What happens when your insurance company goes bust?

It does happen.  And when it does, it’s a major financial migraine for policyholders.

During the 2008 financial meltdown, large global powerhouse insurers were brought to their knees, requiring financial assistance from the government to get them off life-support.  (Remember AIG in the US; ING in the Netherlands?)

Although the Canadian insurance industry was largely spared the carnage occurring elsewhere, Canadian insurers have become insolvent in the past, rendering them unable to fulfill the contractual promises made to their policyholders.

Example:  Markham General Insurance Company was an insurer that quickly grew to insure 65,000 clients, mostly in Ontario.  Don Cherry provided regular radio endorsements for its largest broker, Believer Plus.

In July 2002, Ontario courts together with the provincial regulator ordered Markham General to be wound up because of its financial inability to continue providing insurance.  Initially, it was believed that sufficient capital remained to pay existing claims and refund premiums for policies being terminated early.

But the wind-up was a whole lot more messy; over 3,000 unfunded claims had to be administered by the liquidator.

Now almost 10 years later, injury claims worth $230,000. remain outstanding after almost $12M in injury claims have been paid.  And that doesn’t include claims for damage to automobiles and other property for which many claimants have received partial payment by way of settlement.

The lesson?  Ask your broker to comment on the financial strength of the insurer with whom you are being placed.  This does not provide bullet-proof certainty, but the explanation will build – or erode – your confidence.

Tags: bankruptcy, claims, coverage, economy, insurance, ontario, risk