawmakers have taken a major step toward clarifying how insurer insolvencies should be handled in passing a bill, which if applied in the liquidation of Reliance Insurance Co., promises to save the state’s guaranty fund and ultimately Pennsylvania consumers $40 million.

The Senate voted 47-2 in favor of a bill (SB 815) requiring that the amount of large deductibles on certain business policies of insolvent insurance companies be credited against outstanding claims. The bill would limit the liability of state insurance guaranty funds to no more than the insolvent companies would have had if they had remained in the black.
Senate Bill 815 is now in the House for consideration.

“The bill is not particularly complicated. All it does is clarify that under our insurance liquidation laws, any deductibles connected to an insurance policy go to claims under that policy, not to the estate of the insurer,” the bill’s sponsor, Sen. Don White, said.

“That means the guaranty associations here and across the country will have to assess less money on insurance policyholders. Without this bill, the Insurance Department is forcing the guaranty associations to cover claims that were supposed to be paid by these deductibles—and that means additional assessments on policyholders, which is the same thing as additional taxes,” White said.

It would affect the ongoing Reliance Insurance Co. insolvency in particular by saving the state’s guaranty fund as much as $40 million to cover outstanding claims under certain large deductible Reliance policies.

The Pennsylvania Department of Insurance took over the failing Philadelphia-based Reliance in 2001. The $2.8 billion insolvency is regarded as the nation’s largest.

Reliance had issued many policies to corporate policyholders with large deductibles of $250,000 and more. Large deductible policies typically cover workers’ compensation, commercial auto and general liability exposures of large commercial policyholders. Right now, those deductibles are going into the Reliance. SB 815 changes that by insisting that these deductibles be directed to the claims they were intended to cover.

The bill’s sponsor maintained the change is a matter of fairness.

“Any bankruptcy—whether it is an insurance company, some other business, or a person—is a painful one, and no creditor or claimant can ever be made whole,” White said. “The best we can do is make sure creditors and claimants are treated fairly. This bill helps do that with insurers that go under: It gives the insurer’s estate the same money the insurer had, no less but no more. And it saves policyholders here and across the country money.”